Inevitably, a push back against crypto seems to be underway. China is planning to outright ban several crypto currencies, starting with Bitcoin. While the US DoJ, in the wake of the colonial pipeline attack, has started a crackdown against crypto. They have shutdown crypto exchanges and are making efforts to recover funds stolen by hackers and scammers. The FBI & Europol even set up an elaborate sting operation using their own dark web encrypted messaging service. (Can only imagine the google reviews for this service won’t be great…then again I don’t think you get access to google in prison!).
But then we have news that El Salvador wants to make bitcoin legal tender. So what gives? Well firstly I think we need to understand that most crypto currencies, bitcoin in particular, aren’t really currencies as we’d define them. The price volatility and the lengthy time to process transactions (60 minutes to a day or two…long time to wait for a coffee!) means its not really a convenient currency that could ever be used by the majority of people. It would be more accurate to describe them as a sort of digital bearer bond.
Now while yes, you can pay for goods in services with bearer bonds, but generally you don’t, as they likely won’t be accepted and the costs on your end (not to mention the processing time) means its not practical. Similarly, given the issues with crypto, only a few companies are willing to accept payment in crypto and then only really for ideological reasons (as the boss is libertarian bitcoin bug). If more customers actually used crypto as their main means of payment and companies were forced to bare the financial costs of delayed/fraudulent payment & price fluctuations themselves (which would become exponentially worse with more transactions), they’d quickly abandon it. This is pretty much what happened with Musk and Tesla recently. Causing Musk to go from libertarian hero to Bernie Sanders socialist in the eyes of bitcoin bugs (and as if to aid insult to injury a recent bitcoin conference has turned into a covid superspreader event).
The other problem with bearer bonds is that you are going to get more than a few odd looks if you try to use them. While there were some legitimate uses for them, notably as regards investing and money transfers between countries. But an awful lot of the time they are used to launder money or help dodge taxes. And similarly, while yes there is some use of crypto is for legitimate investment purposes. But they have also become increasingly the tool of choice for criminals looking to launder cash, move it overseas or as payment for extortion (bitcoin being used 95% of the time).
So you certainly understand why this crackdown is ongoing. As for El Salvador, well its one of an number of offshore hubs who profit from the more shady aspects of offshore financial activity, crypto being a particular speciality. So you can see why they wants to try and give bitcoin some legitimacy and avoid it being banned completely. Although one should note, they just want to make it legal tender, they are not adopting it as a national currency or anything like that.
Now crypto advocates would say that this shows why banning it will never work. Ya, until being in possession of bitcoins, or accessing a digital wallet, becomes a crime in of itself (similar laws with regard to cash, jewels, bonds or other assets means that if you can’t prove they were acquired legally, they can be confiscated under anti-money laundering legislation and you can be prosecuted as well, just for being in possession of them).
But suppose a country actually tried to use bitcoin as its national currency. What would happen? Probably several months of chaos and then collapse! The government’s ability to borrow, issue bonds, or control its money supply would be effectively impossible. And the rapid and volatile swings in its value would result in all sorts of problems. e.g. you pay the public service in bitcoin, but in between collecting taxes on a Friday and paying them on a Monday the price drops 20% so either you have to cover those costs out of the state coffers or the workers would have to be happy to accept an effective pay cut.
Now libertarians would say, but this is the point. We don’t like central banks (and there will be no public sector employees in the libertarian workers paradise) and we want to stop banks just printing money and borrowing recklessly. While I’d agree governments have gone a bit crazy with the money printers and borrowing over the last few years (you should be saving in the good times for a rainy day). But the pandemic (a rainy day!) shows why this is sometimes necessary.
Without central bank intervention, the response to covid would be very different. No lockdowns to flatten the curve (meaning hospitals get overwhelmed), no furlonging of workers (so mass unemployment, means massive claims for unemployment benefits) and no money to pay for medical PPE or the fast tracking of vaccines. In short you’d be looking at millions of extra deaths and a far more serious level of economic damage.
In fact, somewhat ironically, crypto being backed by a major government would be the last thing libertarians would want to happen. The first thing the US, the EU or China would do, is acquire large amounts of this digital currency, enough to allow them to gain control over it (either individually or collectively via the IMF). And note that when I say “acquire” I don’t mean buy. They’ll just confiscate it off criminals (about half of all bitcoin transactions involve criminal activity). Or pass some law allowing them to cease privately held accounts and set the price for compensation (if the bother paying compensation at all). This is pretty much what happened to US private gold reserves in 1934 and in other countries on various occasions (one of those pesky facts libertarian gold bugs tend to ignore, the gov’mint can just take your gold…and bragging about it online btw makes that alot easier, or they’ll make its sale or transfer illegal/heavily taxed).
The banks would join in and you’d be left with a monetary system even more under the thumb of the regulators, the government and the banks than the current financial system. Which is probably wants going to happen eventually. There are already proposals from various financial institutions to launch their own crypto currencies. Given that these will have the backing of the banks and, eventually governments, they can offer a level of convenience, security and price stability that existing crypto’s cannot.
Bitcoin and other crypto’s might survive for awhile, as a sort of digital gold, but only if they can clean themselves up. Crypto advocates need to accept that this criminal activity is going to result in unwanted attention. They need to start taking measures to contain the problem. You fight the law, the law tends to win.