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As far as I understand, governments & banks create money into existence. Governments often use the money they create to build infrastructure, give grants and create jobs.

What if everybody begins to use a cryptocurrency therefore nullifying the value of the governments currency?

How will governments circumvent the issue of spending when nobody wants to use it?

Notes

  • This is in a scenario where cryptocurrency is used in daily transactions.
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    $\begingroup$ Hmmm. That's about two or three semesters of economics courses and perhaps a civics course to explain the issues involved. The question's assumptions of what governments do is flawed, the question mixes up governments and economies, and the question assumes "governments" are naive about their revenue sources. $\endgroup$
    – user535733
    Commented Oct 31, 2017 at 3:38
  • $\begingroup$ Indeed an interesting question. However I don't see any worldbuilding in it. We already have cryptocurrency, and I don't see "nullifying the value of government currency". VTC as off-topic. Better ask this in Economics ? $\endgroup$
    – Vylix
    Commented Oct 31, 2017 at 3:53
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    $\begingroup$ Cryptocurrency is not much different from foreign cash, IMO. You could abandon USDs in favor of Euros, or the other way around, but why bother? If it were an attractive alternative capable of sustaining an economy the same way Fiat does, why would they care? $\endgroup$
    – timuzhti
    Commented Oct 31, 2017 at 4:55
  • $\begingroup$ @Alpha3031: exactly what I wanted to say. It's just going to be another way of performing trade - even if as a government I cannot exert any kind of control over it, so what? A government's control over its own currency is usually tenuous at best anyway. Market forces have been and will always be the main forces of change. $\endgroup$
    – Xenocacia
    Commented Oct 31, 2017 at 6:13
  • $\begingroup$ @Alpha3031 the difference is that America, atleast now is unable to print/create more euros. $\endgroup$
    – mateos
    Commented Oct 31, 2017 at 6:46

2 Answers 2

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You are asking a loaded question. Even if one accepts that governments create currencies out of thin air, those in free economies are valued by market forces. The government may create the physical tokens, and the government combined with the banking system creates the digital tokens, but they are backed by the the strength of the economy and the belief that all major actors will pay their debts. If faith in the currency drops, you get inflation and falling exchange rates.

As long as the government has the power of taxation, and as long as it insists that taxes are paid in the national currency, there will be a market where buyers try to buy this national currency. So the national currency will retain value. How much exactly is a question of supply and demand -- one might see interesting effects where the value goes up before Tax Day, if the nation has such a thing, and fall again as tax refunds glut the market.


To the question: The result might be a situation similar to real-world nations which use another nation's currency as legal tender.

  • Panama, which uses US Dollars in daily practice.
  • Kosovo, which uses the Euro.

Those are smaller economies, which trade the freedom to set their own monetary policies for the stability of a larger currency area.

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Makes little difference to the government

Governments are not like Facebook that you can simply ignore if you wish.

The biggest effect of cryptocurrencies is already on law enforcement and financial service (bank) regulation. Banks can trade in cryptocurrencies (or any other currency) if they wish. Few have interest in cryptos since the perceived risk of loss is high, and the risk of unintentionally participating in money laundering is high. Banks have an interest in a clear audit trail and recovery avenues for many reasons.

One currency will not "nullify the value" of another. Bitcoin did not eliminate value of the Hong Kong Dollar, nor the reverse. All currencies that trade will have an exchange rate set either by the market or by regulation...and cryptos are no exception.

Governments will continue to collect taxes and to pay their civil servants and soldiers in whatever currency it finds most advantageous to do so. If it's a competently run representative government, then that currency will probably match whatever the population is using.

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  • $\begingroup$ One currency will not "nullify the value" of another. It will if nobody wants to use it, cryptocurrency has the power to trigger hyperinflation/currency crash. It only needs to trigger the beginning of the downwards spiral. $\endgroup$
    – mateos
    Commented Oct 31, 2017 at 4:10
  • $\begingroup$ Governments will continue to collect taxes and to pay their civil servants and soldiers in whatever currency it finds most advantageous to do so. Governments may have trouble paying their civil servants, especially if they don't have the money to do so in the first place. The entire reasons governments want to create money is because they spend more than they earn, This is the case in almost all countries $\endgroup$
    – mateos
    Commented Oct 31, 2017 at 4:13
  • $\begingroup$ @Albert both of those comments seem much more your personal views than generally accepted economics. Voting to close - worldbuilding is not for politics. $\endgroup$
    – user535733
    Commented Oct 31, 2017 at 4:23
  • $\begingroup$ I'm pretty sure it's generally accepted that if nobody wants something, it has no value $\endgroup$
    – mateos
    Commented Oct 31, 2017 at 4:25
  • $\begingroup$ Regardless, your answer did not answer my question. I'm looking for a solution if it does happen. I'm not asking if it may happen $\endgroup$
    – mateos
    Commented Oct 31, 2017 at 4:26

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