How Government Regulation Of Cryptocurrency May Be Ruining Its Advancement

Since their appearance a few years ago, cryptocurrencies have evolved from being just items of value to an integral part of today’s financial scene. While they offer individuals and investors the liberty to be in total control of their funds or assets, they have faced a huge amount of criticism from governments around the world and this is because the nature of these cryptocurrencies makes them “slippery” and hard to control by government and financial institutions.

This year alone, there have been intense amounts of crackdown actions against cryptocurrencies and operations related to them. Governments around the world have either placed bans against cryptocurrency use and operations in their countries or plan on doing so. Only a minority have shown support for cryptocurrencies and believe that they are good. El Salvador is the first country to adopt a cryptocurrency as a legal tender and the only country showing cryptocurrencies the full support they might deserve.

The cryptoverse has recorded losses of about $500 billion this year and these were as a result of the government’s attempt to either ban or control cryptocurrencies and related activities in their countries. Government interference and attempts to regulate cryptocurrencies have sent the prices of these digital assets to plummet. Governments across the world, like China and Nigeria for example, have placed bans on cryptocurrencies forcing businesses and miners to move out of these countries or shut down. All these contribute their quota to ruining the advancement of cryptocurrency.

To provide an insight into why governments dislike cryptocurrencies, we have to examine how fiat money (that governments trust) works and the role it plays in the economy of a country. Unlike cryptocurrencies that cannot be seen, fiat money is physical and is backed by the full faith and credit of a government. Countries have reserves which form the basis with which the central bank determines the amount of money to be printed and put into circulation for the economy.

The financial system is more complex than it may seem but one thing that remains sure is that the government remains at the top of the table controlling the system through the central bank. The system that involves lenders, borrowers and consumers rely on a chain of trust between parties with the federal reserve (the lender of the last resort) being at the end of that chain. This goes to say that fiat money is backed by tangible assets owned by a country.

Cryptocurrencies have been called currencies based on thin air, i.e., they are not backed by any tangible asset. They also do not need any central bank to operate, this takes them almost out of the grip and control of the government because the central bank does not have any authority to regulate its use. Unlike fiat money that is controlled and regulated using intermediaries like commercial banks and financial institutions, only the government can regulate cryptocurrencies but it is a huge argument that the government will only be destroying cryptocurrencies by trying to regulate them.

While speaking at the Code Conference that took place last month in Beverly Hills California, CEO of Tesla and Space X Elon Musk said that the US government should desist from regulating cryptocurrencies in the country. “It is not possible to, I think, destroy crypto, but it is possible for governments to slow down its advancement”, he said. According to him, the government should do nothing and just let cryptocurrencies thrive on their own. He also emphasized that he didn’t mean that cryptocurrencies are a cure-all by asking that they not be regulated. “I wouldn’t say that I’m a massive cryptocurrency expert. I think there’s some value in cryptocurrency, but I wouldn’t say it’s the second coming of the Messiah”, he said.

Irrespective of huge advantages like financial inclusion and ease of payments especially across borders that cryptocurrencies come with, governments across the world seem to dislike them for quite a number of reasons. Some of these reasons include:

• Government’s belief that cryptocurrencies fuel criminal activities

After comparing reasons for the dislike of crypto by governments, one that stood out was governments’ belief that cryptocurrencies fuel criminal activities like terrorism, money laundering, internet fraud, etc. They are of the opinion that these cryptocurrencies also help criminals to evade detection from law enforcement and appropriate bodies. While this might be true to a large extent, some experts argue that before the advent of cryptocurrencies, there has been the existence of nefarious activities and that criminals have always evaded detection. They also argue that irrespective of the dispensation, crime would not cease to exist and that cryptocurrencies should be left to thrive.

• Cryptocurrencies undermine the authority of governments

The nature of cryptocurrencies makes them decentralized and anonymous. This gives people the ability to undermine government authority by bypassing capital controls imposed by the government. This is another reason why the government may fear or completely dislike cryptocurrencies, as they have little or no control over them.

• Governments believe that cryptocurrencies will cause an upheaval in the existing financial systems as they eliminate the need for intermediaries

Financial systems across the world are characterized by intermediaries that make the financial system work. These intermediaries include banks, financial institutions, etc., that give governments power and help them control the financial systems. In the case of cryptocurrencies, the need for any form of intermediary is eradicated thereby short-circuiting whatever power the government had over the financial world as they become more and more popular.

The following are some of the ways that government regulation of cryptocurrencies may be ruining it:

• Government interference is responsible for most price manipulation

One occurrence that has always been quite a mystery for analysts and experts is how cryptocurrencies are susceptible to price volatility especially because there are no rules governing the movement of their prices. After research and studying the market, experts have come to the conclusion that government interference by trying to regulate cryptocurrencies may be one of the major reasons for price volatility. According to these experts, governments’ attempts at regulating cryptocurrency by regulating the price of assets, such as fiat currencies, through buying and selling actions in international markets, manipulates the prices. Governments also reduce the demand of cryptocurrency by imposing regulations that increase the cost of doing business thereby making such cryptocurrency less desirable.

• The whole point from the beginning was decentralization and anonymity

The whole point of cryptocurrencies from the onset was decentralization and anonymity. This is what they thrive on. Governments, by trying to take these unique selling points away from cryptocurrencies are ruining them. Governments want to have knowledge of who uses cryptocurrency and what they are being used for and the inability for them to have this information at their beck and call make them categorize cryptocurrencies as fuel for criminal activities

• Cryptocurrencies are here to stay whatsoever

Cryptocurrencies have become an indelible or inerasable part of today’s financial system. Experts think that because cryptocurrencies have attained an unshakeable position, all attempts to take it down will prove to be abortive as it will only delay, but not put an end to its advancement. So, instead of ruining it by trying to regulate it, banning it or shutting down related operations, they should be left to thrive on their own.

Conclusion

Deep down, governments know that cryptocurrencies are not something that can be eradicated. This may be why they are beginning to develop their central bank digital currencies (CBDCs) which they can issue and control. The fear with cryptocurrencies will always be governments’ inability to completely control them.