Governments Against Cryptocurrency: Why Countries Restrict Bitcoin

AnnMary

AnnMary

2020-07-29 13:24:03

Governments around the world have taken a range of stances on Bitcoin and cryptocurrency. Some have been welcoming of the disruptive new technology, while some have been skeptical. Others have put heavy restrictions or even outright bans on bitcoin trading, including China, Vietnam, Bolivia, and Ecuador. 

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So what is their reasoning for restricting and banning cryptocurrencies? Here are four main reasons that governments tend to crack down on crypto. 

Reason 1: To cut criminal activity

The most obvious reason why governments restrict cryptocurrency is to limit criminal activity. Criminal enterprises rely on money laundering to run their operations. This is the basic practice of processing criminally gained money into the mainstream financial system. This practice has been taken very seriously by governments over the last few decades. Many governments think that the key to cutting out organized crime is to suffocate them by cutting their ability to move money around. 

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Cryptocurrency offers a unique opportunity to criminals. Many cryptocurrencies like Bitcoin are partially anonymous, while others such as Monero are designed to be completely private. This means that criminals can easily move their illegal money around without risk of being detected. 

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Of course, this is a huge problem for governments that are constantly battling crimes such as computer hacking, drug trafficking, human trafficking, weapons trafficking, and credit card fraud. Some see the easiest way around this newfound threat is to ban it within their borders completely. In theory, this effectively pushes criminal enterprises overseas. But, in a globalized world, it’s unclear whether a ban can cut criminal activity within the nation’s borders. 

Reason 2: To protect their markets

Another key reason why governments want to ban cryptocurrency is to protect their markets. Free markets can be very volatile, as we’ve seen with the last few global financial crises. One of the main weapons that governments have to stabilize markets is their monetary policy. This is the process of using interest rates and currency controls to bring consumption, investment, and inflation to desired levels. We’ve seen this heavily since 2008 in Europe and America with Quantitative Easing

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Cryptocurrency acts like it isn’t controlled by any government. If cryptocurrency use becomes widespread, it could drastically hurt a government’s ability to use its monetary policy to stabilize markets. 

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ICOs are also seen as a big destabilizing force by many governments. They are essentially free and unregulated investments in any kind of project. Some ICOs have raised billions of dollars largely from people with minimal experience in investing. Governments restrict these riskiest types of investment for those with a license. It stops market bubbles and crashes by ensuring inexperienced investors are taken advantage of. ICOs cut out a government’s ability to do this. 

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For this reason, many governments are concerned about cryptocurrency and think that the safest option is to ban it outright. Or, to restrict its use to the fringes of the financial system. One of the key roles of governments is to protect consumers, and one way to do that is to ban technologies seen as potentially dangerous. 

Reason 3: Unknown Consequences

Another major factor is that we just don’t know how blockchain technology and cryptocurrencies are going to play out. Maybe they’ll prove able to support a more decentralized and global financial system that works for all. Or, maybe they’ll prove a disaster and cost nations heavily. 

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Blockchain is an unprecedented technological advancement. It gives so much power to people around the world to connect and collaborate. Some of the applications they are developing have the potential to upend many traditional financial institutions. For example, the decentralized finance movement is looking to replace many of the services we traditionally get from banks such as money lending and borrowing. Even money exchanging is starting to happen on blockchain networks with decentralized exchanges gaining in popularity. Having all of this financial activity beyond the scope of government oversight could be dangerous. 

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Nobody can say for sure of overthrowing traditional currencies and financial institutions is a good idea. With this in mind, many governments around the world are cautious about Bitcoin and other blockchain networks because of the consequences we simply can’t predict just yet. 

Reason 4: Control

The final and perhaps most important reason is control. Governments are used to be able to make decisions regarding finance within their own borders. They don’t want to let the power go in the face of new technology. Especially when they may never be able to get it back. 

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This is particularly obvious in the case of China. China has banned the trade and use of cryptocurrency within its borders. This is in line with many of the country’s policies of tight surveillance and control of its population. China was a world leader in cryptocurrency before the ban, with many bitcoin miners taking advantage of cheap electricity to outcompete foreign miners. But, the Chinese communist party quickly realized that bitcoin was a technology they simply couldn’t control in the long term. So they shut down the currency. 

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Instead, the Chinese government is creating and promoting their own cryptocurrency. This currency is designed to be easily traded and used around the world and is intended to place China as a global currency leader. However, it’s also obvious why they want to do this. A state-run cryptocurrency would allow for unlimited tracking of transactions withing the currency. It’s clear this attractive to the Chinese government to expand their surveillance and control of their citizens and markets. 

Will It Pay Off?

While governments use these reasons to restrict cryptocurrency, it’s unclear whether it’s even possible to restrict the new technology. Bitcoin was designed as a digital payment network impervious to the meddlings of governments. So, it’s still unclear whether a ban will prove to have the desired effect long-term. 

Either way, cryptocurrencies are taking off in many countries around the world. We’ll see in a few decades if it was a good idea to ban cryptocurrency or the governments should have encouraged its use. 

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