Buy, Ban, Or Copy? How Governments Are Responding To The Cryptocurrency Revolution

The global economy is facing an unprecedented currency disruption.

For decades, fiat currencies — based solely on the credit of a national government — have been the global norm. Since the United States stopped tying dollars to the value of gold in 1971, for instance, the currency has no value apart from its federal endorsement.

More recently, cryptocurrencies — decentralized, virtual currencies kept anonymous and protected from counterfeiting via encryption — have rapidly gained prominence. Countless reputable institutions — from Tesla and Morgan Stanley to Harvard University and PayPal — are now accepting, buying, and encouraging the use of bitcoin and other digital money.

Proponents of cryptocurrencies point out their value as a hedge against hyperinflation. Citing central banks’ increasingly dovish attitudes toward price levels, Noelle Acheson — Director of Research for cryptocurrency news outlet Coindesk — argues that bitcoin not only protects against rising inflation, but also “all the other negative consequences that usually accompany it.” 

Beyond skyrocketing price levels, Acheson sees bitcoin as a “hedge for unstable governments that close bank accounts, police states that want to seize private wealth, broken payments rails due to corrupted systems or outside cyber attack threats, paranoid leaders that want to disenfranchise opponents, export-protecting devaluations that trigger more inflation.” In a word, bitcoin protects against “crazy.”

Policymakers across the globe are responding to the rise of cryptocurrency in a variety of ways.

At the most pragmatic level, some are recognizing bitcoin as an investment opportunity. 

Temasek Holdings — a sovereign wealth fund of Singapore that manages $306 billion in assets — has been buying bitcoin since 2018. GIC — Singapore’s other sovereign wealth fund, which manages $488 billion — invested $70 million into the parent company of crypto exchange OSL. Likewise, Norway’s Government Pension Fund Global — which controls $1.3 trillion in assets — indirectly invests in bitcoin through one of its holdings.

El Salvador is the only country to fully accept bitcoin as legal tender. 

The small Central American nation — which previously used only the dollar as its official currency — passed a bill stating that “central banks are increasingly taking actions that may cause harm to the economic stability of El Salvador.” The legislation explains that the risk posed by central banks renders it “necessary to authorize the circulation of a digital currency with a supply that cannot be controlled by any central bank and is only altered in accord with objective and calculable criteria.”

In partnership with Salvadoran President Nayib Bukele, Jack Mallers — CEO of bitcoin wallet company Zap — touted the fact that bitcoin can freely travel across international borders and boost inclusivity for disadvantaged populations: “Over 70% of the active population in El Salvador doesn’t have a bank account. They’re not in the financial system. They had a huge problem of financial inclusivity and providing their citizens with basic human freedom.”

Indeed, bitcoin permits migrant Salvadorans working abroad to send their earnings home without losing a sizable portion to international transfer fees. In the words of Mallers, these fees can amount to “f*cking half” of a worker’s paycheck.

Other countries, however, are attempting to ban or heavily discourage cryptocurrency. 

For one, China barred financial institutions from facilitating cryptocurrency transactions and banned initial coin offerings (ICOs) — the introduction of new cryptocurrencies as a fundraising mechanism for companies. 

Citing the Chinese government’s desire to ensure its “currency sovereignty” and “legal currency status,” the People’s Bank of China instead began issuing digital yuan earlier this year. Although it lacks the decentralization of true cryptocurrency, the digital yuan offers “controllable anonymity” by offering citizens private transactions — albeit with the People’s Bank of China as the “sole third party.” 

Nations such as Ecuador, Thailand, and Saudi Arabia have followed suit in discouraging the use of cryptocurrency while creating their own “central bank digital currencies” (CBDCs).

Meanwhile, the Federal Bank of the United States plans to release a report this summer about the possibility of developing its own CBDC.

“The effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks, and other payment service providers that allow money to flow on a daily basis,” Fed Chair Jerome Powell said in a recent video. “Our focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation.”

Accordingly, Powell stressed that a digital currency would only be adopted in the United States after a “thoughtful and deliberative process.” Nevertheless, Wall Street is preparing for the embrace of digital currency as inevitable; one Morgan Stanley economist remarked that “the more widely digital currencies are accepted, the more opportunity for innovation and the greater the scope for disruption to the financial system.”

The success of governments’ attempts to maintain monetary supremacy over cryptocurrency is yet to be determined. On one hand, most CBDCs mimic cryptocurrencies through their use of blockchain technology, with the added benefits of stability and widespread acceptance. On the other hand, users of CBDCs would potentially lose the benefits of decentralization and anonymity offered by bitcoin.

As central banks venture into uncharted waters, time alone will determine citizens’ response to the digital currency revolution.

The views expressed in this opinion piece are the author’s own and do not necessarily represent those of The Daily Wire.

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