As Bitcoin and digital assets become institutionalized, the narrative of regulators is slowly changing. Once shunned as a currency for nerds and criminals, banks and institutions are now embracing the decentralized innovation. As digital assets gain recognition, the chance of a complete ban is fading.
Concerns remain among investors, however. Regulation of the new asset class has yet to reach consensus. While some nations are already taxing the trading and ownership of cryptocurrencies and promoting the new industry, others are banning their use. China now criminalizes any transactions via blockchains in addition to mining.
A thorn in the eye
Bitcoin as a currency is free, decentralized and neutral money, with fixed money creation. So in a hypothetical Bitcoin standard, governments and central banks lose their monetary power and control over their populations. It is therefore not surprising that some governments vehemently oppose it.
But bans often have the opposite effect, as the early days of the Internet have shown. States and governments had to comply because the effects of the revolutionary technology were too far-reaching to be stopped. This was demonstrated in the recent past by the messenger service Telegram. When it was banned in Russia, this gave the service an immense user gain. The blocking of 18 million IP addresses paralyzed a large part of the Internet in Russia, but Telegram continued to function. After the embarrassment, Russia lifted the ban again.
The Bitcoin network, like the Internet, is based on an independent open-source protocol. Everyone has the opportunity to use the network or even participate in it. It is often referred to as the “money of the Internet” and, as we are seeing in developing countries, enables the inclusion of the population in a global payment system.
The decentralized network has created the possibility of making censorship-resistant money accessible to everyone while offering no central attack surface. With Bitcoin, no one can be held accountable, transactions are final, and owners are self-determined in their dealings. The network itself is adaptable and can adapt to new circumstances.
A local, national ban would slow adoption in the country, put various banks in explanatory trouble, and criminalize citizens. People lose easy access and would have to find complicated ways to use the network. Exchanging national currency for bitcoin would have to be done abroad or privately, and it would be difficult to find anyone who might be interested in exchanging for that currency.
A majority of people would not want to expose themselves to these strains and risks. The fear of becoming liable to prosecution will prevent a large proportion from participating. A ban on possession and use would have massive consequences and mean a decrease in adoption. In a democratic country, this exclusion of citizens will lead to further problems. Preventing self-determination undermines trust in fair government.
The Streisand Effect
The prohibition of free technology and censorship of networks is something that society tends to attribute to totalitarian states. Concerned citizens will certainly question why the government denies them access. In the process, people will quickly question the current monetary system, in which money is created out of thin air. Then, central banks and corrupt politicians will be quickly identified as the impediments. A foundation for revolution.
“It’s a good thing that people in the nation don’t understand our banking and monetary system, because if they did, I think there would be a revolution before tomorrow morning.” – Henry Ford
In Venezuela and Lebanon, the national currency has been subject to severe hyperinflation for years. For years, increasing sums have been traded via LocalBitcoins. When people have nothing left to lose in terms of currency devaluation, they look for ways out. That is in the nature of humans.
Promotion of innovation
Bitcoin was the driving force behind distributed ledger technology, which is now used by various companies, banks and governments. Among other things, COVID certificates, health data or shares are stored on it. By banning the basis, not only its descendants are endangered, but also large parts of the economy. No country can afford the responsibility of refusing to develop a technology. A so-called brain drain would be the consequence, if the innovative companies and programmers look for better conditions abroad.
The transparency of the network is a good argument for sympathetic states. The pseudonymous transactions can be viewed by anyone and are stored forever. States have the possibility to analyze the blockchain and track payments, which is not so easy with cash.
With legitimization as a digital asset, states could benefit several times over. In addition to tax revenues from an asset, the right framework conditions create a breeding ground for innovative companies and service providers. Even some of the banks will be able to hold their own and find new ways with their customers. Citizens will regain a certain degree of personal responsibility, if desired.
The first approach of the USA to regulate crypto assets federally and legally can be found in the 2,700-page Infrastructure Bill. The monster proposal was met with criticism at times, as the fine print is intended to regulate the handling of money more strongly in general at the expense of privacy. The “Digital Asset Bill” contains amendments that would also represent a significant intervention in the crypto industry.
The industry would like to see uniform regulation and has been largely supportive of the agencies. However, the various federal agencies disagree on who should oversee and tax what and how.