Just the Beginning of Government Regulation of Crypto

This isn’t what central bankers want to see.

The news out of China, Hong Kong, and South Korea restricting or banning ICOs is not at all surprising — of course they want to control ICOs and cryptocurrencies. The strength of any government in today’s world is almost entirely tied to the strength of its currency. Sure, standing armies are useful too, but they require a lot of currency on hand to maintain and equip.

First, a quick summary of why countries like to have their own currencies — they like to print money. This is a massive oversimplification, and there are a lot of secondary reasons, but this the primary reason.

Printing new money is a very powerful tool for any government. The US Fed could print $20T tomorrow and eliminate the national debt, and our debt owners would have to take it and consider it settled. Of course, this would lead to massive upheaval — hence the US doesn’t do this all at once. Instead they do it very slowly — printing as much money as possible while keeping inflation at a few percent per year — which effectively reduces the total debt without spiking interest rates.

It’s never called ‘printing money’; it’s called ‘quantitative easing’ or something similar that utilizes manipulation of the money supply. ‘Easing’ the money supply is a wonderful way to lower interest rates and spur growth in the short term. It’s especially tempting near an election cycle.

Thus, the incredible power of central banks — they can practically print their way out of any problem. The only times they can’t print their way out of problems is when they’ve already printed so much that they’ve ‘eased’ as far as the market can absorb and more easing doesn’t have much positive effect (like Japan’s years of negative interest rates). Combine this with unlimited powers of taxation, and there is a reason so few countries default on loans despite almost every country in the world running massive deficits. All of this is well known.

Cryptocurrencies operate as the exact opposite of central bank / fiat currencies. They are decentralized, network effect currencies that are controlled and manipulated by no one, and that is central to their appeal. Many, like bitcoin, have an inflation rate built in, but it’s transparent and non-manipulatable.

Obviously, this is an existential threat to central bankers and governments across the world. Should crypto become the global standard, all counties would lose an incredibly powerful tool — arguably the most powerful asset they have. It’s also an existential threat to all of the central banker / Fed jobs, as the role of a central banker in a crypto world is exactly nothing. There are hundreds of thousands of central bankers globally, that have high paying, powerful, influential jobs — these won’t simply disappear without an epic fight.

It’s also worth noting that central bankers around the world are a fairly tight group — many went to the same US universities, worked at Goldman together, etc… I’d be shocked if we don’t see the same regulatory efforts in the US and Euro area very shortly — likely under a guise of ‘consumer protections’. There are bad actors and scams in the crypto / ICO space. These will be made examples and be the excuse to hamstring the whole sector.

This will not change the eventual prevailing of crypto (first weaker currencies and strong currencies in the very long term). But these are the world’s most powerful institutions — so they certainly have the ability to make the ride very rocky and slow. The only surprise is that it took so long for these very educated central bankers to understand the crypto threat to their model.

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