Home Politics Governments Are Scrambling for a Cryptocurrency Policy

Governments Are Scrambling for a Cryptocurrency Policy

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Written By: Miles Pearson – Forex Focus

2017 was a banner year for cryptocurrencies. Bitcoin—the flagbearer of the cryptocurrency market—reached heights of 3,000-percent growth, turning droves of investors into overnight millionaires. While private markets grow fat in what many deem to be a bubble, central banks and regulators wring their hands over how to handle the groundswell. Cryptocurrencies were almost specifically designed to disrupt traditional financial institutions.

Now, governments must make a hard choice. Either embrace the volatile and potentially destabilizing digital-currency trend, or reject the trend altogether and risk being left on the wrong side of history. The choice is tricky and could be dire for any given government. It’s no wonder that central banks and governments are largely exploring in what capacities they can interact with cryptocurrencies—slowly. The reactions have teetered from dismissal in some countries to outright adoption in others.

While much of this is speculative, policymakers are signalling their intentions rather well. South Korea’s government has wavered between completely rejecting cryptocurrency trading to potentially incorporating it into its economic model. Russia has had public discussions about introducing its own cryptocurrency in a move to circumvent the bevy of sanctions currently hampering its economy.

However, what will likely happen is a slew of central banks holding cryptocurrencies as part of their reserves. That move makes sense, though it adds a heightened level of volatility to central reserves. Holding cryptocurrencies in the same way that banks hold other reserves—such as gold or foreign currencies—allows central banks the maneuverability to react in the event of market shocks.

Cryptocurrency is likely here to stay, and possessing a reserve of digitally minted coins could prove beneficial in the near future. Yet, quantifying their values will wax and wane throughout the year. Incorporating their values into a country’s national wealth could prove problematic if the values shift too violently in short periods. The confusion is not unexpected: cryptocurrencies were designed to act counter to government-run currencies.

Circumventing government-run currencies, cryptocurrencies created a digital alternative to allow for regulation-free financial trading. The instantaneous and anonymous blockchain ledger attracted throngs of users with an interest in avoiding government-regulated financial transactions. While some digital pioneers were among the ranks of these early users, cryptos gained notoriety for their use in the black market.  Moreover, their violent volatility increases their risks, lessening national governments’ appetite for holding the digital currencies. It’s no wonder that regulators have blocked numerous cryptocurrency deals on Wall Street. The disruptive nature of the new technology could bring instability to a market that is only just picking up steam in the global recovery.

Governments looking to create their own.

American regulators are not alone in this. South Korea recently walked back from an outright ban of cryptocurrency trading—stepping down to a temporary halt. While the reaction was heavy-handed, one could quickly see why the government was leery of continued trading. Bitcoin prices plummeted following the announcement—reversing much of the gains that had been seen in the runup to the announcement. The government cited issues of financial instability, tax evasion and black-market activity as their motivations. Specifically, the ban was meant to target the use of cryptocurrencies on domestic transactions. There is little precedent in the cryptocurrency-policy arena to guide current regulatory efforts.

While it is clear that governments see great value associated with cryptocurrencies, the volatility is off-putting to institutions built around stability and limited risk. It seems that countries with the largest interest in promoting cryptocurrencies are those currently outside the overarching financial network. Russia has made public its plans to explore a “cryptoruble”. Venezuelan President Nicolás Maduro recently announced plans to introduce a cryptocurrency dubbed the “petro”. Venezuela’s cryptocurrency would be backed by a reserve of commodities exported by the South American nation, including gold, diamonds and, of course, petroleum. Few concrete details exist for either of these potential national cryptocurrencies, but they are necessary drops in the bucket to normalize the concept. With international pariah status seemingly a prerequisite, it would not be a surprise if North Korea were to announce a similar plan in the short-term.

The rumor, however, that the Bank of England (BoE) was planning to introduce its own cryptocurrency is concerning. While the BoE and Governor Mark Carney have gone on record as saying the central bank is categorically not planning to introduce its own cryptocurrency, the readiness with which people accepted this potential speaks volumes. Markets are ready for governments to step into the cryptocurrency fray, but no one is entirely sure how or to what degree.

Ultimately, governments must find a way to effectively maneuver cryptocurrencies. Bitcoin’s lightning performance in 2017, and the widespread reach through which cryptos have penetrated financial markets, means this is a market that could materially impact global financial institutions. More importantly, the ease with which the black market deals in cryptos means regulators have a great deal of interest in controlling some aspects of cryptocurrencies.

While regulation is the go-to practice for most governments—as seen in the United States and Korea—other governments have sought to steer into the skid by developing their own cryptos. Whichever route governments take to address the growing influence of cryptocurrencies, a comprehensive and broad strategy is required to address an issue that will be present for, seemingly, the medium-term. Outright rejection would be as inadvisable a policy choice as disregarding the booming cryptocurrency market.

Central banks’ approaches should consider the benefits that cryptocurrencies might have and figure ways to tailor them to their economies’ nuances.


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