After the collapse of prices, it will be interesting to know what will happen when governments take the regulation of Bitcoin and its ‘siblings’ seriously.
With cryptocurrency prices plummeting as central banks start raising interest rates, many are wondering if this is the beginning of the end for the bubble. Maybe not yet. But a higher opportunity cost of money causes the prices of assets whose main uses are in the future to fall disproportionately. Rock-bottom interest rates favored cryptocurrencies, and young investors are now feeling what happens when interest rates rise.
A more interesting question is what will happen when governments get serious about regulating Bitcoin and its siblings. Of the major economies, so far only China has begun to do so. Most policymakers have tried to change the subject by talking about central bank digital currencies (CBDCs).
While CBDCs are likely to include privacy features for small transactions, larger operations will almost certainly require individuals to reveal their identities. On the contrary, one of the biggest attractions of private cryptocurrencies is the opportunity they offer to circumvent governments. It is true that cryptocurrency transactions are fully traceable through the Blockchain ledger, but users often create pseudonymous accounts, so they are difficult to identify without other information, which is expensive to obtain.
Bitcoin Regulation in Developing Countries: Really Necessary?
Some economists naively argue that it is not particularly urgent to regulate bitcoin and the like because cryptocurrencies are difficult and expensive to use for transactions. Try to sell that to policymakers in developing economies, where cryptocurrencies have emerged as a major vehicle for circumventing taxes, regulations, and capital controls.
For poorer countries with limited state capacity, cryptocurrencies are a growing problem. Citizens do not need to be computer experts to circumvent the authorities. They just need to access one of several simple “off-chain” exchanges. Although cryptocurrency transactions intermediated by a third party are, in principle, traceable, the exchanges are based in advanced economies. In practice, this makes the information virtually inaccessible to authorities in poor countries.
But isn’t this simply fulfilling the promise of cryptocurrencies to help citizens circumvent corrupt, inefficient, and unreliable governments? Perhaps, but like $100 bills, cryptocurrencies in the developing world are just as likely to be used by evil actors as they are by ordinary citizens.
For example, Venezuela is a major player in the cryptocurrency markets, in part because expats use it to send money back and forth without it being seized by the country’s corrupt regime. But cryptocurrencies are also used by the Venezuelan military in their drug smuggling operations, not to mention wealthy and politically connected individuals subject to financial sanctions. With the United States currently applying these sanctions to more than a dozen countries, hundreds of entities, and thousands of individuals, cryptocurrencies become a natural haven.
Why and How Cryptocurrencies can be regulated
Can any version of a ban be adopted? As China has shown, it is relatively easy to shut down the cryptocurrency exchanges that most people use to trade digital currencies. It is more difficult to prevent “chain” transactions since hidden individuals are more difficult to identify. Ironically, an effective 21st-century crypto ban might also require the phasing out (or at least scaling back) of the much older device of paper money, as cash is by far the most convenient way for people to spend money. “push” funds into your digital wallets without being easy to detect. By way of clarification, I am not implying that all blockchain applications should be limited. For example, regulated stablecoins backed by a central bank balance sheet can continue to thrive, but there needs to be a simple legal mechanism to trace a user’s identity if needed.
When, if ever, will there be tighter regulation of cryptocurrencies? If a crisis doesn’t come, it could take many decades, especially if major cryptocurrency players invest huge sums in lobbying, as the financial industry did in the run-up to the 2008 global financial crisis. Do not take so long. Unfortunately, the cryptocurrency crisis will most likely come sooner rather than later.
By Audy Castaneda
