Cryptocurrencies: ban none or ban them all

A little while ago, I argued that even though States might wish to ban cryptocurrencies, it might be too late. This is a follow up article examining a scenario in which regulators might envisage banning cryptocurrencies.

First, let’s address the idea expressed in the title: with cryptocurrencies, you have to either legalize all of them or ban them all. Why is this might you ask? Let’s assume regulators might want to ban Bitcoin. The only way this could happen is through a coordinated effort. It’s just like fiscal paradises: as long as one is still allowed to operate, all the money will flock to that one place. Bitcoin is decentralized meaning that both the mining process (for securing transactions and create new Bitcoins) and the nodes (the distributed copies of the ledger containing all the transactions happening on the network) are distributed across the world. What most regulators will say is that they can successfully close down online exchange platforms which trade your fiat money against Bitcoins or another currency. This would mean that the only way to get Bitcoin from that point on would be either via mining, or via peer to peer transactions using non reversible online payments services like Neteller, Skrill or Payoneer. Obviously, any payments for goods and services done online or offline would be illegal as well and would therefore become part of the “black market” economy. Regulators will point to the fact that although making cryptocurrencies illegal would not kill them, it would severely dent their adoption for mainstream/mass use.

This might be true, to a point, but it only applies to cryptocurrencies which serve no real purpose other than a speculative store of value such as Bitcoin. One caveat that regulators need to keep in mind is that banning one cryptocurrency will not make it any harder to buy/sell.

Imagine that all online exchanges need to remove Bitcoin from their service in order to remain operational. Would that require users to resort to peer-to-peer trading or mining? No. And the reason is simple: there are a number of decentralized exchange services that are being built which simply match up buyers and sellers to trade one cryptocurrency against another. So in essence, users can simply buy another cryptocurrency which is still legal on regulated exchanges (trade their fiat for a legal cryptocurrency) and then trade it via a decentralized exchange for Bitcoin (or any other banned cryptocurrency). Decentralized exchanges are not subject to regulation since there is no one to regulate.. They can very well be just an open source software running somewhere on the wider decentralized web/blockchain. Regulators might object that since buying/trading an illegal cryptocurrency is illegal, they will simply investigate and prosecute any user which is caught doing it. But that won’t be simple by any standards: users can simply resort to more or less private and anonymous cryptocurrencies like Dash, Monery or ZCash, and even if they get banned as well, cryptocurrency “mixer” pools are becoming more and more common to avoid transactions from being traced. Add to that the fact that you can create an infinite amount of single use wallet addresses and tracing transactions is virtually impossible. At present, all of these solutions would require a lot of knowledge and time from users, but rest assured that “all in one” solutions will eventually appear, allowing anyone to buy/trade any cryptocurrency in a user friendly, decentralized, private and secure way.

One last thing regulators might say is that trading illegal cryptocurrencies for online or offline goods/services will still leave a trace on the seller side. For instance, if a service provider declares working a certain amount of hours or making a certain amount of fiat money but is living way beyond his/her means based on those declarations, it might indicate that part of his commerce is paid for in cryptocurrency. This is and will remain true in the foreseeable future and would limit the use of certain types of cryptocurrencies for paying directly for a good/service. But again, if you can easily buy/sell a cryptocurrency against fiat via a legal cryptocurrency, it might have a limited effect.

So all in all, banning so called “speculative” cryptocurrencies might not have a very high effect. While providers of physical or digital goods/services might be less willing to accept payment in those cryptocurrencies due to risks of being caught, if other cryptocurrencies remain legal, it will be easy to simply go through decentralized exchanges in order to pay for those goods/services via a legal cryptocurrency.

The prospect of banning cryptocurrencies which have a specific purpose is even more limited. As I explained above, there are alternative ways to get cryptocurrencies in the event legal online exchange platforms are banned. But contrary to “speculative” cyptocurrencies, cryptocurrencies such as Siacoin, Golem or Ethereum serve a specific purpose: pay for decentralized cloud services, pay for decentralized computing or pay for running decentralized applications. And so banning these cryptocurrencies will have little effect so long as the services they propose remain available and people want to make a use of those services. Since there is no “seller” to regulate or punish, and since in many cases users can pay for those services in an anonymous way, there is really no way to ban those services. So long as there will be demand for those services, they will remain unstoppable.

Now, what about banning all cryptocurrencies? In that event, again, users will still be able to get them via mining or via nonformal exchanges. And while such a ban will limit their use, it is unlikely that such a ban will have much of an impact. Regarding “speculative” cryptocurrencies, they will remain a “store of value”, a way to protect people’s investments in case of a major economic crisis and erosion of the value of fiat currency (which is one of the major reasons the Chinese have invested so much in Bitcoin). This risk is not just for some third world countries. Most recently, the turkish lira lost 10% of it’s value! In such cases, legal or illegal, “speculative” cryptocurrencies will still thrive as a “store of value” as opposed to being a method of payment.

For cryptocurrencies that have a specific purpose, a complete ban will also have little effect, but on top of that, there would be many problems with the legality of such a ban in the first place! Let’s take a close look at what that means: regulators will not be able to ban cryptocurrencies which are used to pay for a specific service unless they also ban other forms of virtual currencies that exist online and that are currently perfectly legal. Cryptocurrencies which are used to pay for an online service (decentralized storage, computing or dapps…) are very much like coins that you buy in an amusement park, a luna park or even a concert ticket: they are simply a token that allow you to access a specific service. The value of that token is simply market driven. If you happened to buy a concert ticket at a discount during an exceptional initial sale, and the ticket is in high demand, you can easily resell it at a profit. The same applies to those cryptocurrencies. Online, you have a wide variety of virtual currencies which are used to pay for things: many MMORPGs have their own virtual currency which is redeemable against fiat currency. In World of Warcraft, you can buy and sell digital items against a virtual currency in the game. It is not so much different from a cryptocurrency which you buy to rent out space on somebody’s hard drive. The only meaningful difference is that the companies that issue these “centralized” tokens or virtual currencies are subject to taxation. That is probably it… On a decentralized blockchain, however, there is no central authority to tax! If you decide to rent out your hard drive space against some cryptocurrency which you can trade for fiat on exchange platforms, where can you set up a tax?

Regulators will most probably have to adapt to the new reality: that part of the services will now be provided peer-to-peer and will not be taxable in any meaningful way. After all, people “trade” services all the time! Every time you help out your friends to move from a place to another or carry out some form of work, economic value is generated, services are traded, yet no tax is paid. Blockchain technology and cryptocurrencies simply allows to generalize these peer-to-peer services but allowing them to expand beyond the restricted circle of “trusted” family and friends. This is why we often label blockchain technology as enabling “trustless exchanges”.

So in conclusion, cryptocurrencies are here to stay. Banning one of them would be useless, banning all of them might make things a bit more difficult, especially in a coordinated manner (international agreements by all governments), but so long as people will be in demand for the unique properties of certain cryptocurrencies (like Bitcoin as a store of value) or the innovative decentralized services they provide, they will continue to thrive.