Why do countries ban virtual currencies?
Russia became the latest country to join the evolving conversation last week as the Bank of Russia called for a blanket ban on cryptocurrency mining, trading and use in the country. . Although it remains to be seen if a ban will materialize after President Vladimir Putin spoke On the side of cryptominers, Russia would be far from the first to put in place such measures. The list of countries that have completely banned cryptocurrencies includes China, Egypt, Iraq, Qatar, Oman, Morocco, Algeria, Tunisia, Bangladesh and (as of this month ) Kosovo. Forty-two others have adopted restrictions to this effect, banning crypto exchanges or limiting the ability of banks to engage with crypto.
What are the factors driving these decisions and how might they affect the future of global crypto regulation?
The current global “crypto crash” is not the first time that Bitcoin and the broader crypto market have depreciated significantly. Similar accidents happened in 2021, 2020, 2018, 2013 and even before. These cyclical up and down cycles are due to the inherent volatility of crypto.
Like a decentralized currency Regardless of support from governments or financial institutions, Bitcoin and other virtual tokens allow greater freedom of transaction while being susceptible to extreme price swings caused by investor speculation and hype. Crypto’s volatility has spurred the creation of so-called ‘stablecoins’ such as Tether, which remove the principle of decentralization by pegging to the price of a stable asset – usually the US Dollar – although these tokens are highly dependent resources and the good behavior of their issuers, as was demonstrated when a trial provided by New York State revealed that Tether Holdings did not own the $69 billion it claimed backed its currency.
The current global “crypto crash” is not the first time that Bitcoin and the broader crypto market have depreciated significantly.
A case study can be found in El Salvador, which in September 2021 became the first country to adopt Bitcoin as legal tender. Intended to expand financial inclusion and help residents save on annual remittance fees, only a small fraction of companies decided to accept Bitcoin transactions due to concerns about price volatility and data privacy. The International Monetary Fund (IMF) cited these issues alongside “significant risks associated with the use of Bitcoin on financial stability, financial integrity and consumer protection” in one report recommending that El Salvador remove Bitcoin from legal tender.
Lack of regulation
As an emerging technology, new legislation has been needed to define and govern the use of cryptocurrencies, with widespread recognition of assets by governments being a relatively recent development. For some investors, blockchain’s focus on individual users and lack of state regulation is one of its biggest selling points. For governments, this lack of regulation presents significant problems, including the difficulty of calculating tax liability on crypto-assets.
The Indian government has spoken about this by announcing a Invoice to ban most private cryptocurrencies in November. In addition to only allowing certain cryptocurrencies to promote the underlying technology and its uses, India will launch its own official cryptocurrency. Prime Minister Narendra Modi has also openly expressed his desire for democratic nations to cooperate on the regulation of crypto to ensure it does not “end up in the wrong hands”.
Australia has taken similar steps to strengthen government oversight of cryptocurrency, announcing plans to create a licensing framework for crypto exchanges alongside a possible digital currency backed by its reserve bank. These measures will likely only become more common over time as governments continue to crack down on big tech companies, especially in the area of payments.
For governments, this lack of regulation presents significant problems, including the difficulty of calculating tax liability on crypto-assets.
Although primarily identified as a problem by end users, the impact of widespread cryptocurrency use on the climate has not escaped governments. The root of the problem lies in crypto’s use of blockchain systems and their reliance on intensive use of computing power; each bitcoin transaction, for example, requires the majority of computers in the bitcoin blockchain network to check action.
Bitcoin is one of the biggest power consumers in this regard, with each individual trade requiring 1,173 kilowatt-hours of power to complete, roughly equivalent to six weeks of power consumption in an average US household. Bitcoin mining and transactions alone expend an amount of energy per year comparable to the whole country of Norway.
In addition to the greater climate impact of this expense and associated carbon emissions, the energy-intensive use of crypto has an immediate impact on power grids, especially in developing countries. Following a recent series of power cuts, the Iranian government has claims that illegal crypto mining has been responsible for “10% power cuts this winter”. Meanwhile, Kosovo’s recent decision to completely ban cryptocurrencies follows its own series of blackouts, for which the government has also blamed large-scale crypto mining. As climate change becomes increasingly high on national agendas, it is reasonable to assume that restrictions on cryptocurrencies will continue to tighten as nations seek new ways to mitigate the crisis.
The usefulness of cryptocurrency for money laundering and buy drugs online has been known to regulators for years, and its prevalence has never diminished to any great extent – even during crypto bear runs, the volume of “dark net” transactions stay as high as ever. Indeed, illicit activity appears to be the only area of crypto transactions that is not affected by large-scale price fluctuations.
The COVID-19 pandemic has exacerbated the spread of crypto transactions on the dark net, primarily in the area of ransomware attacks where infiltrators encrypt a victim’s information and demand payment in their preferred form of cryptocurrency. The fear that the potential criminal use of cryptography might outweigh its benefits was explicitly mentioned in the January report of the Bank of Russia calling for a nationwide crypto ban. Turkey Crypto ban in 2021 used language in a similar vein, as did the most recent anti-crypto crackdown in China.
Of course, this potential risk has not escaped the rest of the international community. The United States may soon adopt its own regulatory position to combat fraudulent crypto practices, President Biden reportedly prepare an executive order asking federal agencies to weigh the risks and opportunities posed by cryptocurrencies.
Is the damage done?
Whether or not the United States and Western Europe take their own steps to curb blockchain commerce, the damage the wave of regulation has inflicted on investor confidence in crypto may already be irreversible. January saw the value of popular and niche cryptocurrencies plummet, wiping out around $1.4 trillion of the combined crypto market. Bitcoin and Ethereum both crashed more than 50% from their 2021 highs, while other assets fell more than 80%. If the United States implemented other countries that enforced their own crypto restrictions, this slippage could become even more significant.
The strongest supporters of crypto are not deterred, however. Online investing communities continue to urge each other to hold on to their crypto wallets. In response to the IMF’s recommendation that his government drop bitcoin as legal tender, Salvadoran President Nayib Bukele responded with a laughable meme. We can only wait and wonder if their instincts are right, or if this latest low could be the one that finally lasts – and what the global regulatory world might look like in 2023.