The world became more organized with more powers to regulatory bodies following the widespread socio-economic damages inflicted by the two world wars.
In this organized world, where central banks wield power with respect to currency and monetary policy and elected representatives exert command in enacting legislation, there is little scope for fringe elements to thrive. Over the past few years, the cryptocurrency space has moved from being a fringe player to becoming a mainstream investment asset, thanks to the proliferation of crypto exchanges and favorable stance of a few billionaires.
But this mainstreaming of cryptocurrencies was never accompanied by regulatory endorsement.
One may say cryptos make a good investment asset, but the point is, were they perceived as such? Was Bitcoin meant only to return windfall profits to its holders? Is short-term wealth creation the only utility of the underlying blockchain tech that proponents say can make transactions quicker and cheaper? The answer is a resounding “no”. Cryptos were conceived as digital currencies. Jack Dorsey has time and again asserted that bitcoin can become ‘native currency of the internet’. It undeniably means cryptos must find utility in payment systems.
However, to achieve this feat, cryptos have to secure the backing of regulatory authorities.
What’s behind the regulatory backlash?
Authorities across the world are cracking down on cryptos, let alone bestowing any approval on these so that they can complement the currency space. The reason behind this crackdown is decentralized control in the crypto world that has no space for central banks and other regulators to wield power. Money is more than just a medium of exchange or store of value. Central banks manage money flow by using the monetary policy tool. The pandemic, for example, brought an economic downturn in most economies, and central banks opted accommodative stance by keeping benchmark rates at a record low to infuse as much money as possible in the economy.
Low rates embolden borrowers, thereby spurring economic activity. Businesses expand operations, create employment and this triggers a chain of events boosting macroeconomic indicators.
With cryptos as legal tender, central banks stand to lose their control over liquidity management. The Fed, for example, has a target of two per cent inflation. Price rise above this level can compel the Fed to tweak the monetary policy and hike rates to suck liquidity from the economy. Are these tweaks possible when people start using cryptocurrencies as regular money? This is the primary reason authorities from China to the US have either begun the crackdown on cryptos or are mulling imposing restrictions. Today, money management is one of the most critical tools for authorities to improve macroeconomic indicators. In this scheme of things, cryptos are an outlier.
Senate’s recent hearing on cryptocurrencies
Senate’s Banking Committee lately debated the same issue in the ‘Cryptocurrencies: What are they good for’ hearing, which saw many senators criticizing the growing dominance of crypto investment space.
Sen. Elizabeth Warren, one of the most vocal critics, highlighted power wielded by “faceless group of miners” as a cause of concern. Though a few, including Sen. Cynthia Lummis and Sen. Sherrod Brown, cited the “transparency of open source finance” and “useful application of blockchain”, the hearing was dominated by a negative stance in their restricted endorsement towards digital currencies. Another key theme of the hearing was if issues within the crypto space can have ramifications for the country’s overall financial system. Jerry Brito of Coin Center, one of the participants, tried to allay any fears regarding alleged systemic risks but termed cryptos as “commodities”.
The hearing was preceded by a letter from Warren to Janet Yellen, the treasury secretary. Warren had urged Yellen to act fast to check the risks posed by cryptos. Although Warren did not seek an outright ban on cryptos, she wanted the Financial Stability Oversight Council to infuse security in the crypto trading space for consumers’ financial safety and reduce risks to the country’s financial system.
The Fed’s Jerome Powell has said cryptocurrencies or stablecoins would not be needed once the country develops CBDC or central bank digital currency. Warren’s criticism in the hearing and Powell’s rebuff of cryptos came in the backdrop of the Fed’s Monetary Policy Report that referred to prices of crypto assets as a reflection of the heightened risk-taking appetite of investors.
Little hope without regulatory backing
How can one expect stability in crypto trading when a popular exchange, Binance, is in the eye of the storm in multiple jurisdictions? And how can one expect cryptos to become a legitimate part of the global payments system without stability? Watchers have largely snubbed El Salvador’s experiment with bitcoin as a legal tender. It was, in fact, this development that was the most defining in the world of cryptos. But the market did not react to the news and no significant change in the value of bitcoin was seen. For the first time, an authoritative entity had backed cryptos, but there wasn’t any real change on the ground except a few breaking news headlines.
In the medium-to-long term, what will shape the crypto space is the stance of authoritative entities and figures, ones that can add legitimacy to the space and put an end to buzzes like an imminent bubble burst. Until then, a few backers like MicroStrategy, which refused to slow down on acquiring more bitcoins despite incurring losses on previous investment, and Elon Musk will shape sentiments.
But the point is that in a world that has only become more organized, with more powers to regulatory bodies, cryptos will have to ultimately earn positive commentary from regulators.
