Who controls money? Governments and their central banks. They print it and digitize it in the form of bank and credit accounts. Are they going to watch crypto enthusiasts drum up newer versions of fiat? No. Most, if not eventually all, will try to slow it down or even outright ban it.
The other thing going in governments’ favor is the fact that cryptos have earned a bad reputation for their high volatility, wealth concentration and more importantly being perfect conduits for money laundering, and tax evasion among other financial cloak and dagger methods.
But can government truly kill cryptos?
Where do cryptos show weaknesses?
On 14 April, bitcoin’s price touched an all-time high of $64,863. By 19 May, it had fallen by more than 50% to $30,682.
On June 8, it was closer to $33,000. The fall was driven by China talking about tighter crypto legislation to protect its financial system. What added to it was entrepreneur Elon Musk’s sudden concern about the environmental impact of Bitcoin mining.
The hope is that a day will come when cryptos will be real money.
There are hundreds of cryptos going around. The fact that cryptocurrencies can move 50% upward or downward in a matter of weeks tells us that there is a fundamental weakness at the heart of their structure.
Take the case of what happened when Musk suddenly showed concerns about the impact of bitcoin mining on the planet: mass-selling ensued.
Also, most cryptos have highly concentrated ownership, with a small number of individuals owning a lot of it. As a January 2021 report published in The Telegraph points out: “According to industry data, around 13% of all bitcoin… sits in the hands of just over 100 individual accounts.” This concentrated ownership goes against the belief that one day, cryptos will act like money when a large number of retailers will accept these as a standard form of payment.
Cryptos’ leader Bitcoin stands strong
The number of Bitcoin’s global users has eclipsed 100 million. The system’s network security, number of developers, and new applications are at all-time highs. Dozens of companies including Tesla and Square have started to add Bitcoin to their corporate treasuries.
This worldwide success allowed the top crypto to survive a variety of attacks which in some cases threatened its existence.
It did not fall victim to the government’s shut down efforts such as with previous attempts at parallel online digital currencies, like e-Gold and Liberty Reserve, which were shut down by the US government before even making it to $10 billion in market capitalization. Bitcoin now has a market cap of $1 trillion, plus or minus.
Bitcoin is tenacious because it is a globally-distributed phenomenon. The vast majority of mining takes place outside of the US, in China and central Asia. The software’s core developers and node-runners (who host Bitcoin’s servers) are scattered throughout the world.
This decentralized architecture has already insulated Bitcoin from attacks at the highest levels.
Existential threats to cryptos
The US government led by then-Treasury secretary Steve Mnuchin launched an attack on Bitcoin in December 2020 which would have forced US exchanges to gather more information about individuals withdrawing their Bitcoin to wallets they control. But the crackdown failed.
The biggest attack in Bitcoin’s history came in 2017 at the software level. That spring a handful of the most important industry actors gathered and signed what is called the New York Agreement. The authors boasted more than 83% of the global mining hash power, more than 50 total companies, more than 20 million wallets, and a huge share of the payment infrastructure. It was an alliance between Chinese miners, Silicon Valley, and Wall Street, and their goal was to change Bitcoin to allow it to process more transactions per second, at the cost of sacrificing decentralization and the ability of users to audit the monetary supply from home.
Despite the odds, grassroots activists ended up building a movement that defeated this New York alliance.
By November 2017, the corporate “SegWit2X” plan was dead, and Bitcoin remained decentralized.
A government controlling hash rates could have their miners burn billions of dollars to temporarily damage the network in what’s called a “51% attack.” In such an attack, a majority of miners could team up and use their superior hashrate to momentarily overwhelm the network. The price of the hardware required would exceed $5 billion.
Another alternative would be to seize a majority of the world’s mining equipment in a military operation. But the logistics is prohibitive.
Governments could try to marginalize Bitcoin by introducing a competitor: a Central Bank Digital Currency, something many central banks worldwide are experimenting with, especially China. Ultimately, however, CBDCs like China’s DCEP can’t compete because their floating global price will be tied to the existing fiat currency, which will inevitably fall in relative purchasing power.
Banning the crypto
That may soon be the case in India, according to news agency Reuters. The report states:
“India will propose a law banning cryptocurrencies, fining anyone trading in the country or even holding such digital assets […]”
India’s proposal, which isn’t yet law, would “criminalize possession, issuance, mining, trading and transferring crypto-assets.”
A recent report from Academy Securities sums it up as follows:
“This (crypto ban) subject is getting a lot more attention as countries like Turkey try and repress criminal behavior and the U.S. wrestles with how to impose sanctions effectively in the age of digital currencies. Taxation is also an issue that is garnering attention rapidly. Look for governments to try and regulate how crypto is used and taxed.”
The shocking best way to kill crypto
If governments suddenly get Bitcoin fever and embrace cryptocurrency, it might spell the end for digital money.
U.S president Ronald Regan had it right when he said: “The nine most terrifying words in the English language are: I’m from the government, and I’m here to help. “
Imagine if countries start to embrace the use of cryptocurrencies such as Bitcoin. Next are heavy regulations on it. Taxes that would be levied and hence the benefit of holding them gets diminished. Governments would insist on having a blockchain record of every transaction you ever made, giving them eyes to pry into everyone’s financial life. That’s the end of crypto as we know it.