The boa constrictor wraps itself around its prey, and squeezes until the life has gone; they cut off the blood supply. Governments are going to be cryptocurrencies’ boa constrictor.
South Korea provides the perfect illustration of how this reptilian embrace will work. Cryptocurrency operators in South Korea will have to shut down if they do not file a report with the government by 24 September. They are required by then to make three sweeping (and expensive changes): they must have an information security management system; they must confirm that the exchange has opened an account where deposits and withdrawals can be verified using real names; and they must ensure there are no legal or regulatory violations by company executives. Upbit, the country’s biggest exchange, closed trading in 24 out of its 25 tokens on 18 June.
Kim Hyoung-joong, head of the Cryptocurrency Research Center at Korea University, said “regulation could nip this new industry in the bud before it has a chance to grow. Bad investments are a personal responsibility. The government should sit back and watch”.
This snake has no intention of sitting back and watching its prey survive.
A poll by UBS of 30 central banks’ reserve managers concluded that 85% don’t see cryptocurrencies replacing gold in their foreign currency reserves. On the other hand 60% of them expect at least one G7 central bank to make digital currencies directly available to consumers within the next half decade. More than 80% per cent expect “wholesale” central bank coins, which would be made available to large financial institutions in the next five years.
So these reptiles don’t like cryptocurrencies; but they rather like the technology that gives cryptocurrencies their edge.
This is how it will be – all the libertarians devoted to advancing their own particular prized version of a cryptocurrency will gradually be squeezed into ever-tighter corners as central banks and governments slowly re-assert control over their most important form of authority – money.
Cryptocurrencies may become legal tender in tiny, unimportant jurisdictions – no offence intended, El Salvador – but it’s unlikely that they will ever make it to the stage of being internationally recognised legal tender.
The cobra’s venom
India’s cobras are also at work.
Indians have become rapidly fascinated by cryptocurrencies. By May this year Indian citizens had put the equivalent of almost $6.6 billion into cryptocurrencies, against around $923 million up to April 2020. Chainanalysis, a blockchain data platform, identifies why India has got the crypto bug: it’s because (as in Venezuela) people are trying to find an alternative to “when a country’s native fiat currency is losing value to inflation”; people turn to cryptocurrencies “to preserve savings they may otherwise lose”. They have been ploughing into cryptocurrencies even though the country’s central bank, the Reserve Bank of India (RBI) issued a directive – struck down by the Supreme Court in March 2020 – that banks should have no dealings with virtual currencies. India’s government is due to consider this month the ‘Cryptocurrency and Regulation of Official Digital Currency Bill, 2021’; this would ban all private cryptocurrencies in India and provide for the creation of an official digital currency – a Central Bank Digital Currency or CBDC.
Reverse China Syndrome
The 1979 movie The China Syndrome took for its main plot the rather fanciful idea that if a nuclear meltdown happened in the US it would tunnel its way to the other side of the planet.
What should we call a meltdown that started in China and ended up in Wyoming?
That’s what’s happening in the world of cryptocurrencies. A lot of the more than 5,000 cryptocurrencies listed as ‘assets’ on Coinbase, which operates a cryptocurrency exchange platform, were once ‘mined’ using advanced computers in China. It’s estimated that as much as 75% of the world’s Bitcoin mining happened in China. Note the past tense; in May, China’s central bank, the People’s Bank of China, began an on-going attack on cryptocurrencies; cryptocurrency miners in China closed shop en masse. Cryptocurrency prices plunged.
Maybe some of the dislocated cryptocurrency miners will find a home in the US state of Wyoming, famed for rodeos. Wyoming might now become famous for rodeos where riders straddle Bitcoins instead of steers. Kraken Bank, based in Wyoming, has become the first digital currency business to receive a US state banking charter. It hopes to launch in the second half of 2021.
Legal tender and state power
Leaving aside the question of whether cryptocurrencies are currencies or assets, the major issue facing their developers is how far central banks are willing and able to coordinate policy regarding them.
The Bank for International Settlements – the central banker’s bank – has already signalled that it favours central bank digital currencies (CBDCs), because they could create a ‘virtuous circle’ of great financial access, lower costs and better services. “Central bank digital currencies… offer in digital form the unique advantages of central bank money: settlement finality, liquidity and integrity. They are an advanced representation of money for the digital economy [and should be] designed with the public interest in mind”, it said. The International Monetary Fund (IMF) published a paper last October, gazing into the future. It said: “A single global stablecoin (GSC) becomes commonly adopted in many countries and replaces the local currency as store of value, means of payment, and unit of account; and is also widely used for international transactions. This scenario may arise if a big tech platform of global scale decides to launch a GSC to its large customer base which spans across the globe…the GSC could be adopted globally at a rapid pace… As the GSC gains popularity, network effects would take over: agents would start invoicing contracts in the GSC and financial intermediaries would start collecting deposits and lend through GSC-denominated contracts. At some stage, once adoption reaches some critical mass, the peg to existing reserve currencies may no longer be needed to generate trust in the value of the GSC, and the GSC could become a fiat currency”. The more recent BiS document disparaged ‘stablecoins’ – but the policymakers’ drift is clear: digital currencies controlled by the state are on their way.
China wants to launch its own digital e-yuan, which has been trialled in various of its cities, for universal use in time for the Beijing Winter Olympics in February 2022. For China a CBDC is as much about ensuring state control over the most fundamental aspect of a citizen’s life – how and on what do they spend their money? One doesn’t need to be conspiracy-minded to see its crackdown on private cryptocurrencies as a step in this direction. Technology and politics are driving this money revolution; just as the telephone landline business is dying thanks to mobile phones, so too is cash ebbing away thanks to mobiles.
Covid’s unforeseen consequences
It might seem a big step from Covid to CBDCs.
But the pandemic has created an atmosphere of inter-generational mistrust. It’s contributed to widening wealth gaps. It’s not surprising that people, especially the younger, feel that they either have been or are being ‘left behind’ by governments who seem able to lavish spending yet unwilling to recognise rising inflation. As we have said so often, the purchasing power of your money is endangered. The astonishing rise of cryptocurrencies is in part a demonstration of the hunt by many for lasting value in whatever is used as a currency.
At Glint, we share the same goal as cryptocurrency fans. As fiat currencies lose purchasing power, and governments struggle with the plethora of problems Covid has brought into sharp focus, it’s no wonder that people can be attracted to cryptocurrencies. They seem to hold out the chance to preserve wealth, by stepping outside the regime of government-controlled legal tender.
But if I am right – and governments either jointly or alone – do a ‘boa constrictor’ on virtual currencies – then these currencies will be strangled and, apart from die-hard fans, will lose influence and support. Those holding Bitcoin or the thousands of other virtual currencies may find themselves swallowed whole by the state, chewed up and excreted. There is an alternative, and it’s gold-as-money, as exemplified by Glint. Should you want to take your money out of crypto, but still want an alternative to government currencies: it’s here, has been used as money for centuries. Off-ramp from crypto into gold. Gold with Glint.
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