Interest in cryptocurrency, such as Bitcoin and Ethereum, has seen an increase over the last several years. People throughout the globe continue to be intrigued by the concept of a currency that has no physical backing but rather one that is fixed in cyberspace.

This has led to a new playing field that is rapidly working into the mainstream financial system. However, as this new system of currency is becoming less theoretical and more concrete in practice, there is an increasing risk for government control and centralization. 

There are currently two primary approaches to digital currency: cryptocurrency and central bank digital currencies (CBDCs). Cryptocurrency is a specific kind of digital currency that holds to the principle of value through scarcity. Rather than having a fluctuating base value like paper currency, Bitcoin and other cryptocurrencies operate in a constrained system (in Bitcoin, for example, there will only ever be 21 million tokens) to establish a base value. Governing bodies do not determine this value, but it instead lives on distributed ledgers or blockchains.

CBDCs, in comparison, operate based on government oversight and centralization of resources through a central bank. This system is newer than other digital currency systems and has grown out of the potential shortcomings of the cryptocurrency system. 

For example, some have argued that having a centralized and controlled digital currency system would best allow for tracking transactions between parties and maintaining a country’s capital controls. In other words, by treating CBDCs like cash, the value of the currency can fluctuate based on its variable supply. This makes it easier for the central banking system to regulate how the digital currency operates within the system, allowing for more financial control by the central government.

While the Mississippi legislature has not passed detailed legislation concerning digital currency, state and federal governments across the country have taken a particular interest in this area over the last several days. 

For example, U.S. Federal Reserve Chair Jerome Powell has advocated that greater regulation be placed over cryptocurrency (if not establishing a federal CBDC) to mitigate potential risks to financial stability. This announcement came after last week’s discovery that Bitcoin’s worth had dropped nearly 30 percent after China had established new regulations upon the sector and has wavered in value since. 

Many interpret these new findings as a justification to increase the government’s involvement with digital currency. However, the danger of CBDCs is that they undercut the free market principle of competition within the context of various methods of currency.

Additionally, cryptocurrency, as it stands, provides a private option that prevents the problem of inflation that we see with government-centralized currency. The mere concern of financial instability is insufficient to justify centralization. After all, as Heritage Foundation’s Stephen Moore notes, “nearly every recession and depression of the last century can be traced to government mistakes, not necessarily private ones.”

As this new system continues to develop, it is all the more crucial to keep in mind the dangers of centralization and the giving up of financial control to the government.

Josiah Dalke is a Research Intern with the Mississippi Center for Public Policy. He is a Washington State native seeking a government degree at Patrick Henry College.