In general, governments are not the greatest proponents of cryptocurrency, and understandably so. The system itself was founded by so-called cyber “punks” as an alternative to centralized banking and, as such, a healthy opposition from governments is kind of the point. However, as Bitcoin and other cryptocurrencies grow in both value and importance, they are becoming harder to ignore. Governments around the world have had to recognize that there is only so much they can do to regulate or disrupt this cryptocurrency infrastructure and that there may be benefits to jumping along for the ride.
What does a crypto-friendly government look like?
According to Bitcoin.com’s list of the most Bitcoin-friendly countries, many of the more socially advanced nations such as Sweden, Denmark, Finland, Holland, and Canada are leading the way. With smaller, more easily controlled economies, their goal seems to be to create a cashless utopia. However, economic leaders in more diverse and less flexible economies, including the US, the UK, and China, have also started making more concessionary moves - and in some cases strides - towards welcoming cryptocurrency and blockchain technology.
Crypto-friendly policies include deregulating the use of crypto, recognizing it as a currency and form of exchange, permitting tax-free bitcoin trading, and providing support for startups operating in the space. In some of the most Bitcoin-friendly countries, you can pay for services in Bitcoin and find Bitcoin ATMs readily available. Estonia took things one step further, announcing a raft of legislation in 2017 to legitimize Bitcoin and Bitcoin trading, including the first e-residency permit. As a result, digital nomads and bit-entrepreneurs began flooding there to register their businesses.
Other nations who see themselves as technological world leaders may not want to be left behind on the crypto wave. Currently, Japan leads the way in Bitcoin technology, with 23 exchanges and for 11% of the world’s trading volume. In terms of regulations, it is seen as a world reference point with some of the most forward-thinking government policies. Japan was one of the first nations to officially recognize crypto as a legal form of tender for making transactions. It helps that the population are generally accepting and welcoming of technological advances, as these have driven the economy for decades. It is estimated there are over 11.5 million Japanese using and trading with crypto. Whilst other more traditional cultures are still struggling to understand and trust the technology, the Japanese have welcomed it with open arms from its very inception, with some of the first Bitcoin mining taking place in Japan.
Not to be outdone, neighboring South Korea is also recognized as one of the leading nations in terms of crypto and Bitcoin technology. The South Asian nation has also seen its fortune tied closely to technological advances and its population share Japan’s enthusiasm for innovation. In addition, online payment technology has been used in the gaming community even before the advent of crypto, thus preempting the technology and giving the population an understanding of how it can work in real life (often a stumbling block when it comes to widespread adoption). In terms of penetration, South Korea has the highest per-capita usage of Bitcoin in the world and, at its peak, the relatively small population accounted for 30% of the world market. Government regulation has responded to the market, tightening and easing restrictions in accordance with perceived transgressions; for example, restricting trading with outside markets, or increasing taxes on trading. As a result, the Korean government has in turn been viewed as friendly or hostile to crypto. However, they can do little to curb the enthusiasm amongst the population, which ensures it remains on the government agenda.
The US, of course, has to be included in the conversation. Home to the world’s most powerful economy and the technological hub of Silicon Valley, the US is at the forefront of the Bitcoin revolution. Although regulation varies from state to state, the federal government has made crypto trading legal and tax-free since 2013 (although stops short of naming it legal tender). The States is, unsurprisingly, the country with the biggest number of crypto exchanges and the most traders in the world.
But besides attracting a flood of digital nomads, keeping their crypto-savvy millennial population happy, and putting themselves at the forefront of technological innovation, what other advantages are governments set to enjoy by making things easier for crypto?
We are already seeing many governments leveraging the technology to improve their own banking systems. It makes sense once you get past the fact that blockchain technology is decentralized, as the system still allows for a governing authority to set the rules. Then, the benefits include easier digital transactions, currency exchange, an end to costly money printing, and potentially even a path to reducing sovereign debt.
The list of nations launching their own digital currency is growing all the time, with Canada one of the latest to announce their interest in this space. They have been researching the possibility of launching a national crypto coin as a potential solution to a future without cash.
However, they are not ignoring the potential drawbacks and point out that such a move...
...could erode competition in the financial services sector and consumer privacy, as well as exclude marginalized populations from fully participating in the economy.
It can not be assumed that all nations will concern themselves with such matters. China’s recent interest in blockchain technology has provoked concern in some quarters after they announced their presence in the decentralized space with the launch of an official dApp which allows citizens to pledge allegiance to the Party. We have already seen how they have leveraged facial recognition technology for monitoring and profiling the minority Uighur population and might ask how else they might use blockchain as a means of social control.
So, should we be wary of governments making forays into this space? Some argue that government involvement goes against the guiding principles of why crypto was set up in the first place and maintain that putting this technology into the hands of any government - but particularly authoritarian regimes - is asking for trouble.
Authoritarian regimes and crypto
In places like Venezuela, crypto has proved invaluable in rescuing citizens crippled by hyperinflation and the sudden collapse of the economy. This article explains how the destruction wreaked by many authoritarian regimes might be limited by the introduction of Bitcoin:
In Zimbabwe, Robert Mugabe printed endless amounts of cash and inflated the savings of his citizens into nothing, but his successors can’t print more bitcoin. In China, Xi Jinping can track all of your transactions on Alipay and WePay, but he cannot orchestrate mass surveillance on all Bitcoin payments. In Russia, Vladimir Putin can target an NGO and freeze its bank account, but he can’t freeze its Bitcoin wallet. In a refugee camp, you might not be able to access a bank, but as long as you can find an Internet connection, you can receive bitcoin, without asking permission and without having to prove your identity.
In Venezuela, Maduro tried to launch the nation’s own crypto to maintain control and bypass international sanctions. The Petro, was deemed a failure both at an international level and amongst the Venezuelan population - after decimating their national currency, why would citizens trust a digital version? The benefits to a population under authoritarian control are undermined if that same government is controlling the cryptocurrency.
And, lest we imagine that this technology would be safer in the hands of our Western democracies, we need only look to this scheme which was trialed back in 2016 by the UK government to deliver and keep track of welfare payments to realize that the temptation for authoritarian control afforded by blockchain technology may prove too hard to resist for many.
Decentralization in a climate of distrust
In another sense, support for a decentralized monetary system may be buoyed on the international stage by a popular movement towards political decentralization: Independence referendums have taken place recently in Catalonia, Scotland, and the UK, showing popular support for more decentralized government. We can also look at the US and see a growing distrust of central government, highlighted by the last two general elections.
Many see an opportunity for governments to use crypto as a way to break away from central government and achieve a level of independence.
In the case of Catalonia, the economic question forms an integral part of its struggle for independence from Spain. As the wealthiest region, many in Catalonia object to the way central government distributes taxes while disregarding local concerns and cultural issues. Although the region’s calls for independence are unlikely to succeed (all independence movements must be ratified by central government), the region has been looking at crypto as a way to move away from Madrid - whether they like it or not - and achieve some level of socio-economic independence. There was an attempt in 2016 to launch their own cryptocurrency with the Cataloniacoin, along with many other digital initiatives which can be achieved unilaterally. Jordi Puigneró, Minister of Digital Policies and Public Administration for the region, highlights the question of trust as a key component that has characterized their struggle with Madrid and which can be resolved using blockchain. As Puignero puts it,
Trust is what moves economic transactions and it’s what moves the relationship between the citizens and their government.
It is suggested that a combination of e-residency, a digital currency, and other blockchain technology for decentralized governance could be combined to leverage independence goals in the region.
In the UK, there has long been resistance to a centralized currency, with the Eurosceptic argument being tied to a fear of the Euro long before Brexit was anywhere near being a reality. In fact, many point to the introduction of the European single currency as the true beginning of the Brexit movement. Arguments commonly point to distrust and dislike of centralized government (although in reality, a more deep-seated Nationalism may be at the root) and populist politicians have benefited by positioning themselves as defenders of national interests and against growing political centralization.
Scotland have also been looking at launching their own Scotcoin for some time, as part of their fight for independence from the UK.
Regulating the market
On the other side of the coin, governments have to be aware of some of the more destabilizing elements inherent in crypto.
In fact, we are starting to see how world governments are collaborating in an attempt to more closely regulate the crypto market. Recent guidelines have been put together by the Financial Action Task Force (FATF), an intergovernmental body set up by G7 countries in 1989 with the aim of tackling money laundering and other financial crimes. The recommendations require that both the sender and recipient of virtual transactions use real names and that virtual exchanges partner with official banks. South Korea has just added its name to the growing list of members signing up to the agreement. Although at this point the guidelines are just recommendations and don’t commit members to specific legislation, we may start seeing those countries who don’t sign up grey-listed by the organization if they are deemed not to be doing enough to tackle financial crime in their area. Some consider attempts to regulate crypto in this way as not only harmful to its central tenet of transparency but ultimately ineffective in its objectives.
It’s typical of centralized government to attempt to regulate in the same way they would their own institutions, but crypto does not behave in the same way, and governments may be surprised to find it changing and adapting in unexpected ways.
An uneasy relationship
As governments attempt to find a balance in their relationship with crypto and blockchain, some are wary that their enthusiasm could mask an attempt to consolidate the centralized power of corporations and governments even further. Others see the potential to bring in a new wave of services that are less reliant on intermediaries like businesses and nation-states.
In the same way, we might see a cashless future as a way out of state-sponsored financial collapse and towards individual economic independence, but it could equally mean the permanent exclusion of certain people from the economy and complete control of the population if put in the hands of governments.
If we look at the guiding principles that drove the creation of the cryptocurrency model, namely the decentralization of power and banking systems, and their potential to destabilize local currencies and circumvent a government’s ability to control markets and the economy, as well as its enablement of criminal activity, it is easy to see why governments would be afraid of it. Governments and crypto were never meant to like each other and it remains to be seen how some of these crypto-friendly policies develop.
There is an inherent irony in the fact that without government support, crypto will never gain the traction it needs: if it does not have external validation, it loses value. Therefore, we need to find a way of fomenting the relationship between state and crypto, so that the decentralized economy can flourish, while simultaneously pushing back against state-sponsored, centralized uses of blockchain technology.
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