Why Governments Can Never Stop Crypto
Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
Many people argue that cryptocurrencies will never be accepted as a valid form of money because governments can just pass laws to outlaw them.
“Remember China, China, China!” goes their mantra.
Trouble is, these crypto skeptics ignore the actual, on-the-ground consequences of such “bans” and how easily they can backfire.
Let’s take a quick round-the-world tour, and I’ll show you exactly what I mean. And yes, we can start in Beijing.
Back in 2017, the Chinese authorities didn’t pussyfoot around. They went straight for the jugular — the cryptocurrency exchanges.
That made sense, or so they thought. Exchanges are formal companies that need to be compliant with the regulatory framework of the countries where they operate.
But here’s the big all-important factoid that Beijing seems to have missed: For a population to adopt cryptocurrencies, they don’t need exchanges.
Are exchanges convenient? Yes.
A dire necessity? No
In fact, as I’ll explain in a moment, they are just one of the ways you can exchange your government-sponsored fiat money into cryptocurrency.
Then, once you’ve completed that initial trade, you’re up in crypto-space. You can teleport your money anywhere you want. Your transactions are almost entirely outside the regulatory reach of any country on Earth.
This doesn’t mean cryptocurrencies live in a Martian No Man’s Land. They do follow a set of bylaws. The difference is, they’re not the edicts or directives by any central authority. Instead …
The only rules that apply to a public distributed ledger are the rules of consensus that exist within its network. Nothing else.
In the parlance of the U.S. Securities and Exchange Commission or Commodity Futures Trading Commission, you might say that cryptocurrency networks are intensely rigorous — but amorphous — self-regulatory organizations.
So, what was the net effect of the so-called “China ban” on cryptocurrencies?
Beijing was unable to outlaw the possession of crypto assets; it’s almost impossible to even track down who owns what where.
They understood this. So, they didn’t even try.
Reason: By their very design, cryptocurrency networks are anonymous.
Or, they’re at least pseudonymous. In other words, although each account and the amount held is public information, it’s not possible to directly tie the ownership of these accounts to any one individual.
Meanwhile, despite the “ban,” China has turned bullish on blockchain.
Last week, President Xi Jinping declared that China must “seize the opportunity” created by blockchain, and that it will play “an important role in the next round of technological innovation and industrial transformation.” And this week, China’s Communist Party is taking a series of steps to follow through.
It underscores the reality that Chinese citizens are still very active trading crypto assets, despite the fact that the “ban” has been in force for over two years.
This is not to say that banning exchanges has no effect whatsoever. Though said effect is limited. If established exchanges are not available, people simply move to specialized social media sites and similar applications.
Consider websites like LocalBitcoins.com, a peer-to-peer trading marketplace, for example.
These sites provide a framework to ...
- Agree on terms and ...
- Reduce the risk that either side will run off with the money.
In areas where cryptocurrency trading is officially “banned,” these kinds of platforms merely transform into de-facto over-the-counter (OTC) exchanges.
To put it simply:
So far, the only significant effect of crypto bans has been to drive some traders to OTC (over-the-counter) trading platforms.
And it’s not just China. Similar crypto bans in countries like Venezuela and Zimbabwe have accomplished little beyond making these platforms that much more popular.
Can governments shut down these as well? That would very difficult.
The parties meet anywhere — at a café, outside a bank, on a park bench. They agree to the terms. The fiat portion of the trade is carried out. And once the buyer has transferred the fiat via bank transfer (or even in cash), the seller releases the crypto.
Plus, for additional safety, both the fiat and the crypto can be locked in an escrow account under a smart contract.
Where crypto trading is literally on the street
Does it work? Absolutely! I know because I’ve personally done these over-the-counter trades.
My experience isn’t from a place where crypto is banned, but rather with a government that’s on the brink of default.
As the authorities struggle to make ends meet and keep the lights on, they resort to draconian measures.
That takes us to the next stop on our tour: Argentina, where the government has imposed a whopping 33% tax on international transactions.
Think about that. It means that every time you want to use the banking system to get your money out of the country, the government takes nearly a one-third cut.
Maybe you want to make an online purchase of an airline ticket from a foreign carrier.
Or perhaps you just want to buy the latest smartphone not yet offered in local stores.
It doesn’t matter. If the money leaves Argentina, you pay the tax.
Or, consider the plight of businesspeople …
My father, for example, does business with companies based in Argentina. Whenever he brings the money home, the one-third tax is the equivalent of a massive confiscation.
All with practically zero hope it will end anytime soon!
For him, the only chance to get his money out of the country is to get some Bitcoin.
So to give him a hand, I went to Argentina to see how hard it would be to locate someone trading pesos for Bitcoin. As it turned out, not only did I find individuals, but I also found local dealers.
“If you want to buy Bitcoin,” said one, “you pay us 15% over market. If you want to sell, we pay you at least 10% over market.”
I did even better than the 10%. Bitcoin was selling for about USD 6,000 at the time, and I got between USD 6,800 and USD 7,000. The people I dealt with told me they’d buy as much crypto as I could lay my hands on.
The crypto dealers’ business model makes a lot of sense, and it’s in big demand.
They have high-net-worth clients looking to get their money out of the country. In big amounts and FAST.
So, the dealers keep a healthy stash of cryptocurrency on hand, offering their customers the ability to get their money out of the country while bypassing the banking system. Instead of paying the government’s outrageous 33% tax, the customers are glad to pay the dealer his 15%.
This a big change from the capital-control powers governments used to have just a few years ago!
Back then, when countries imposed capital controls, they could ban black-market dealers and throw them in jail.
Businesspeople would dress like hippies, stuff their backpacks with currency and try walking across the border. But border agents caught them frequently, and the controls were often effective.
Not now! Not in the crypto age!
The flight to Bitcoin in Argentina is the same thing that’s happening in nearly every country that has tried to impose currency controls.
Argentina’s national currency is down 50% against the greenback just in the past year. And now, the same folks who helped cause the crisis have just been voted back into office.
So, no matter what governments do or don’t do, you can see why crypto assets like Bitcoin are the only chance citizens in these countries have to protect their wealth.
At the end of the day, what do governments accomplish with bans or draconian controls?
They help to increase awareness of cryptocurrencies. They’re making crypto more popular.
Maybe we should send them a thank-you email:
“Keep up the good work, guys.”