Bitcoin Over Central Banks

Can Bitcoin Kill Central Banks?

By JAMES MCWHINNEY Updated November 09, 2021

Reviewed by ERIKA RASURE

Fact checked by SKYLAR CLARINE

Through their policymaking, central banks played a key role in manufacturing the 2008 financial crisis. One of the responses to that crisis was Bitcoin (BTCUSD). With its decentralized system and peer-to-peer technology, Bitcoin has the potential to dismantle a banking system in which a central authority is responsible for decisions that affect the economic fortunes of entire countries. But the cryptocurrency has its own set of drawbacks that make it difficult to make a case for a decentralized system consisting of the cryptocurrency.

KEY TAKEAWAYS
Bitcoin’s peer-to-peer technology and decentralized system have the potential to upend the role of central banks in modern financial infrastructure.
Proponents of central banks say they are vital to the economy to maintain employment, stabilize prices, and help keep the financial system going in times of crisis. Critics suggest central banks have a negative impact on consumers and the economy and are responsible for debilitating recessions.
While it has potential as a replacement to central banks, Bitcoin itself suffers from multiple drawbacks, including a limited supply and lack of legal status in most economies.
Central banks are borrowing elements of Bitcoin’s design and technology to explore the use of central bank digital currencies (CBDCs) in their economies.
Role of Central Banks in an Economy
Before exploring the effect of Bitcoin on central banks, it is important to understand the role that central banks play in an economy. Central bank policymaking underpins the global financial system. The mandates for central banks vary between countries. For example, the Federal Reserve in the United States is responsible for controlling inflation and maintaining full employment. The Bank of England ensures the stability and solvency of the financial system in the United Kingdom