Satoshi Nakamoto, the mysterious figure(s) behind Bitcoin, designed the cryptocurrency as an alternative to fiat currencies. The first transaction featured a caption stating that the government was once again gearing up to bail banks out, yet another time. This, in effect, was a statement of fiat currencies’ inadequacies.
Many analysts speculated that Bitcoin was doomed to fail from the very start, and governments, central banks, and banks were and still are against it. However, the cryptocurrencies are still here in spite of the crazy volatility levels and ongoing bear market. Expectedly, governments are manifesting their wary now that Crypto seems to be here to stay.
Governments have been responding differently to the threat posed by Bitcoin, and some have banned it outright. China has made it illegal to engage in anything involving foreign cryptocurrencies, and Russia is getting there as well. This trend will spread to other countries with time. However, the U.S. and most European countries seem to have embraced cryptocurrencies for now, albeit with some apprehension as they are mulling regulation.
So, what would make powerful nations such as China ban Bitcoin, a relatively new form of currency? What threats does this digital currency coin dispose of?
Governments would be incapable of running without taxes. Taxation is such as a sensitive issue that this is where authorities draw the red line – prosecutors turn to tax evasion when everything else hits a snag. Cryptocurrency is an ideal way to evade taxes thanks to several features.
The anonymity offered by Bitcoin, coupled with the fact that Bitcoin transactions are done on a peer-to-peer Blockchain platform, makes it exceedingly difficult for authorities to track peoples’ spending and income. As such, anyone holding Bitcoin can buy, sell, and get paid, in any decentralized exchanges, without paying taxes. Additionally, Bitcoin is stored in digital form and accounts are accessible only to their owners. As such, the authorities cannot monitor your wealth over time.
Tax evasion through cryptocurrency is already happening on both small and large scales. People who transact using cryptocurrency evade small taxes that would have been levied on these transactions via banks. What’s more, the wealthy are turning to Bitcoin for closing huge deals as they seek to evade the governments’ scrutiny.
Money laundering is a financial crime that also aids in tax evasion. Laundering money has never been easier thanks to the emergence of Bitcoin, and it is estimated that USD 2 trillion is lost in money laundering every year.
Lack of control
Every government rises to power with the promise of a better economy. A good economy means better living standards and the masses are very passionate about this.
There are many ways to stimulate economic growth, but most governments always turn to monetary policies. This is a complex topic but fairly simple at face value. Governments manipulate the money supply to control inflation and deflation and hence set the economy on the desired path. This doesn’t always work, but it helps to keep things going for now. To this end, governments feel secure by knowing that they can always print more money to meet their needs.
The result of any monetary policy is one and the same: debt. Each dollar printed comes with a debt attached, and this debt has been soaring to unsustainable levels. The result is inflation, which means that people’s savings are devalued. People didn’t always know that, but the masses are catching up as exemplified by the ongoing “Yellow Vest” protests in Paris.
Bitcoin is a decentralized, peer-to-peer digital currency. This means that no single entity is responsible for issuing the coin. It also means that governments cannot manipulate it. Bitcoin is also limited in supply, unlike fiat currencies which are printed in the millions whenever necessary. All of these features and others are designed to ensure that the crypto coin is completely independent and can only be swayed by natural demand/supply forces. Considering the world economy’s potential for growth, this means that Bitcoin will only appreciate in value in the long-term. As such, Bitcoin investors do not have to worry about their savings getting devalued.
This is all good for the ordinary guy, but it is a ticking time-bomb for politicians. If at least 51% of the global population adopted crypto, governments would be incapable of manipulating the economies for their selfish, political ends.
One of the desirable features about Bitcoin is its privacy. People’s identities are masked by an encrypted set of numbers known as a public key. As such, transactions are essentially anonymous; that is unless you have the resources to decrypt these complex numbers. Bitcoin critics have argued that this makes the cryptocurrency vulnerable for use in crime, and they are right.
Bitcoin is used regularly for illicit trades. It was the popular means of payment on Silk Road, the infamous dark web online market where users could buy drugs and even hire assassins. This site has been closed for years now, but several others just like it have popped up since then. These sites’ users like Bitcoin because of the anonymity it affords as they know that illicit transactions cannot be traced back to them.
Fear has risen since Bitcoin could be used to fund and facilitate terror. Bitcoin has been adopted all over the world, and transactions take mere minutes to process. What’s more, Bitcoin transactions are under-the-radar due to the use of blockchain technology and also as they are not processed by banks, which are regulated by the government. This makes it convenient for financiers of terror to fund terrorism much more effective than before when they had to get past dozens of hurdles. However, recently unveiled data and reports suggest that terrorists prefer cash to cryptocurrencies, but would take either nevertheless.
Governments have placed great emphasis on the vulnerability of Bitcoin for facilitating crime. Ironically, fiat money is used to do the same albeit in different ways. What’s more, regulating Bitcoin would help overcome some of these vulnerabilities in a much better way compared to fiat money.
A political game-changer
Imagine a world without banks and financial institutions calling the shots. This is ambitious, but it can come true should cryptocurrencies eventually replace fiat currencies. Everything would change, including the political landscape. People would be more informed about their economies and power would revert to the masses. It could be somewhat of autopia for you, but it would be devastating for political regimes.
Control over a country’s money supply gives governments’ great control over their citizens’ wills. Without this control, governments would have to be much more accountable, transparent, and humble. Politicians know this, and they would rather kill cryptocurrencies before they kill them. Interestingly, some of the people taking part in the Yellow Vest protests are urging their fellow citizens to turn to Bitcoin and other cryptocurrencies, and people seem to be heeding to this call.
What to expect
Banning cryptocurrencies is futile unless governments are capable of monitoring all activities on the internet. Banning cryptocurrencies will only make them more valuable in the long-term.
However, there is a way for both governments and cryptocurrencies to exist, but it demands compromises from both sides. The United States has acknowledged the risks posed by Bitcoin. However, rather than ban it, it is contemplating coming up with regulations to govern its use nationally and hopefully even internationally. Regulation would rob Bitcoin of most of its desirable, outstanding features, but it would remain a slightly better alternative to fiat currencies. Regulation, however, may take years to achieve considering the complexity of the matter.
The fact that the U.S. and regulatory bodies such as the SEC are binding their time with cryptocurrencies is comforting, but it is worrying. The U.S. government will only tolerate Bitcoin if it is sure that it can control and regulate it.