The crypto crisis means regulation will come sooner rather than later. Kenneth Rogoff

wooitho Cryptocurrency prices are falling As central banks begin raising interest rates, many are wondering if this is the beginning of the end of the bubble. Maybe not now. But a high opportunity cost of money reduces the prices of assets whose main use is in the future. Ultra-low interest rates flatter crypto, and young investors are now aware of what happens when interest rates rise.

Another interesting question is what will happen when governments finally get serious about regulating bitcoin and its brethren. of the largest economies China Have started doing it till now. Instead most policy makers have tried change subject By talking about Central Bank Issued Digital Currencies (CBDC).

But this is a non sequitur thing. While CBDCs are likely to include privacy features for smaller transactions, larger transactions will almost certainly require individuals to reveal their identities. Conversely, one of the biggest attractions of private cryptocurrencies is the opportunity they offer to bypass governments. True, cryptocurrency transactions are entirely traceable via the blockchain ledger, but users usually set up accounts under pseudonyms and are therefore difficult to identify without other information, which is expensive to obtain.

Some economists naively argue that there is no particular urgency to regulate bitcoin and the like, as using cryptocurrencies for transactions is difficult and expensive. Try telling this to policymakers in developing economies, where crypto has become an important vehicle for evading taxes, regulations, and capital controls.

For poor countries with limited state capacity, crypto is a growing problem, Citizens don’t have to be computer savvy to bypass the authorities. They can access one of several simple “off-chain” exchanges. Although intermediate cryptocurrency transactions are in principle traceable by a third party, exchanges are based in advanced economies. In practice, this makes the information virtually inaccessible to poor-country officials in most circumstances.

But isn’t it just CryptoKitties that is fulfilling its promise to help citizens bypass corrupt, incompetent and unreliable governments? Maybe, but, like $100 bills, cryptocurrencies are likely to be used by developing countries. scandalous actor As done by ordinary citizens.

Venezuela, for example, is a big player in the crypto markets, partly because expatriates use them to send money back and forth without being confiscated by the country’s corrupt regime. But crypto is certainly used by the Venezuelan military in its drug-trafficking operations, not to mention by wealthy, politically connected individuals subject to financial sanctions. Given that the US currently imposes financial sanctions on over a dozen countries, hundreds of entities and thousands of individuals, crypto is a natural haven.

One reason advanced-economy regulators are slow to act is that while cryptocurrency-related problems primarily affect the rest of the world, these problems are not their concern. Clearly buying into the idea that cryptocurrencies are essentially assets in which to invest – and that the value of any transaction is insignificant – regulators are more concerned about domestic investor safety and financial stability.

But economic theory has long demonstrated that the value of any money ultimately depends on its potential underlying uses. The biggest investors in crypto may be in advanced economies, but the uses – and disadvantages – so far have mainly been in emerging markets and developing economies. One could also argue that investing in some advanced-economy crypto vehicles is in a sense no different from investing in conflict diamonds.

Advanced-economy governments will most likely see problems with cryptocurrencies eventually coming home. When this happens, they will be forced to impose a broad-based ban on digital currencies that do not allow the identities of users to be easily traced (unless, until, technological advances eventually remove all remnants of anonymity). , in which case the cryptocurrencies’ prices will fall automatically). The ban would certainly have to extend to financial institutions and businesses, and would probably include some restrictions on individuals as well.

Such a move would lead to a sharp drop in the price of today’s cryptocurrency by reducing liquidity. Of course, the more countries that implement them, the more effective the sanctions will be, but significant local impact does not require universal implementation.

Can some version of the restriction be enforced? As China has demonstrated, it is relatively easy to shut down the crypto exchanges that most people use to trade digital currencies. It is more difficult to intercept “on-chain” transactions, as the underlying individuals are harder to identify. Ironically, an effective ban on 21st-century crypto may require phasing out (or at least scaling back) the much older instrument of paper currency, as cash has hitherto been accessible to people “on their own” digital. -Ramp” is the most convenient way to fund. purse without being traced easily.

To be clear, I am not suggesting that all blockchain applications should be constrained. For example, stablecoins regulated based on central bank balance sheets can still thrive, but there should be a direct legal mechanism to trace user identities if needed.

When, If Ever, Could Cryptocurrency Regulation Really Happen? In the absence of a crisis, it could take decades, especially with the big crypto players pouring huge sums into the lobbying, as the financial sector did during the 2008 global financial crisis. But it probably won’t take nearly that long. Unfortunately, the crypto crisis is likely to come later rather than sooner.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University and was the Chief Economist of the International Monetary Fund from 2001 to 2003.

Project Syndicate

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