Cryptocurrencies and governments – Part Two

In the previous article on this topic, we dealt with how many states have shown interest in cryptocurrencies’ growth, and how the situation some still ignore, is in fact having effects on societies and people’s lives. We focused on the enthusiasts, in particular those whose enthusiasm is closed to fanaticism, not accepting criticism and tends to be ridiculous.

However, we saw how – behind a curtain of ridiculous – there are choices with actual economic and social impact on entire communities, so important they cannot be underestimated.

In this article, our focus will be on the opposing approach, the one of the states seeing in private digital currencies a threat for their authority and stability, so they choose to forbid them and eventually think about creating a new, centralized and state-controlled version.

China vs cryptocurrencies

China, prerunner of market trends, in September declared all transactions with cryptocurrencies illegal, intensifying Bitcoin and other cryptocurrencies repression, while preparing the release of its own version of digital currency, the e-yuan, probably available in 2022.

Bejing has shown once again the repressive measures it intends to put in place against what it has defined as a means of “economic and financial distress”, as well as means of criminal activities, such as money laundering, tax evasion and fraud.

Behind the worries of the chinese government, about the criminal activities and the disruptive power of cryptocurrencies (the same problems highlighted in El Salvador, as we saw in the previous article), lies the fear of loosing control over the economy, which the chinese bureaucrats have reached with difficulty through the years: cryptocurrencies, well before the pandemic, were used to circumvent Bejing’s controls, and that capital drain opened a way for a freer circulation of capital, opposed to the government’s financial policy. It is also clear the will to control a field, unregulated up until now, which has led China to adopt its own centralized digital currency, and consequently repress private currencies that may be in competition with it.

The impact of the repression will be limited for now, since China alone has just a relative influence on digital currencies’ markets. The government’s measures, however, have created a precedent, an example other states are probably going to follow.

India vs cryptocurrencies

In India, after a year of thinking about embittering sanctions, the chinese measures convinced the government to pass a law to forbid both possession of and transactions with private cryptocurrencies, while it is trying to create an official, centralized digital currency.

Indian crypto market had grown after a Supreme Court’s decision, back in March 2020, declaring a previous ban unconstitutional. It had grown of more 600% in a year, reaching more than 15 milion users in June 2021, in India only (according to a Chainalysis’ research).

Even if there have been investments for 6.6 bilion dollars, criticism - from both within the government and the central bank - has intensified: Prime Minister Narendra Modi has highlighted how the elements of cryptocurrencies that many see as strengths - such as decentralization and anonimity - are in fact dangerous, since they can be used to perpetrate criminal acts, especially if used on the large scale.

At the same time, the central bank has expressed its worries about private cryptocurrencies, such as Bitcoin, Ethereum and others, claiming that there may be risks for the security and the financial stability of the nation.

The law, setting forth the criminalization of possession, emission, exchange, and transfer of cryptocurrencies, will be one of the strictest, even more strict than the chinese decision, forbidding mining and transactions, but not the possession.

The world vs cryptocurrencies

India is in line with a lot of other countries trying to stop the spreading of cryptocurrencies, threatening the state monopoly on the production of banknotes and coins, while trying to promote centralized and safer alternatives.

China and India are peculiar cases, but a lot of South-East Asian countries are trying to regulate cryptocurrencies’ markets and create official digital currencies. Other international actors are trying to push centralization of digital currencies through less severe measures, such as the European Union, which has a plan for a digital euro in 2025, or the US, already implementing a e-dollar, without forbidding cryptocurrencies, but providing space for alternatives. Even if a nation alone cannot have a significant influence on the huge, global, decentralized market of cryptocurrencies, a collective international action against them, can create the premises for an important market reshaping.

It is clear that, even if there are examples of enthusiasm and futuristic programs (as we saw in the previous article), there is a global tendency for hostility, rather than enthusiasm, towards cryptocurrencies. The trend is a more state-centered, more regulated, safer and central bank or government-controlled approach when it comes to digital currencies. Many look forward to these regulations, which would make the advantages of digital currencies and blockchain technology available, while reducing the risks for what concerns the economy and the criminal activities.

It is important to highlight, however, that state-official digital currencies have risks as well (listed in this article): for instance, governments could have too much power over their citizens’ economic behaviour, which is especially frightening if we think about the existing authoritarian governments.

The nightmare of crypto-enthusiasts is becoming a reality, since state-intervention is the dominating approach when it comes to cryptocurrencies. Current data do not allow us to say if the change will be for the better or for the worse. What can be safely claimed, is that the approach towards cryptocurrencies is changing in places of power, and it would be better to take the topic seriously if we do not want to be bound to others’ future economic choices.

Translated by Greta Thierry