How will cryptoregulation end? | opinions

With cryptocurrency prices plummeting, many are wondering if this is the beginning of the end of the bubble. Possibly not yet. However, the higher alternative costs for money are pushing prices disproportionately down on assets whose primary use is in the future. Ultra-low interest rates favored cryptocurrencies. Young investors are now getting a taste of what will happen when interest rates rise.

A more interesting question is what will happen when governments finally get serious about regulating Bitcoin and Co. Of the major economies, only China has started to do so so far. Most policy makers have instead tried to shift the issue to digital central bank money.

But that’s a bit of an illogical leap. While the CBDC is likely to include privacy features for smaller transactions, participants in larger transactions will almost certainly be asked to reveal their identities.

Avoid state influence

In contrast, one of the biggest appeals to private cryptocurrencies is the ability to evade government influence. It is true that crypto transactions via blockchain ledgers are fully traceable. However, users typically create their accounts under a pseudonym and are therefore difficult to identify without additional information which is costly to obtain.

Some economists naively claim that the regulation of Bitcoin and Co. is not very urgent because it is difficult and expensive to use cryptocurrencies for transactional purposes. Tell it to politicians in developing countries, where cryptocurrencies have emerged as an important tool to avoid taxes and to evade regulation and capital controls.

For poorer countries with limited government capacity, cryptocurrencies are a growing problem. Citizens do not have to be computer geniuses to circumvent government regulations. All you have to do is access one of the various simple “off-chain exchanges”. Although crypto transactions mediated by third parties are in principle traceable, these exchanges are based in developed countries. In practice, this makes the information inaccessible to authorities in poor countries in most cases.

But does not just mean that cryptocurrencies are fulfilling their promise to help citizens escape the influence of corrupt, inefficient and untrustworthy governments? Maybe. But like $ 100 banknotes, cryptocurrencies are used by malicious actors as well as ordinary citizens in developing countries.

Cryptocurrencies as a refuge

For example, Venezuela is a major player in the crypto markets today. This is partly because foreigners use these markets to send money back and forth without being confiscated by the country’s corrupt regime.

But the cryptocurrency is certainly also being used by the Venezuelan military to smuggle drugs – not to mention wealthy, politically connected people who are subject to economic sanctions. As the United States currently imposes such sanctions on more than a dozen countries, cryptocurrencies are a logical refuge.

One reason regulators in developed countries have been so slow to respond is the belief that they do not have to worry about crypto-related problems as long as these problems primarily affect the rest of the world. Regulators seem to embrace the idea that cryptocurrencies are fundamentally investments, and they are more concerned about domestic investor protection and financial stability.

Less liquidity, falling prices

But economic theory has long shown that the ultimate value of a currency depends on its potential uses. The largest investors in cryptocurrencies may be in the developed world, but the purpose – and the damage caused – has so far been mostly in the new world and developing countries.

The governments of the advanced countries will most likely find that the problems with cryptocurrencies will ultimately backfire on them. When that happens, they will be forced to adopt a general ban on digital currencies that does not allow easy tracking of user identities. This ban will certainly apply to financial institutions and companies and will probably also include certain restrictions for individuals.

Such a move would steep the erosion of today’s cryptocurrencies by reducing liquidity. Of course, the more countries that apply the restrictions, the more effective they will be, but universal implementation is not required for them to have a significant impact locally.

Cryptocrisy sooner rather than later

Can any version of a ban be implemented? As China has shown, it is relatively easy to close the crypto exchanges that the vast majority of people use to trade digital currencies. It is more difficult to prevent “on-chain transactions” because the people involved are harder to identify.

Ironically, an effective ban on cryptocurrencies in the 21st century may require phasing out (or at least limiting) the much older instrument of fiat money, since cash is clearly the most practical method of depositing money into digital “wallets” without to be easily recognized will.

I will not here suggest that all blockchain applications should be restricted. In this way, regulated stack coins, which are secured by central bank balances, can continue to be used successfully. But there must be a simple legal mechanism to establish the user’s identity if necessary.

When could there actually be a stricter regulation of cryptocurrencies? Apart from a crisis, this can take many decades, especially since major crypto-players – like the financial sector in the run-up to the global financial crisis in 2008 – are spending huge sums on lobbying. However, it probably does not take nearly as long. Unfortunately, a cryptocurrency crisis is likely to hit faster than later.

Copyright: Project Syndicate.

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