Meaning: When the cryptocurrency crisis hits (and it soon will), the United States will be forced to remove the cloak of anonymity that facilitates criminal acts and that gives the crypto its lure
CAMBRIDGE, Mass. (Project Syndicate) – With cryptocurrency prices plummeting as central banks begin to raise interest rates, many are wondering if this is the beginning of the end of the bubble.
Maybe not yet. However, a higher opportunity cost of money disproportionately drives down the prices of assets whose main use lies in the future. Ultra-low interest rates flattered crypto, and young investors are now getting a taste of what happens when interest rates rise.
A more interesting question is what will happen when governments finally get serious about regulating bitcoin BTCUSD,
and its brethren. Of the major economies, so far only China has begun to do so. Most decision-makers have instead tried to change the subject by talking about central bank-issued digital currencies (CBDC).
But this is something of a non-sequitur.
President Biden’s executive order for cryptocurrency may have raised more questions than it answered: What is a central bank’s digital currency? How is it different from crypto? And why hasn’t the Fed introduced a digital dollar? WSJ’s Dion Rabouin explains. Photo composed: David Fang
A growing problem
Although CBDCs are likely to include privacy features for small transactions, larger transactions will almost certainly require individuals to reveal their identities. In contrast, one of the biggest attractions for private cryptocurrencies is the opportunity they offer to bypass governments. Admittedly, cryptocurrency transactions are completely traceable through the blockchain book, but users usually set up accounts under pseudonyms and are therefore difficult to identify without other information, which is expensive to obtain.
Some economists naively claim that there is no particular urgency in regulating bitcoin and the like, because cryptocurrencies are difficult and expensive to use for transactions. Try to tell it to decision makers in developing economies, where crypto has become an important tool to avoid taxes, regulations and capital controls.
“ Investing in some advanced cryptocurrencies is in a way no different from investing in conflict diamonds. ”
For poorer countries with limited government capacity, crypto is a growing problem. Citizens do not have to be computer thieves to bypass the authorities. They can only access one of several simple “off-chain” exchanges. Although cryptocurrency transactions mediated by a third party are in principle traceable, the stock exchanges are based in advanced economies. In practice, this makes the information practically inaccessible to the authorities of poor countries in most circumstances.
Money laundering, tax evasion
But is this not just a crypto that fulfills the promise to help citizens circumvent corrupt, inefficient and unreliable governments? Maybe, but just like $ 100 bills, cryptocurrencies in developing countries are just as likely to be used by evil actors as by ordinary citizens.
For example, Venezuela is a major player in crypto markets, partly because foreigners use them to send money back and forth without being seized by the country’s corrupt regime. But crypto is probably also used by the Venezuelan military in their drug smuggling operations, not to mention wealthy, politically affiliated individuals who are subject to economic sanctions.
Given that the United States currently maintains economic sanctions against more than a dozen countries, hundreds of units and thousands of individuals, crypto is a natural refuge.
One reason why regulators of advanced economics have been slow to act is the view that as long as cryptocurrency-related problems mainly affect the rest of the world, these problems are not their concern. Apparently buying in the idea that cryptocurrencies are essentially assets to invest in – and that the value of any transaction is unimportant – regulators are more concerned about protecting domestic investors and financial stability.
Crypto = conflict diamonds
But economic theory has long shown that the value of money ultimately depends on their potential underlying use. The largest investors in crypto may be in advanced economies, but their use – and damage – has so far been mainly in emerging markets and developing economies. One could even argue that investing in some advanced cryptocurrencies in a way is no different than investing in conflict diamonds.
Governments with advanced economies will most likely find that the problems with cryptocurrencies eventually come home to rest. When that happens, they will be forced to impose a widespread ban on digital currencies that do not allow users’ identities to be easily traced (unless, in other words, technological advances eventually remove all traces of anonymity, in which case cryptocurrencies). prices will collapse by themselves). The ban will certainly have to apply to financial institutions and businesses, and will probably also include some restrictions for individuals.
Such a move would greatly undercut current cryptocurrency prices by reducing liquidity. Of course, restrictions will be more effective the more countries apply them, but universal implementation is not necessary for significant local influence.
Hard lobbying to prevent regulation
Can a version of a ban be implemented? As China has demonstrated, it is relatively easy to close the crypto exchanges that most people use to trade digital currencies. It is more difficult to prevent “on-chain” transactions, as the underlying individuals are more difficult to identify. Ironically, an effective ban on 21st century crypto may also require the phasing out (or at least downscaling) of the much older paper currency entity, because cash is by far the most convenient way for people to “ramp up” funds into their digital wallets without being easily detected.
Just to be clear, I do not suggest that all blockchain applications be restricted. For example, regulated stable coins, backed by a central bank balance sheet, may still thrive, but there must be a simple legal mechanism to trace a user’s identity if necessary.
When, if ever, can there be stricter regulation of cryptocurrency? The absence of a crisis can take many decades, especially with large crypto players pouring huge sums into lobbying, much like the financial sector did in the run-up to the global financial crisis in 2008. But it will probably not take that long. Unfortunately, the cryptocurrency crisis is likely to come sooner rather than later.
This comment was published with permission from Project Syndicate — What’s the Crypto Regulation Endgame?
Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, was Chief Economist at the International Monetary Fund from 2001 to 2003. He is co-author of “This Time is Different: Eight Centuries of Financial Folly” (Princeton University Press, 2011) and author of “The Curse of Cash” (Princeton University Press, 2016).
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