• Andrew Xiao

Cryptocurrency Regulation - What’s Next For Governments?


By Andrew Xiao

 

Two months ago, Chinese regulators passed an extensive series of legislation cracking down on the trade and operation of cryptocurrency. Earlier this year, the CCP instituted a ban on the sale of all crypto miners in China, citing environmental concerns and uneven energy distribution. In the U.S, policymakers have proposed legislation to limit the sale of crypto, with states such as Alabama indicating security concerns with the currency’s volatility. Such actions add to a growing trend of the role global regulators and governments play in the rapidly emerging cryptocurrency market, raising questions of whether or not government involvement in the emerging industry is justified. Due to the inexperienced nature of crypto, governments around the world must tread carefully when approaching the unregulated sector, as an overregulated industry could lead to collapse.


Since its creation in 2008 by an unknown entity pseudonymized “Satoshi Nakamoto,” Bitcoin has surged in popularity, globally recognized as the next major currency by both supporters and critics alike. It boasts a decentralized algorithm for processing transactions by ensuring that any transaction made by the user would be verified and vetted by millions of individual computers against their own copy of the central ledger — known as a blockchain algorithm. Through this, Bitcoin users benefit from its improved security and the lack of a need for a bank, enabling customers to avoid the taxes and fees associated with banks while also providing effective financial security.


However, while there are many benefits to the currency, there are as many downsides. In order to power these millions of computers, or cryptominers, behind Bitcoin, vast amounts of energy are required. Currently, as of October, the Cambridge Center for Alternative Finance (CCAF) estimates that Bitcoin cryptominers draw a total of 110 Terawatt Hours per year — 0.55% of global electricity production, or roughly the equivalent to the annual energy draw of small countries like Malaysia or Sweden. The long-term environmental impacts and added energy stress to power grids are the main reasons behind the Chinese ban. Bitcoin’s historic market volatility provides many challenges, with price spikes and sudden drops, warding off possible investors and making the currency hard to be taken seriously.


Perhaps the most prohibitive factor, however, is the lack of regulation among the currency. As it is a quickly developing new market, policymakers have struggled to keep up, leading to the volatility and sudden price fluxes of the industry, as well as its emerging use for money laundering and illicit markets. The question of the role governments play in regulating the market is now being brought to light, warranting policymakers to seek a goldilocks-like level of regulation, enough to provide security and stability to crypto, but not to kill the industry.


As crypto becomes more mainstream and governments voice their condemnation, Bitcoin has found its supporters elsewhere. Around the same time Chinese regulators pushed to limit crypto, El Salvador became the first country to adopt Bitcoin as legal tender, allowing any transactions — from groceries to taxes — to be paid in the currency. Led by the tech-savvy president Nayib Bukele, El Salvador pledged a 150 million dollar investment — 12% of El Salvador’s GDP — into Bitcoin integration, after a successful integration experiment at the popular tourist town of El Zonte Beach. Through the government-backed app ‘Chivo Wallet,’ Salvadorans are encouraged to withdraw funds in cash from more than 200 ATMs in the country, and they receive $30 in Bitcoin when they download the app.


However, as only about a third of Salvadorans use the internet, and with almost a quarter living below the poverty line, Bukele’s move into Crypto has often been called into question. Despite Chivo Wallet being created and maintained with taxpayer funds, the app is run by a private anonymous entity, with Bukele classifying almost all information about the app. Opposition leaders, such as Mario Gómez — an outspoken critic of the Bitcoin integration — was briefly detained by security forces without a warrant and had his cell phones seized, only adding to concerns regarding Bukele’s more autocratic stance in recent years. With widespread protests in El Salvador against the new Bitcoin law, Bukele remains hardline with his policy, claiming a somewhat 3 million Chivo users downloading the app, a number that many analysts have called into question.


El Salvador only adds to an alarming trend of authoritarian regimes and strongarm governments using Bitcoin for questionable purposes, with reports of countries such as Venezuela and North Korea using the currency to undermine UN sanctions. With the power and control behind the app, the government essentially has control over the country’s central banking system, while also suppressing opposition, the power behind crypto is essentially used to keep the government in power. Crypto, if in the left in unchecked hands, essentially stands as unchecked power.


There have been promising developments in Crypto, however, as stablecoins, an emerging new type of crypto, with growing interest from the SEC and the federal government to provide regulation, promises to serve as a bridge between cryptocurrency and traditional fiat currency in order to solve the issue of Bitcoin’s volatility. stablecoins, brought forth by a Hong Kong-based company, has gained significant traction in U.S. markets, due to its ability to be backed by the dollar, gold, or another stable asset. Its intent is to allow investors to avoid the notorious price swings of cryptocurrency, making it much easier to hold crypto. Support for stablecoins have surged — albeit endorsed by lobbyists and crypto executives — with a recent market valuation of just under $130 billion. The call for regulatory agencies to set up an appropriate framework has become more and more urgent, as financial analysts worry of potential economic strife. After a 17-hour system outage in September, federal officials outlined a series of likely rules that, if imposed, would benefit the security behind stablecoins, including mandating reserves to always have enough liquid to meet redemption demands as well as setting up a software system robust enough to avoid slowdowns and crashes during mass transactions. In parallel, the Treasury Department as well as the SEC, have both announced plans to prevent crypto from being used in illicit activities, such as money laundering and tax evasion.


As Crypto becomes the “next big thing,” governments around the world have scrambled to keep up; whether it be in condemnation or in support of the currency, crypto provides a multitude of new challenges for governments. Analysts worry if regulations prove too strict, crypto would collapse under the weight of legislation and kill the promise of decentralized digital currency.