Bitcoin's future as a cornerstone of the financial ecosystem

Bitcoin’s journey began in 2009 with the release of a whitepaper by the pseudonymous Satoshi Nakamoto. Initially envisioned as a peer-to-peer electronic cash system, Bitcoin sought to provide a decentralised alternative to traditional fiat currencies, enabling users to transact directly without intermediaries like banks. Its revolutionary blockchain technology provided transparency and security, addressing challenges like double-spending. However, Bitcoin’s trajectory soon diverged from its original purpose.

While early adopters experimented with Bitcoin as a medium of exchange, its journey as a currency has faced notable challenges. A significant milestone in its adoption occurred in 2021 when El Salvador became the first country to recognise Bitcoin as legal tender. This move highlighted Bitcoin’s potential to function as an everyday payment method and aimed to boost financial inclusion of the country’s largely unbanked population. However, issues such as price volatility, scalability, and limited global acceptance continue to hinder Bitcoin’s broader adoption as a stable currency. By the mid-2010s, Bitcoin began transforming into a store of value, earning the moniker “digital gold.”

Trends in Adoption

Some countries have explored Bitcoin’s potential as legal tender, with El Salvador making history as stated earlier. However, many Salvadorans still prefer traditional currency.

Nations like China have banned Bitcoin mining and crypto transactions, citing concerns over financial stability and illicit activities. Several developed nations, including the United States and the European Union member states, have refrained from granting Bitcoin the status of a legal tender.

Instead, regulatory frameworks often classify Bitcoin as a speculative asset, with stringent oversight aimed at curbing risks associated with its volatility and decentralised nature.

India’s Regulatory Stance

India has taken a cautious approach toward Bitcoin and other cryptocurrencies. Bitcoin is not recognised as legal tender, and the Indian government emphasises the risks of cryptocurrency use, including its potential to disrupt monetary policy and financial stability. India’s “Policy Trilemma”—balancing free capital flow, exchange rate stability, and independent monetary policy—makes adopting decentralised currencies challenging. Allowing Bitcoin as a currency could undermine the Reserve Bank of India’s (RBI) ability to regulate capital flow, control inflation, and ensure financial stability.

To modernise its financial system without adopting decentralised cryptocurrencies, India has introduced the Digital Rupee, a Central Bank Digital Currency (CBDC). Launched in 2022, the Digital Rupee facilitates efficient payment systems while ensuring monetary policy alignment under RBI oversight. This move reflects India’s preference for centralisation and regulatory control, contrasting with Bitcoin’s libertarian ethos.

Rise of CBDCs

Globally, CBDCs are emerging as a preferred solution for digital financial innovation. Nations like Sweden (e-Krona), China (Digital Yuan), and the European Union (Digital Euro) are developing CBDCs to streamline transactions, enhance financial inclusion, and counter the influence of private cryptocurrencies. Unlike Bitcoin, CBDCs operate under central bank control, ensuring monetary stability and compliance with national economic priorities.

Bitcoin as an Investment Asset

As Bitcoin’s utility as a currency waned, it gained prominence as an investment asset. Its capped supply of 21 million coins appeals to investors seeking an inflation hedge, akin to gold. Institutional adoption by companies like Tesla and MicroStrategy, along with increasing interest in Bitcoin ETFs from firms like BlackRock, has further solidified its status as a legitimate asset class. Millennials and younger investors are particularly drawn to Bitcoin for its digital nature and higher potential returns compared to traditional assets like gold.

India’s Digital Rupee aims to strengthen interbank settlements and retail payment systems while reducing cash dependence. Unlike Bitcoin, it operates within a centralised framework, ensuring alignment with the RBI’s policies. This approach highlights the contrasting paths between Bitcoin’s libertarian vision and central banks’ pursuit of digital financial innovation.

Bitcoin as Legal Tender

Bitcoin’s evolution highlights its resilience. While its decentralised design and price instability limit its viability as a mainstream currency, it continues to thrive as an asset class, competing with gold in the digital economy. Meanwhile, nations worldwide are prioritising CBDCs over cryptocurrencies like Bitcoin, leveraging blockchain technology to modernise payments while maintaining control over monetary systems. For Bitcoin, its future lies not as a currency but as a cornerstone of the modern financial ecosystem, redefining wealth preservation and investment in the digital age.

Views are personal. The author is Shravan Shetty, MD, Primus Partners.