Home >Opinion >Columns >Governments won’t sit around and let cryptocurrencies boom

The months of April and May have been wild for cryptocurrencies. Take the case of Bitcoin, the most popular crypto. On 14 April, its price touched an all-time high of $64,863. By 19 May, it had fallen by more than 50% to $30,682. At the time of writing this, it was at $37,270. This fall was driven by China talking about tighter crypto legislation to protect its financial system. What added to it was entrepreneur Elon Musk’s sudden concern about the environmental impact of Bitcoin mining.

Every bubble has a theory behind it. This is true for cryptocurrencies also. Cryptos have a fixed supply; hence, unlike government-backed fiat money, their supply cannot go up suddenly. They allow individuals to work around the conventional financial system and let payments be made directly between payer and payee. Further, cryptos permit transaction anonymity. And lastly, the hope is that a day will come when cryptos will be real money.

Crypto believers have drummed up these points to accentuate its cult. And many people have bought into it without thinking it through.

While there may be a limit to the supply of each crypto, there is no limit to the supply of cryptos. There are hundreds of cryptos going around. The fact that cryptocurrencies can move 50% upward or downward in a matter of weeks tells us that there is a fundamental weakness at the heart of their structure. As Mark Carney writes in Value(s): Building a Better World for All: “This extreme volatility reflects in part the fact that cryptocurrencies have neither intrinsic value nor any external backing… Even though they were set up in opposition to it, cryptocurrencies piggyback on the same institutional infrastructure that serves the overall financial system and therefore on the trust that it provides." There remain many difficulties in cryptocurrencies establishing their own trust “in the face of cyber-attacks, loss of customer funds, limits on transferring funds and inadequate market integrity".

Take the case of what happened when Musk suddenly showed concerns about the impact of bitcoin mining on the planet: mass selling ensued. Many investors who had bought bitcoin because Musk had been promoting it simply sold when he started to have doubts. Their trust in Bitcoin was through Musk.

Also, most cryptos have highly concentrated ownership, with a small number of individuals owning a lot of it. As a January 2021 report published in The Telegraph points out: “According to industry data, around 13% of all bitcoin… sits in the hands of just over 100 individual accounts." This concentrated ownership goes against the belief that one day cryptos will act like money, when a large number of retailers will accept these as a standard form of payment.

As Carney writes: “It is simply untenable in democracies that the core of the monetary system could be based on forms of electronic private money whose creators control large blocks of the currency, like bitcoin, [or] would have privileged access to customer data or payments systems (like some stablecoins)."

While this is an important point, it will never come to this, simply because governments and central banks will never let such a stage arrive.

Up until now, governments through central banks have had the exclusive right to create money (by printing it or issuing it digitally). Now they are not going to sit around doing nothing while crypto entrepreneurs try to keep coming up with newer forms of money. This explains why some of the world’s biggest governments are cracking down on it.

Also, anonymity of money bothers governments. As Carney writes: “Cryptocurrencies, when used as money, raise a host of issues around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion and the circumvention of capital controls and international sanctions. To the extent that they are used for transactions rather than speculation, many cryptocurrencies seem more attractive to those active in the black or illegal economy." Given all this, governments can’t sit around and let cryptos flourish. They need to at least be seen to be doing something.

The history of money tells us that while different forms of money emerge privately, it is the state which usually controls the monetary system. This is a point that John Maynard Keynes made in A Treatise on Money, in which he said that all modern states have had the right to decide what is money and what is not, and they have had it “for some four thousand years at least".

As long as taxes have to be paid in government-backed fiat money, its demand is going to stay. Also, more and more countries are likely to regulate cryptos in the years to come.

Finally, it is worth remembering that there is a huge difference between countries printing money and a few individuals getting together to start their own form of money. Fiat money backed by countries, despite all the abuse it gets and is prone to, will always have more credibility (in most cases).

Of course, there will always be a basket case, like the naira of Nigeria, where owning Bitcoin or some other crypto might make more sense at an individual level than the currency itself, but with due respect to grammar Nazis, some swallows don’t make a summer.

Vivek Kaul is the author of ‘Bad Money’.

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