Cryptocurrencies one step closer to state control

    16 Jun 2021
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    Another surge in the value of BTC and the corresponding rise in interest, predictably entailed more than the next cryptocurrency boom. On top of that, the state bodies of different countries have become more active with their unending desire to regulate everything in sight.

    The official recognition of bitcoin as a legal tender was a true sensation in the crypto-world. Part of the crypto community immediately got inspired: they say now other states will follow suit, fiat is retreating, a celebration is in order. Others, older and more experienced, on the contrary, tensed up. After all, the benefit of cryptocurrencies was precisely the ability not to deal with the state at all.

    So when the state integrates them into its financial system or even recognizes in some form, expect an increase in administrative pressure on the cryptosphere. For any official legal tender government agencies immediately try to create a mechanism to control the movement of funds. We have already seen an example of that in Belarus: before the beginning of 2018, legally cryptocurrencies were basically trinkets – thus the cryptosphere did not intersect with the state and existed independently.

    Then there was a presidential decree, which introduced cryptocurrencies into the legal field. The public approved, Belarus was even called a “cryptopia” for several months … But by the beginning of 2019 the cryptocurrency field in the country was tightly regulated, in the worst Soviet traditions. Now the story may repeat itself in other countries.

    Salvadorian precedent

    On June 9, bitcoin – alongside the US dollar – became the official currency of El Salvador. Over the next three months, the government of the country must create an entire infrastructure for cryptocurrency payments. Specifically, Banco de Desarrollo de El Salvador is tasked with creating a trust to instantly convert BTC to USD.

    The law will require all providers of goods and services to indicate prices in both dollars and BTC; also, the cryptocurrency can now be used in any area of El Salvador that has the technological capacity for that. Moreover, the world famous crypto enthusiast, President of Salvador Nayyib Bukele, instructed LaGeo to start state mining using “cheap, 100% clean and renewable energy from volcanoes.” (LaGeo owns two geothermal power plants, there will be another one built.)

    But let’s take a closer look at the situation. In 2001, El Salvador abandoned the national currency, from that moment on the US dollar became the country’s currency. Actually, the case is not unique: a number of countries use dollars or euros instead of national currencies and enjoy the stability it gives them “at someone else’s expense.”

    However, the concepts of “stability” and “bitcoin” hardly mesh together. Moreover, when a country abandons its own currency, it also abandons its own monetary policy. El Salvador in 2001 practically entrusted its financial system to the US Federal Reserve. And now bitcoin is on a par with the dollar … It’s almost the same as if one of the US states introduced BTC along with the dollar on its own territory.

    Such state would immediately get the troops sent in from Washington – after all, it would have violated the Constitution, making the USD not the only legal tender. Nobody is going to send troops to El Salvador (although 50 years ago they could have), but the main creditor of the planet, the International Monetary Fund, has already publicly expressed discontent. IMF spokesman Jerry Rice said that the use of BTC along with the USD “creates regulatory problems and creates risks.”

    What followed were the usual lamentations that the inclusion of bitcoin to the official financial system threatens to undermine its stability, so now the IMF and other organizations will analyze in detail the consequences of legalizing BTC in El Salvador. Although personally I have strong suspicion that El Salvador might in fact be left to its own devices by the suits – just to see how such an unusual experiment will end.

    Where do the US and China agree?

    Now let’s turn to the topic of resistance to cryptocurrencies from government institutions. The strategic reason for the latest historic drop in bitcoin price was the simultaneous pressure on cryptocurrencies from such economic giants as the United States and China.

    Beijing especially seems to have decided to root out the users of independent digital assets as a class and the cryptocurrency industry as a whole. For example, in Xinjiang province, miners were ordered to discontinue their operations. And the PRC Ministry of Public Security has arrested more than a thousand people, accusing them of money laundering through cryptocurrencies. The large-scale operation, according to the Ministry’s press service, was carried out as part of a plan to combat fraud in the telecom sector. As a result, 1,100 people were arrested and “about 170 criminal groups” got liquidated. The arrests took place in Beijing and Hebei and Shanxi provinces.

    And this is far from the first such attack. Let’s not forget that in spring, the Chinese authorities banned banks from servicing the accounts of clients associated with crypto exchanges. In response, local traders began to collectively switch to trading platforms in other jurisdictions.

    There are two reasons for this attitude of the Chinese authorities to cryptocurrencies. First, bitcoin has become the most popular tool for businessmen to withdraw money from the country in recent years. Chinese capitalists do not really want to spend their whole lives under the thumb of the Communist Party, but all currency transactions outside the country are rigorously controlled.

    The second reason is the active government promotion of the digital yuan, which itself is based on the blockchain, but is a central bank digital currency (CBDC) – that is, a completely state-controlled digital currency. Therefore, it does not tolerate independent decentralized competitors.

    The American authorities are also getting ready for tough regulation of digital assets, first and foremost those they themselves have nothing to do with. Earlier presidential advisor Jake Sullivan had mentioned that Joe Biden would raise the issue of crypto regulation at a meeting with the leaders of the G7 countries. Also, the Joe Biden administration has already stated that they want to receive detailed information about the traders from cryptocurrency services and exchanges.

    And now we know that the US Internal Revenue Service (IRS) has asked Congress to grant it broad powers to monitor the operations of cryptocurrency holders (tracking all transactions with digital assets).

    The head of the IRS, Charles Rettig, in his speech to the Senate Finance Committee, said that his department wants to keep track of the citizens operating in cryptocurrencies worth more than $10,000. Practically, those are expressed intentions of total control. According to Rettig, since the capitalization of the crypto market is approaching $ 2 trillion, the state can no longer ignore this ecosystem. The IRS, he said, has its own means of monitoring the digital currency market, but it lacks the powers to act.

    The most surprising thing is that ordinary American crypto users also advocate the introduction of state regulation in this area. A poll conducted by Harris in early June showed that 57% of American cryptocurrency holders believe crypto regulation is necessary to protect the interests of investors. 79% of respondents under the age of 57 are unequivocally in favor of legislative regulation of cryptocurrency operations. 56% of the younger generation agree.

    What’s notable is both the United States and China with their actions only prove the self-sufficiency and universality of cryptocurrencies as a tool to ensure the independence of businesses and people from the state and banks. We are likely entering a period of protracted struggle between states wishing to tightly control financial relations and people who do not want such control.

    Something similar was expected back in 2017, but then the collapse of the entire cryptocurrency market temporarily made the confrontation irrelevant. What happens now? That, we will learn soon enough.

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