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3 Reasons Why Governments Are against Cryptocurrencies
According to reports from PwC, over 85% of central banks are either investigating or on pilot programs for digital versions of fiat currencies. The digital versions are now gaining traction as Central Bank Digital Currencies (CBDC), with China taking the lead with the e-yuan. However, while many countries seem ambitious about this version of virtual currencies, it doesn’t mean they embrace cryptocurrencies.
CBDCs are not cryptocurrencies, and some governments developing them have even banned cryptocurrencies. China is one of the major economies with a CBDC but is vehemently against cryptocurrencies. The big question is, why ban cryptocurrencies yet they bring so many benefits to users? Stick around to understand these government actions.
The Fear of Losing the Monetary Authority
Monetary policies are the tools that every government uses to control the circulation of money. The policies help maintain checks of the financial stability of the country and inflation. The government intentionally influences the amount of money circulating in its economy to regulate spending, trigger investment, create jobs, and control inflation.
For instance, it can initiate the sale of securities when there is excess money in circulation. Citizens buy these securities using the circulating cash, thereby returning money into the government’s vaults. However, the government does the opposite when there is an excess of circulating currency.
However, the government only exercises this control because it is the legal tender of the fiat currency. Turning to cryptocurrencies denies the government this authority and control over the money in circulation. Cryptocurrencies are decentralized.
There is no royal mint for cryptocurrencies but are instead generated by a network of miners through the computation of complex mathematical puzzles. Transfer of money in the crypto space happens peer to peer. There is no central authority like the central bank or middlemen such as the commercial bank in conventional currency.
Transacting in them eliminates centralization, which means the government would no longer have the power to restrict the amount of money circulating in the economy. The loss of control means a significant downstream impact on the country’s fiscal policy and business environment, hence the governments’ resistance to cryptocurrencies.
Possible Facilitation of Money Laundering and Illicit Financing
Decentralization is probably the most threatening feature of cryptocurrencies for governments. Think of a currency that the government cannot trace its transactions and can’t possibly impose taxes on. In conventional banking, the government has access to all transactional information for both individuals and institutions.
Individuals open bank accounts with all their details, and it’s easy to know who sent how much money to who and at what time. As a result, banks can detect suspicious transactions and help the government to trace money laundering activities. In cryptocurrencies, the case is different. Transactions are recorded on a blockchain in real-time, and it’s impossible to change or repeat a transaction.
However, it’s purely impossible to know the identity of the individuals involved in a transaction. Money gets transferred between wallet addresses which are usually a series of random figures. There are no transactional details, so it’s easy to carry out money laundering activities and other illicit financings anonymously.
In short, governments view crypto coins as a convenient route for tax evasion, drug trafficking, prostitution, terrorism, and all sorts of illegalities. Besides, cryptocurrency-related crime is not an emerging issue. According to reports, 0.34% of all crypto transactions in 2020 were in illegal activities.
Ecological concerns were a major reason behind the Bitcoin crash in 2021. Bitcoin prices came crumbling after Tesla CEO’s U-turn from the coin and even ceasing accepting Bitcoin as payment in his company. According to the SpaceX founder, Bitcoin mining consumed a lot of energy, specifically in China, and much of the mining activities used cheap and climate-hazardous thermal coal.
In China, the crackdown on cryptocurrencies is not a new thing. However, provinces are still coming out to condemn cryptocurrency mining, citing environmental concerns. Qinghai is the latest Chinese province to come out in a bid to curb crypto mining on environmental grounds. Officials even received orders not to permit crypto mining activities.
According to a report seen in May, China’s crackdown on crypto mining is incentivized by the surge in illegal coal extraction brought about by mining crypto activities. The illicit coal extraction endangers the lives of Chinese citizens and undermines the president’s ambitious environmental goals altogether.
While the fight against cryptocurrencies may appear a harsh reaction to a promising investment opportunity for crypto enthusiasts, it could be worth it in the end. Cryptocurrencies are notoriously volatile, but their potential benefits can be alluring to many. There will always be losers in the market, which threatens investors’ livelihoods without the possibility of government intervention.
Furthermore, crypto coins are anti-inflationary, although this does not mean they can solve an entire economy. Governments would never accept to give up their legal tender, plus they would never allow the financial system to be in a horse race. Besides, the threats to the environment, crime, and the role of fiscal and monetary policy are not worth ignoring.