The dark cloud that has always hung over crypto has been the threat of government regulation, even though some regulation could actually be good for the asset class. In short, regulation could purge bad actors from the crypto space, eliminate ultra-high leverage that contributes to dramatic rises and falls, and foster trust among institutions and mainstream investors. Despite all of the wonderful things blockchain technology can do, most media around Bitcoin and crypto in mainstream outlets are negative. Get used to the haters if you haven’t already by now. If you’re here and you’re reading this article, know that you are early to crypto. Currently less than 1.5% of the world’s 7.8 billion people own or transact in blockchain assets.
If you hold crypto as of today, you’re an ‘innovator’. Give yourself a high-five. We’re seeing early institutional adoption- soon we’ll see mass institutional adoption.
On the other hand, crackdown regulation (the likes which we have seen out of China) has the potential to cause 40% drops in the prices of crypto. However, this is only FUD in the markets– there is no fundamental threat to blockchain technology because it is nearly impossible to shut down. To shut down blockchain tech, you’d have to pull the plug on the entire internet. No country’s government is that foolish.
Crypto Has Built-In Protections Against Bad Actors
Why is crypto such a big deal? Transactions, records, and layers of middlemen have not kept pace with the digital transformation we’ve seen over the last 30 years. Blockchain is the solution to this- it provides efficient, cheap, immutable, secure transactions and record-keeping. Blockchain’s most important feature is that it is decentralized. The creators (I believe there were multiple who operated underneath the pseudonym ‘Satoshi Nakamoto’) of Bitcoin knew that any store of value in cyberspace would be vulnerable to attack, so they created a system that was hard and extremely economically expensive to manipulate. If we look at Bitcoin as single node on the network, all we have is a wallet address with public and private keys, and a few lines of code. If one node on the network is removed, another can pop up just as easily. Since Bitcoin is a proof-of-work crypto, it will have more than enough power to withstand any kind of manipulation. While proof-of-stake cryptos like Ethereum or Cardano or Polkadot are much more efficient in terms of using less energy to operate and executing more transactions per second, they are slightly more vulnerable to attack by bad actors. So if all of the world’s governments collectively turned against crypto and tried to eradicate crypto, Bitcoin of all coins has the best built-in defense mechanisms. This video by Guy over at The Coin Bureau explains the tradeoffs between PoW and PoS brilliantly.
China has been trying to ban cryptocurrencies since 2017
China will be the first country to issue a Central Bank Digital Currency (CBDC), because CCP sees the utility in blockchain tech, and digital currencies have the added benefit of giving the state transparency into all private transactions. If you were a central government issuing a CBDC, what would you think of private cryptos like Ethereum or Cardano? You’d think they are a threat to the adoption of your coin, the Digital Yuan in this case. You would employ different methods to try and halt adoption of those currencies. Let me be clear about this, if China could actually ban private cryptocurrencies within its borders, it totally would. In September 2017 the CCP banned initial coin offerings (ICOs), which are essentially exercises in raising money to start a new cryptocurrency. This way the China at least wouldn’t see any new coins coming online within its borders.
Shanghai, birthplace of the world’s largest crypto exchange, Binance. Binance moved to Japan in 2017 and has been on the run in several different countries since.
China is notorious for its “Great Firewall” which blocks social media outlets like Facebook from operating in the country, and aims to prevent the transfer of private wealth outside of its borders. Still, millions of Chinese use VPN to log on to Facebook, and moving wealth out of the country is something of a national pastime. The Great Firewall has so far been unable to block crypto transfers from coming across its borders. All crypto exchanges have been run out of the country (Binance, currently the largest crypto exchange by volume, was founded in Shanghai but left China in 2017). If the government of a nation of 1.4 billion people that has some of the brightest minds, trillions of dollars in resources, and several years of effort can’t figure out how to pull the plug on blockchain technology, that should tell you something.
Governments Can Still Make Life Difficult
None of this is to say that governments can’t make it more difficult for people to adopt crypto. The IRS has posted a reward of $600,000 for anyone who can hack Monero, a leading privacy coin. Most of us have had to go through the painstaking process of Know-Your-Customer (KYC) with exchanges like Binance and Coinbase, where we’re uploading official documents like our passports and having screenshots taken of our faces. These are even stricter measures than it takes to open a standard bank account in most countries. This is already a huge hurdle, and defeats much of the original purpose of DeFi- to bring banking and finance to the unbanked. If we have to buy all of our coins on the exchanges with these strict KYC protocols, how will this bring finance to the unbanked? Another potential friction to adoption is that taxes specific to gains made on cryptocurrency could be raised relatively quickly by law-making bodies.
Further, ‘The Government’ is not some faceless anti-crypto body. In most countries, elected officials have to represent their constituents lest they get voted out. And their constituents are curious about investing in crypto. More than 49% of financial advisors in 2020 reported that their clients have asked about crypto, opposed to just 17% in 2019. If a big chunk of the investing class (which has outsize power and influence in government, like it or not) has interest in or holds crypto, lawmakers are far less likely to do anything that will hurt the asset class. It’s likely that mainstream retirement vehicles like individual retirement accounts will help global adoption of crypto tremendously. Some government leaders (like El Salvador’s Nayib Bukele and Britain’s Chancellor of the Exchequer George Osborne) are extremely bullish on crypto and have helped the technology gain global recognition and adoption in El Salvador’s case. Most governments have been intelligent enough to see there is great potential in blockchain technology, and are afraid of being left out in a global innovation. These governments likely have mixed feelings about crypto for this fact- yes the technology could add utility and value to the country’s economy, but it also poses a threat to the state’s power to manipulate monetary policy of the fiat currency they issue. Because of these conflicting feelings and because of the demands of their citizens, most countries have adopted a wait-and-see approach to cryptocurrencies. The wonderful thing about this is that blockchain technology continues to see adoption increase each day, making it more difficult for any kind of reversal effort by governments.
‘Banning’ crypto would require true worldwide coordination, something we almost never see. We all get a little scared when we see headlines about governments cracking down on crypto, but keep this fundamental always in mind- crypto cannot be banned. Stay confident in your investments. Further, Millennials and Gen Zers have been shown to see more value in the digital asset space- a Fall 2020 BlockChain Capital survey reveals 55% of Millennials will likely purchase bitcoin in the next 5 years vs. only 19% for the 55-64 age category. Gen Z are digital natives. Someone who has purchased skins or items in Fortnite has already been exposed to owning digital assets. Understanding and trading NFTs will be far more intuitive for this generation that for others. As Millennials and Gen Z age and advance into their careers, investment in the digital asset class will only grow. The arrow of history is pointing one way- and that’s adoption of the blockchain across many core economic processes and finance.