Cryptocurrency & Capital Control: Can Central Banks Reach Consensus?
Digital currencies have existed for over a decade, and the ubiquitousness and preference for them due to several systemic changes over the years, have created an attraction and trust for them. The persisting questions are, “Do these digital currencies reflect a stable value?” Can a “currency” that depreciates by 5%-10% of its value within a couple of hours meet one of the cardinal requirements of money, a store of value? The world is wary of digital currencies due to these throbbing issues. However, have stablecoins taken away these specific concerns? Not so. Many critics of the digital currencies will agree that not only are they like nuke codes in the hands of an erratic dictator, but they have also invited the Sobre to a drinkfest.
Globally, cryptocurrencies and crypto-related activities are treated with unending suspicion as paranoia has preceded outright ban in some countries. In 2020, the promotion of payment through bitcoin, in a tweet by Jack Dorsey to sponsor the #EndSARS protest (The #EndSARS protest was tagged a decentralized social movement and saw to the mass protests of mainly Nigerian youths against police brutality in Nigeria, leading to a cache of events). The slogan, a derivative of a Twitter hashtag, called for the disbanding of the Special Anti-Robbery Squad (SARS), a unit of the Nigerian Police under the State Criminal Investigation and Intelligence Department (SCIID) with a record of abuses against Nigerians. In response to this, the Nigerian government banned the trading of cryptocurrencies and all crypto-denominated transactions. The Central Bank of Nigeria also issued a post-no-debit order through local deposit-money banks on accounts that previously engaged in crypto-related transactions.
In Algeria and Egypt, the trading of cryptocurrencies is considered illegal. In Algeria, the “Journal Officiel” (constitution) gazetted as of 28 December 2017, described any breach of this provision punishable by the laws. Egypt takes a religious stance; the Dar al-Ifta, a repository of Islamic legislation classifies commercial transactions in bitcoin as haram (abomination under Islamic laws). While some countries have made categorical statements, some others are ambivalent about the fate of these digital currencies.
China features prominently in extensive discussions about digital currencies. For instance, the recent publication by the Peoples Bank of China, the state-sponsored currency regulator, addresses the public with warnings on the possibility of an unstable country due to the “overreaching, speculative, and indulgent activities of digital currencies”. The well-circulated memo expresses the government’s position: “To the people’s governments of all provinces, autonomous regions, and municipalities and the Xinjiang Production and Construction Corps, trading and speculative activities on virtual currencies have been on the rise recently, which have been disruptive to the economy and the financial market, provided a hotbed for gambling, illegal fundraising, fraud, pyramid schemes, money laundering, and other illegal and criminal activities, and posed significant dangers to the resident’s properties.”
The argument put forward by the Chinese in the recent memo espouses crucial viewpoints. These concerns have persisted perennially for nations who consider financial transactions through digital currencies as ceding sovereignty to an esoteric and mysterious regulator. For long through deeply entrenched communist practice, extensive state-curated market activities, and manipulative capital controls have sought to; provide safety measures for national security and social stability, keep intact the commercial laws and banking edicts of the People’s Republic of China, the Securities Law (particularly cybersecurity of the People’s Republic of China), regulate telecommunications and cultural interactions of its citizenry. It has gone further to create regulations and responses to all forms of fundraising with suspicion. In the capital market, China has handed out strict rules on the administration of futures trading while exerting excessive influence over compliance-monitoring agencies to prevent what it decides as financial risks. In all these, it has left a trail in the search for a total clampdown on cryptocurrencies. While it is not necessarily due to the threat to national security, many see this consistent attack on crypto-activity facilitators as a wide-sweeping effort to take the wind off the sail on any vector that threatens its communist monetary policies.
China maintains tight control of the yuan through the People’s Bank of China. The fear of remote control is why the Chinese government has expressed reservation and angst against these decentralized tokens. The inability to control these digital currencies puts them in a disadvantaged position. Knowing China, it would go any length to preserve its control. Extreme capital control and underhand fiscal manipulation feature prominently in the accusations the world has repeatedly accused the Chinese government.
One of the major issues discussed in the recent end of Q3 question and answer session is the threat of virtual currencies to the Chinese economy. The Chinese government posits that virtual currencies are “not being issued by monetary authorities, relying on cryptography and distributed ledger and similar technologies, and existing in digital forms. Because of those features, they cannot be called legal tenders and should not circulate as currency in the market.”
Historically, the effort to create a balance between the real value of a currency and its market value is elusive. Currency stability is a direct effort of a government to keep consistent the local fiscal policy. In mainland China, the government monitors the price of the offshore yuan (CNH). The offshore yuan trades in centralized exchanges and over-the-counter (OTC) transactions in Hong Kong, Japan, New York, and London. The government tracks the performance of the yuan against the dollar to mop up cash whenever the yuan weakens against the dollar by; issuing yuan-denominated bonds, shorting the dollar thanks to its $3 trillion cash reserve, or quantitative tightening (withdrawing the excessive cash in circulation). By doing this, the value of the Chinese yuan appreciates against the dollar, bringing the short-term fall to an end.
In Bitcoin Is a Threat to National Security, Ramon Marks and David Harvilicz referred to HomeOpenly Co-Founder, Dmitry Shkipin, who wrote about bitcoin on his Medium page as a “pirate currency” threatening the dollar’s position as the sole unit of money authorized in the US. In their article, they described bitcoin as “the anarchist’s dream, offering a currency falling outside the control of any central banking or government authority, and beyond the intermediary moderation levers of the Bretton-Woods global banking system. It was designed to serve as the perfect, anonymous digital medium for the direct purchase of any kind of good or service. Bitcoin is rapidly heading in that direction, gaining mainstream respectability as a “crypto,” electronic currency for the purchase of anything and everything. It is becoming the currency of the Internet, seen by millions as the cool future of a new global currency system, unfettered by government controls and bank clearing systems.”
While these academic arguments lend credence to the existing regulatory biases against the mainstreaming of cryptocurrencies, in many African countries where a large chunk of the population is underserved or unbanked, this hypothesis has not provided a working framework to solve this situation. The World Bank puts the population of unbanked adults in Sub-Saharan Africa at about 350 million. This figure accounts for 17 percent of the global total.
Centralized financial systems are wary of the potentialities of virtual currencies. Digital currencies offer a way out of tunnel vision and unhealthy financial practices entrenched by these established regulators and service providers. However, the intention of most central banks to create digital currencies may not necessarily promote other projects but make sense of the long-held ideas of the makers of cryptocurrencies — decentralized access. A world where there is an equal chance to participate, provide and scale solutions.
Can we explore the CBDC (Central Bank Digital Currency) option and create a consensus with the promoters of cryptocurrencies? A resounding Yes! If digital monetary operations are mainstream, why cant digital currencies facilitate them? Quite frankly, the argument has been the stability of cryptocurrencies/tokens linked to blockchain projects. These assets can facilitate transactions and payments made through authorized digital tenders, CBDCs in this case.
If the centrality of the regulators’ hardline position is inflation control, stability, or accountability, the Blockchain Regulatory Certainty Act, sponsored by US Rep members Tom Emmer and Darren Sot,o provides a possible way out. The bill exempts blockchain developers and providers of blockchain services that do not take control of consumer funds from financial reporting and licensing requirements. Inadvertently, it resolves the lingering debate about the assumption of responsibility.
The bill places responsibility on the promoters of any cryptocurrency project. According to the amendment, Unless the developer or provider has control over the digital currency, no blockchain developer or provider of a blockchain service shall be treated as a money transmitter, money services business, financial institution as a condition to acting as a blockchain developer or provider of a blockchain service.
If retail banking services are licensed, blockchain services should get licensed. That is why at Bankless DAO, we believe that the answer to this is not just creating a protocol that bypasses the restrictions but giving everyone a platform to benefit from the pool of features and products that attend to them irrespective of political or religious persuasion.
