Crypto & money: Notes & arguments (6)

As already discussed, bitcoin and many other cryptocurrencies remain very volatile. Stablecoins are a solution to this still persistent downside. Stablecoins are stable. They are cryptocurrencies too. Only difference is that they are collateralized with fiat currencies, commodities and in some cases, other cryptocurrencies. You could use them as a non-volatile media of exchange like you would the American dollar or any of the other major global fiat currencies. In the crypto world, they almost literally represent fiat currencies.

If the emerging global digital currency ecosystem evolves as it should, you should be able to transact seamlessly across all virtual currencies, regardless of whether they are private cryptocurrencies or public CBDCs. And you should be able to do so without any third party or intermediary if you choose to. But if you must, there should be relatively fewer third parties and the transactions certainly cheaper and faster.

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That global ideal of frictionless cross-border transactions using public and private virtual currencies may not come about so easily, however. The Bank for International Settlements (BIS), sometimes called “the central bank of central banks”, recently published guidance on CBDCs that included a scathing dismissal of bitcoin, stablecoins and other cryptocurrencies. The BIS would much rather only CBDCs were allowed in the global payments system.

Thus, a continued tolerance of cryptocurrencies by the Chinese government would have probably become an inadvertent “westernization” of its indigenous internet ecosystem

This is understandable. If private digital currencies become the mainstay of the global financial system, Big Tech firms would become the new central banks. Some central bankers likely cringe at the thought of a Mark Zuckerberg of Facebook, which has its own stablecoin called Diem, determining the tone of global monetary policy.

Still, it is probably too late to get in the way of private digital currencies like bitcoin, ether and others. The Chinese government does not seem to think so, though. It has banned all crypto-related activities in its jurisdiction. Hitherto accounting for more than half of global bitcoin mining activity, Chinese miners have had to quickly move their hardware to countries like Kazakhstan and Russia. Some were not so lucky, however, selling their equipment on the cheap or simply ditching them.

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It is somewhat counterintuitive that China would give up its hitherto strategic advantage in cryptocurrencies so forcefully. And it is possible that the move might be considered ill-advised by Chinese thinkers in later years. But it does make sense that China would want complete control of its financial system.

Cryptocurrencies and tokens are evolving into a new version of the web (“Web3”). Thus, a continued tolerance of cryptocurrencies by the Chinese government would have probably become an inadvertent “westernization” of its indigenous internet ecosystem.

However, it could be argued that the reverse was perhaps more likely the case: a “sinification” of the new web and by extension, the older versions. But that was probably too much of a risk to take by the Communist government.

What is likely is that private and public digital currencies would be forced to co-exist. Bitcoin and other cryptocurrencies have probably evolved too far to be successfully put down. With likely varied private and public digital currency systems in the near future, the greater priority should probably be on interoperability and regulation.

There are recent examples to show why this should be the case. In America, where a regulatory approach is still evolving, law enforcement agencies have been able to successfully capture and prosecute criminals using cryptocurrencies for their egregious acts. Conversely, in South Africa, where the reverse is the case, criminals have been able to get away with their crypto-related crimes.

In May 2021, for instance, Colonial Pipeline, a firm which supplies almost half of the fuel for America’s East Coast, paid $2 million to the DarkSide ransomware group to recover its hacked systems. About a month thereafter, the FBI was able to recover about 85 percent of the 75 BTC ransom paid by Colonial. To do this, the FBI was able to secure the private key of one of the cryptocurrency wallets used by the ransomware actors.

One other way law enforcement agents could recover such illegal proceeds would be via a regulated cryptocurrency exchange, which will be mandated by a legal warrant to reveal the identities and details of suspects in a crime. But since there remain myriad unregulated crypto ecosystems around the world, criminal elements continue to have a field day.