Bitcoin's Impact on the Monetary System: Implications and Analysis

This essay delves into the impact of Bitcoin on the monetary system, examining its emergence as a digital currency and its implications on traditional financial structures. The essay explores Bitcoin's functionality as a peer-to-peer digital currency, contrasting it with conventional currencies and the role of institutions like the IMF. It discusses Bitcoin's potential to disrupt the monetary system, addressing issues such as the lack of central control, volatility, and regulatory challenges. The essay further analyzes Bitcoin's advantages, including diversification and potential for lower inflation, while also acknowledging the risks related to trust, regulation, and security. It concludes by assessing Bitcoin's current impact and future prospects within the global monetary landscape, highlighting the need for technological advancements to ensure safety and security for wider acceptance.

Running head: BITCOIN: IMPACT ON THE MONETARY SYSTEM
Bitcoin: Impact on the Monetary System
Name of the Student
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1BITCOIN: IMPACT ON THE MONETARY SYSTEM
Introduction
The present era is living within a world full of advanced technology where all are
talking about and expecting the connectivity with the internet for everything. Currency is also
not left behind in such technology where the paper currency has been transformed to some
extent to the virtual currencies. Bitcoin is one of those revolutions that brought changes in the
way of payment as well as an impact on the world currencies like USD for the future
(Seetharaman et al 2017). The introduction of the Bitcoin in the year 2009 by an unknown
person with the name Satoshi Nakamoto has an impact on the Malaysian market as well as on
the monetary policy at a global level. The world where the generation is dependent on the e-
commerce for the cheaper, faster and an efficient commercial transaction, Bitcoin has
emerged as a private digital currency with so many positive and negative factors with its
emergence.
Discussion
Bitcoin refers to a private digital currency that is traded online through the peer-to-
peer network. This helps in sending and receiving money across the internet. The main
difference between the regular money and the bitcoin is that bitcoin can be used without
having any internet connection unless their name has been chosen to link with the bitcoin
address. It does not even keep track of the users (Alaeddin and Altounjy 2018). Bitcoin is a
cryptocurrency that is stored as an electronic file on the hard drive of the computer. It has
been designed to operate it without any need of the intermediaries or any central authority.
Therefore, it does not rely upon the central bank for issuance, commercial bank for storage or
credit card firms for transferring (Giungato et al 2017). With the help of this, the user directly
and anonymously interacts with the other without any intervention of the third party.
The IMF that is International Monetary Fund sets standards for currencies of an
individual to the nation in order to maintain economic stability at a global level. By imposing

2BITCOIN: IMPACT ON THE MONETARY SYSTEM
similar rules and regulation to nations except for North Korea, IMF ensures to coordinate the
economic policy effectively at a global level (Huhtinen 2014). However, the bitcoin is not
bound by the guidelines of IMF, as the government of the specific country does not formally
back it. This poses a problem to the foreign currency exchange market for a stable economy
with its growth and use. The IMF is unable to obtain such currencies directly because the
bitcoin is outside the framework of the International Monetary Fund. The monetary system,
as well as the IMF, has been set up to cope up with the main two economic problems
(Plassaras 2013). First, the artificial devaluation of currency so that to achieve an economic
advantage. Second is the unstable exchange rates amongst the several currencies. The bitcoin
is not able to meet the first concern as prohibits the users from the artificial manipulation of
the value of the currency. It has the potential to create severe and irreversible fluctuations in
the foreign currency exchange market.
The government-controlled monopoly in the money supply is the result of the
development of the monetary system. For the efficient functioning of the monetary system, it
is required to control the supply of money in a more suitable manner. The role of bitcoin is
not much in terms of its impact on the economy. However, bitcoin is an approach that is
considered as a new breed in terms of the financial instruments that enable a different
approach to the monetary system as well as the monetary policies. When considered to the
monetary system, it has seen that bitcoin has made possible transactions without any help of
the intermediary (Claeys, Demertzis and Efstathiou 2018). Further, this new system has
eliminated the charges as search costs and authentications cost. Accordingly, this leads to the
need for the authentication tool and method while dealing with a large amount of money.
Authentication cost has an impact on the understanding of trust as well as an approach in the
monetary system.

3BITCOIN: IMPACT ON THE MONETARY SYSTEM
Comparing it with trust in the monetary system, it can be divided into two parts. First, trust
in money as well as the purchasing power and second trust in the entire system as well as its
functioning of the transaction. In the first case, the trust in the purchasing power of the
bitcoin is very low due to its volatility in the price and with its legal position. The history of
the bitcoin reflects significant price crashes in the very short history of it. The second case of
the purchasing power is with its legal position (Gruber 2013). The bitcoin is not under the
interest of the government as well as the central banks, which is used to give up control over
the decisions related to the monetary policy. As a result, bitcoin will not be accepted as a
direct method for tax payments. Secondly, bitcoin is a complicated case considering the
system and the transaction functionality of the monetary system. The bitcoin enables
transaction without any trust amongst the parties. To remove the negative impact with the
relevance to the monetary system for its stability, bitcoin needs to gain a legal position for the
money and payment system. Its transaction must grow with the payment method or with the
use of other application and a deterioration in the purchasing power of the fiat currencies.
Bitcoin may not have replaced the world currencies as a dollar, but it also has some
positive areas of impact on the monetary system. The cryptocurrency as bitcoin offers a
feature of diversification that allows a secure welfare gain to the citizen with the existence of
cryptocurrencies (Krause 2016). Addition to this, for the local investment, the private digital
currencies serves as a competition, which in turn generate lower inflation. It has been argued
by many authors that the cryptocurrencies gives an encouragement to the local investment
and serves as a complement rather than a substitute for that very investment. However, in the
offering of an alternative to the local fiat, they bring discipline in the monetary system or
policy, which in turn again decreasing the inflation. Further, this is resulting in the higher
returns from the specific investments and thus as an increase in the overall investment. Apart
from all that, the government itself gains through permitting the use of bitcoin within the

4BITCOIN: IMPACT ON THE MONETARY SYSTEM
local economy as it extracts revenue by the investments. As a result, it is benefitted by a
higher level of local investment.
The banking system has remained preferable in Malaysia as well as other nations such
as America. The main reason behind choosing the system of banks by the citizens is that the
banking system has established trust amongst all with their long history in such business line
(Rahman 2013). The last few years of Malaysia has seen several fundamental as well as
regulatory changes in the guidelines. They have a proper regulatory system that is likely to
commit lesser or no fraud or any failure in fulfilling the commitment with their people or
their customers (Yussof and Al-Harthy 2018). However, the bitcoin is not regulated, and it
has not established much trust amongst the people. Therefore, it has a high chance of
committing some fraudulent activity. The people highly felt that the lack of regulation in such
a new approach and with accepting the fact that the transactions in it are not traced by any
means could bring a negative experience for them. Ultimately, if the customers lose their
money, then there will be not any government or law to for them to help. Drastic fluctuation
in the value will also lead to losing a higher amount of money (Sas and Khairuddin 2017).
Therefore, considering such a negative impact, the system does not have to believe in bitcoin
that it is a preferred system over the traditional banking group of their monetary system.
Though the bitcoin requires certain improvement, it has found that the new technique
is highly being adopted by the people. People are ready to accept such innovation with
respect to their money (Khairuddin et al 2016). Thus, with some effective measures, there
can be some development in the monetary system for the benefit.
Conclusion
Bitcoin has a huge potential to attract others to go for it rather than to choose for any
other monetary system. However, its present form does not have the potential to affect the
other currencies, especially the USD though it can harm significantly. The monetary system

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has been influenced to some extent due to the emergence of a new approach like bitcoin. This
brought instability in the regulatory system, the transaction of currencies as well as the
confidence of the costumers. However, it is an innovative technique, and for the positive
impact and its acceptance in the monetary system, it is highly needed to upgrade its
technology in terms of its safety and security. As a result, the system can also be able to
support such innovation.

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