Market trends

The impact of Bitcoin on financial and government institutions

Erin McShea

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June 29, 2021


Bitcoin was launched in 2009 by Satoshi Nakamoto, and since then, it has gone from being perceived by most as a fringe phenomenon to a widely used digital asset that many believe could eventually replace traditional currency.

By 2020, nearly half a million Bitcoin transactions were sent daily across the globe, and Bitcoin’s usage and popularity are expected to continue to grow. FD7 Ventures’ Managing Partner Prakash Chand expects that Bitcoin’s market cap will hit $10T in “just a few years.

The Bitcoin boom is here — and the AlphaSense document trend for “Bitcoin” is no exception.

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But what will the impact of Bitcoin on financial markets and institutions around the world be?

The real answer: experts don’t totally know yet, but there are implications that are becoming clear as investment in Bitcoin grows and its perception around the world evolves.

Quick Takeaways:

  • The rise of Bitcoin and cryptocurrencies have the potential to disrupt the role and impact of the U.S. dollar on the global economy.
  • Bitcoin is already making international transactions faster and more accessible.
  • Much uncertainty exists around how Bitcoin and cryptocurrency can and should be regulated, but measures are being taken to limit and punish illegal activities related to cryptocurrency.

Making Global Transactions Easier

The impact of Bitcoin started at the currency level. It was designed as a decentralized way to move money internationally and with less friction. And it’s working. In January 2021, there were approximately 400,000 Bitcoin transactions being processed daily around the world. 

By design, Bitcoin transactions are fast, secure, and highly private because they’re built on blockchain technology. And because they eliminate the middlemen like banks and transaction processors, associated fees are eliminated as well.

However, many third-party apps that facilitate Bitcoin buying, selling, and transactions may charge fees, though it depends on the platform. For example, Robinhood does not charge purchase fees when buying or selling Bitcoin but Square’s CashApp does. On the other hand, Robinhood doesn’t allow any transfer of Bitcoin across users, but CashApp does without charging a fee.

There has also been a fervor around cryptocurrency in general; ideologically, audiences have flocked to Bitcoin, believing the price will only continue to rise and that it will serve as a currency disconnected from any government or bank.

Risks associated with Bitcoin

While Bitcoin transactions are designed to be secure, the platforms that facilitate Bitcoin purchases and transactions have been a common target for hackers and fraudsters, often resulting in losses or outright theft.

We found hundreds of news stories in Alphasense covering instances of Bitcoin fraud or theft.

Microstrategy’s most recent annual report expressed the concern of how fraud, alongside a lack of regulation, may have on Bitcoin’s price.

“Due to the unregulated nature and lack of transparency surrounding the operations of many Bitcoin trading venues, they may experience fraud, security failures or operational problems, which may adversely affect the value of our Bitcoin.”

These uncertainties have turned Bitcoin into a wildly volatile asset, which has made financial institutions hesitant to adopt or take a major stake in the cryptocurrency. Those who have may have regrets depending on which direction the cryptocurrency takes on a given month, a feeling shared by many retail investors.

Forcing a New Look at Regulation

Most governments (including the United States) aren’t totally sure about how to regulate Bitcoin and other cryptocurrencies.

While cryptocurrency is being more widely used and accepted as time goes on, it also has a reputation for being used for illegal purposes and used to carry out fraud and scams.

As a result, the need for cryptocurrency regulation has become a point of debate between individuals who use it (and enjoy the lack of bureaucratic and government interference) and financial oversight organizations around the world who see a need to mitigate risk (to individuals and economies).

Governments and financial institutions around the world are considering what regulations need to be in place, and while Bitcoin will experience various forms of regulation across different markets, the level of regulation (or lack thereof) that will come in the near future will affect its price and overall adoption. We’ve already seen how recent actions taken by the Chinese government have affected Bitcoin’s price, inserting even more hesitancy on how mainstream Bitcoin will ultimately be.

In the meantime, law enforcement organizations and the IRS (and their counterparts around the world) are addressing issues like tax evasion and the black market while global financial regulation remains absent.

Bitcoin and Wall Street

After Bitcoin’s explosive boom earlier this year (300% growth and a $60,000 value in early March), big questions loomed about whether Bitcoin would break into the mainstream or implode and fade back into the fringe existence of its beginning.

There is division among professionals about the real ability of Bitcoin to impact traditional financial markets, but everyone is at least paying attention. Citi went as far as to say Bitcoin could “become the currency of choice for international trade,” and BNY Mellon and JP Morgan both indicated they’re increasing their Bitcoin focus.

Bitcoin has since seen volatile ups and downs — Tesla’s reversal of its decision to accept Bitcoin as a form of payment, China’s crackdown on crypto, and Bitcoin’s plunge in May (of more than 50%, prompting a huge sell-off) have reinforced its unpredictability and lack of consistency with traditional market indicators.

Placing a Question Mark on the U.S. Dollar

As the world’s top reserve currency, the U.S. dollar makes up 60% of central bank foreign exchange reserves (the next closest is the euro at 20%) and supports global transactions daily.

It also means that dips in the U.S. economy — like the financial crisis in 2008 — reverberate around the world.

Could Bitcoin and other cryptocurrencies change the world’s perception of the dollar as the top currency, and could it offer alternatives that eliminate the necessity of the dollar in transactions?

Recent events indicate that it’s theoretically possible.

In 2017, the Venezuelan government launched a cryptocurrency called the petro (supposedly backed by the country’s oil supply) in an effort to improve the country’s flailing economy. So far, it’s failed to accomplish that goal and skepticism abounds globally about its viability (it’s currently banned in the U.S.).

Just this year, El Salvador president Nayib Bukele announced that Bitcoin would become an accepted form of official currency in the country. This could have a significant impact on Salvadoran citizens living in the United States who collectively send more than $6 billion home to their families. 

Bitcoin eliminates the necessary middlemen (who get a cut of the money) and makes the transaction possible for the 70% of Salvadorans with no bank account. This has wider global implications given that nearly 2 billion people around the world have no bank accounts and, through Bitcoin, could gain international trading and purchasing ability.

(So far, the World Bank has denied El Salvador’s request for help, putting the process in limbo for now.)

For now, Bitcoin poses no real threat to the dollar as the world’s reserve currency, but it does bring up questions about traditional currency and its necessity for global buying, selling, and trading. How will the continued growth of a globally standardized digital currency like Bitcoin affect federal financial markets? That still remains to be seen.

Going Forward – The impact of Bitcoin and other cryptocurrencies

With change comes uncertainty, and while there is some level of apprehension, Bitcoin and crypto (in one form or another) look like they’re here to stay.

There are perhaps more unknowns than certainties when it comes to predicting Bitcoin’s larger impact on the world’s financial markets going forward, but it’s clear that it has already served as an impetus for financial innovation and — for better or worse — changed the way the world thinks about currency.

Looking to understand how Bitcoin and cryptocurrencies have catapulted their way into mainstream institutions and consumer wallets? Download our on-demand webcast, The Crypto Payments Ecosystem: Ethereum, Bitcoin, and Smart Contracts

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Erin McShea

Erin McShea is a full-time writer specializing in financial services, marketing, and technology solutions. She is also an Adjunct Professor at Temple University's Fox School of Business, where she teaches Creativity and Organizational Innovation.


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