Bitcoin’s Rise As Legal Tender. Following the same trends as other… | by Shefali O’Hara | Mar, 2022

Following the same trends as other technical innovations

Photo by Bermix Studio on Unsplash

The first country that adopted Bitcoin as a form of legal currency was El Salvador on September 7, 2021. Will other countries join the trend?

This week, there was speculation that Malaysia would do so, but that was put to rest yesterday. While Malaysia’s Deputy Minister of Communications made a proposal to the country’s parliament to adopt Bitcoin as legal tender, the Deputy Finance Minister came out against this.

While this may be discouraging to crypto enthusiasts, the reality is – for top government officials to even be discussing this strategy is a big deal. It shows just how far crypto has come.

Some experts think it is just a matter of time.

Not every country is led by forward thinkers such as Nayib Bukele, the President of El Salvador. The adoption of Bitcoin by governments must necessarily trail its adoption by investors. Governments by definition are more risk averse and must answer to a majority of their constituency.

However, El Salvador does provide a roadmap for other countries. As inflation continues to erode the value of currencies such as the dollar and as the situation in the Ukraine plays out, more and more countries as well as people could start to see cryptocurrencies in general and Bitcoin in particular as legitimate alternatives to fiat.

This jives with the normal cycle of market adoption. There are the innovators and early adopters, followed by the early majority, the late majority, and finally the laggards. When do governments join in this?

While governments sometimes finance innovators, they typically lag when it comes to actually adopting a new technology. Just look at the pattern with the internet.

Government researchers began to use a primitive version of the internet in the 1960s. It was used mostly in university and government research settings. The ALOHAnet, developed at the University of Hawaii, became operational in 1971. It was the first time that a wireless packet network was publicly demonstrated. This coincided with the development of the ARPANET. Again, adoption was limited to academic and research organizations, including those who worked for the Department of Defense.

What happened afterwards?

While more and more universities, etc., began to adopt networks, the majority of government entities did not. In fact, if you ignore the contribution of early research funding to the development of the internet, then the government looks like a laggard. Private markets adopted and innovated the new technology enthusiastically while government agencies moved in glacial fashion.

In areas that do not have a research component that is publicly financed, the lag of governmental adoption is even greater.

However, while governments often tend to be conservative when it comes to technical change, they can imitate each other, particularly as older leaders are replaced by younger ones. Being close to each other may help.

So it’s no wonder that Honduras might be the next country to recognize Bitcoin as a legal form of currency.

With a market that reached a valuation of $ 3 trillion last year, it became impossible for governments to continue to ignore it, apparently. According to an executive order signed by Joe Biden, there 25% of US households own some form of crypto. Of course with this kind of market penetration, the American government wants to get involved. This has resulted in some pushback from governments such as the United States, which seek to regulate cryptocurrencies. Recently, for example, BlockFi was banned from allowing new users to open interest-bearing accounts.

This pattern is repeating what occurred in the 1990s with the internet.

Given how late the government was at addressing the advent of crypto, there is really no way they can get the genie back in the bottle at this point. While countries can try to ban crypto, it’s not going to work.

So while regulation may restrict what investors can do, the reality is that the American government does not want to become less competitive. As long as other countries are using and profiting from cryptocurrency, the US is not going to ban it. It is much more profitable from a governmental viewpoint to regulate and tax, not ban.

Bitcoin has recently moved higher, partly because the Terra blockchain bought $ 125 million for its reserves. As it continues to rise in value, more governments may become less hesitant to hop on board. Certainly with the global uncertainty and the US dollar losing some of its status as a safe haven, there is more of a likelihood of Bitcoin becoming more universally adopted.

If it does so, it follows a trend that we see repeatedly with new technologies.

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