(Because it will....eventually)
In another attempt to clamp down on what was perceived as a burgeoning digital trading market, the Chinese government last month passed a regulation officially banning financial institutions and payment companies from providing products and/or services related to – and in exchange for – cryptocurrency transactions. Under this ban, online payment channels, banks, and other similar entities can no longer offer clients services such as savings, registration, clearing, trading, and settlement if cryptocurrency is involved.
However, individuals are free to continue holding cryptocurrencies as they please.
Further details were outlined in a joint statement released by the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China.
This is not the first move Beijing has made against digital currency. Roughly two years ago (June 2019), the People’s Bank of China blocked access to all domestic and foreign cryptocurrency exchanges (as well as Initial Coin Offering websites). In 2017, the Chinese government did something similar. It shut down all local cryptocurrency exchanges, effectively wiping out a market that accounted for 90% of global Bitcoin trading.
So, the big question: should other governments take a page out of China’s book and start releasing regulations and/or restrictions regarding cryptocurrency, what happens to the market?
Can the Government Control Crypto’s Prices?
Technically speaking, there are a couple of ways the government could influence the crypto market.
I. Affected Asset Prices. Governments can regulate digital currencies like they do fiat currencies through buying and selling in international markets. They can furthermore force businesses that handle cryptocurrencies to raise their prices by implementing restrictions and/or regulating fees. Raised prices could discourage new and existing digital investors
II. Crypto Scarcity. By implementing regulations or restrictions, governments have the power to make an asset scarce (like gold or oil), consequently affecting its value.
III. Anonymity Compromised. One of the biggest lures of cryptocurrency is its security and anonymity. The lack of intermediaries or middlemen allows people to make crypto transactions without verifying their identity. Should the government get involved, they may require all individuals possessing cryptocurrency to submit and validate their identity.
Government Versus Crypto?
There’s enough evidence backing the assumption that Government regulations can dramatically affect cryptocurrencies. China’s ICO ban in 2017 resulted in Bitcoin dropping roughly $500 in price. However, the dip didn’t last long. Soon enough, it climbed back up to $5,000. And, judging from its current trading price, Bitcoin definitely continued to climb. This time, bitcoin in particular saw a drop, but the price recovered in mere weeks.
So what does this tell us about government regulations regarding cryptocurrency? Will their meddling spell the end of everything cryptocurrency stands for, or will it cause nothing more than a momentary blip in the market?
Not as Bad as We Think
Noted economist Kenneth Rogoff has stated in an essay that Bitcoin, despite its rising popularity, cannot replace government-issued currency. The main reason being that the electronic nature and anonymity of the currency would “make it extremely difficult to collect taxes or counter criminal activity.”
So, if nothing else, governments can draw reassurance from that.
And it’s this caveat that leads experts to believe that the perceived effects of potential government regulations on Bitcoin and other cryptocurrencies may be limited. There may very well be a period of adjustment (and, perhaps, market instability) following implementation, but past events suggest that these won’t last very long.
Furthermore, cryptocurrencies are decentralized. There are different digital ledges scattered across multiple countries. Attempting to regulate each and every one of them would require a highly coordinated effort involving multiple governments and multiple economies. Indeed, the task may prove to be too demanding for a very little pay-off.
But should the government get involved, their restrictions could yield a potential advantage:
IV. Dissuade Fraudulent Traders. Anonymity does come with its own risks. Criminal activity done in the crypto space can be difficult to trace. Government regulations could purge the market of bad accounts and fraudulent traders—effectively providing more security for individual investors.