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- Governments may love blockchain, but they hate cryptos
- Sanctions for an exchange: aiding and abetting cyberattacks
- A smokescreen to protect control—China bans the asset class, again
- The SEC fired a missile at Coinbase
- More regulatory attacks aimed at slaying the beast that threatens status quo
Cryptocurrencies are becoming mainstream assets. More and more companies are accepting them for payment, financial institutions have started allowing some percentage of digital currencies for portfolio allocation, and one Central American government has adopted the leading crypto as its national currency.
Proponents claim the crypto revolution is the evolution of fintech. Opponents say digital currencies have zero intrinsic value and are most useful for those looking to break the rules, regulations, and laws. Warren Buffett has called Bitcoin and peer cryptocurrencies “a worthless delusion,” “financial rat poison squared,” and has said that they “basically have no value.”
His partner, Charlie Munger, went even further, saying Bitcoin and other cryptos are “disgusting and contrary to the interests of civilization.”
Conversely, Jack Dorsey, co-founder of Twitter (NYSE:TWTR) and CEO of Square (NYSE:SQ), called them the currency of the internet. In an ironically witty comment, Tesla's (NASDAQ:TSLA) Elon Musk revealed his feelings about cryptos when he said:
“I might pump, but I don’t dump the assets.”
While support or resistance to cryptocurrencies could be generational, the conflict transcends the high-profile comments supporting or rejecting the asset class.
Control of the money supply is a core component of the government’s power. The cryptocurrency asset class’s ideology is libertarian and runs contrary to the financial status quo. Cryptos hand the control from governments back to a collective marketplace composed of individuals. If cryptos replaced fiat currencies, governments could not expand or contract the money supply to expand or contract growth, a substantial power and control tool.
We have seen the government and regulatory agencies fire some missiles at the asset class over the past weeks. This could be just a beginning to prevent the asset class from growing past its current $2 trillion market cap.
Governments may love blockchain, but they hate cryptos
There is almost unanimous support for blockchain technology as fintech offers speed and efficiency for settling transactions. Blockchain is either Bitcoin’s child or vice versa, which is the chicken-and-egg dilemma of the cryptocurrency asset class.
Many well-meaning systems and businesses can spawn controversial or even evil consequences. The pharmaceutical industry saves lives but abuses and drug addiction have also cost lives.
Governments have embraced blockchain technology, but cryptocurrencies are another story.
One of the roots of political power comes from controlling purse strings. The ability to expand and contract the money supply is a critical governmental function. The current stimulus that has stabilized the US and global economy during the worldwide pandemic is a perfect example.
Cryptocurrencies are libertarian assets as they remove the control of the money supply from governments. The value of a cryptocurrency is a function of the bids and offers in the market at any time.
Most cryptos have fixed supplies. They fly beneath the radar of governments, monetary authorities, and central banks. The rise of the cryptocurrency asset class is a direct ideological challenge to government control and power. Therefore, while governments may support blockchain, cryptos are a completely different story.
Sanctions for an exchange: aiding and abetting cyberattacks
Alarm bells in the halls of power worldwide likely went off when El Salvador adopted Bitcoin as its national currency in early September. Last week, the US Treasury sanctioned a cryptocurrency exchange for its role in laundering ransoms for cyberattacks.
The Treasury alleges that the “Suex” exchange facilitated transactions involving illicit proceeds from at least eight ransomware variants. We will likely see government lawyers use “know your customer” rules and regulations to sanction the exchange.
As many opponents point out, cryptos are the perfect currencies for nefarious and criminal endeavors. Charlie Munger called them “disgusting.” While the Treasury has gone after an exchange for logical abuses, the ideological reason for roadblocks is also compelling.
A smokescreen to protect control—China bans the asset class, again
I view the increasing number of regulatory actions against the cryptocurrency asset class as a coordinated attempt to preserve the status quo. It is easier to put a regulatory leash on cryptos before the overall market cap—and acceptance as a mainstream means of exchange—grows. The escalating number of sanctions and regulatory actions are nothing more than a smokescreen to maintain the status quo. If digital currencies dominate the markets over the coming years, governments will make sure they dominate the cryptocurrencies available for trading and investment.
The bottom line is that the US, Europe, and all other governments will do everything to keep control of the money supply. Hedge fund manager Ray Dalio recently said, if Bitcoin becomes really successful, regulators will “kill it.”
On Sept. 24, in another governmental move against the asset class, China declared all cryptocurrency transactions illegal.
The SEC fired a missile at Coinbase
The US Treasury’s latest move is the second regulatory missile over the past weeks. The SEC sent Coinbase Global (NASDAQ:COIN) a Wells notice informing the US-based crypto exchange it intends to bring an enforcement action to prevent the rollout of COIN’s “Lend” product that allows customers to lend crypto tokens for a fee or yield.
The SEC argues that “Lend” securitizes cryptos which put them under the agency’s regulatory umbrella. COIN canceled its plans for the product after receiving the notice.
Gary Gensler is the SEC Chairman. As the head of the CFTC, he allowed Bitcoin futures contracts to trade on the CME. During his hiatus from service at US regulatory agencies, Chairman Gensler taught a fintech course at MIT. Many cryptocurrency market participants believed he would support the asset class at the SEC.
Last week, the SEC Chairman said he doesn’t see much long-term viability for cryptocurrencies, comparing them to the wild-cat banking era in the US which occurred from 1837-1863 in the absence of federal bank regulation.
More regulatory attacks aimed at slaying the beast threatening status quo
El Salvador is a lone wolf, adopting crypto as its national currency. Meanwhile, China has made them illegal, with severe penalties for those that defy the law.
The US is using the Treasury, SEC, and other regulatory agencies to “protect” investors and businesses, but the goal is to protect the government’s control of the money supply.
I expect the number of regulatory actions and anti-crypto statements to grow with the asset class’s market cap. Ray Dalio said it best as the governments can “kill” Bitcoin and the other cryptocurrencies.
The number of regulatory missiles is likely to keep coming. The problem is the ideology, which runs contrary to the status quo and government power. When fully regulated, cryptos will no longer return the power of money control to individuals, which is the attraction for many devotees.