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Recently, authorities in India, China, Korea, Denmark, France, and
Norway have issued stern warnings regarding the use and trade of bitcoin
and other digital currencies.
As a consequence, important
exchange outlets for price discovery have been slowed or shuttered
following the government advisories. Furthermore, India and China
represent nearly half of the globe’s total population.
The world
has mostly underestimated the latent demand for a free and nonpolitical
currency unit. In the face of this percolating demand, the arrogance of
our monetary overlords is startling.
Imagine if we were forced to
use a particular brand of toothpaste in the same way that we are coerced
into using the prevailing unit of legal tender. The response might not be so submissive. Contrary to the misinformation in this article, bitcoin is not illegal in any country in the world.
In two separate incidents following the Reserve Bank of India advisory warning, trading operators’ premises were raided by the Enforcement Directorate (ED) citing a clear violation of Foreign Exchange Management Act (FEMA) rules. A top ED official said:
“We
have found that through the website 400 persons have recorded 1,000
transactions that amount to a few crores of rupees. We are gathering the
data of the transactions, name of the people who have transacted in the
virtual currency from Gupta’s server that is hired in the US. At
present, we believe that this is a violation of foreign exchange
regulations of the country. If we are able to establish money laundering
aspect then he can be arrested.”
In the days ahead, the ED will be challenged either to define bitcoin as a currency or to clarify the nature of bitcoin as an asset under Indian law.
Also, the South China Morning Post reported
that China’s central bank met with payment processors on 16th December,
ordering them to “stop giving clearing services to bitcoin, litecoin,
and other cryptocurrency exchanges”. The payment processors were
ordered to sever their relationships with bitcoin exchanges by the end
of January.
This action had a significant impact on bitcoin exchanges in China, such as BTC China.
In Korea, financial authorities announced
that “the virtual currency does not have ‘intrinsic value’ due to its
lack of stability while there is concern at the absence of structure and
indicators to measure it.” Participating government agencies discussing
the impact of bitcoin included the Ministry of Strategy and Finance,
the Bank of Korea, the Financial Services Commission, and the Financial
Supervisory Service.
In Denmark, Michael Landberg, chief legal adviser at the Financial Supervisory Authority in Denmark, said
the most likely outcome for bitcoin exchangers would be an “amendment
to existing financial legislation so that we have regulation covering
it.”
Landberg added:
“It is also important to
have this included in money laundering acts. We’ll seek to follow the
mainstream. Bitcoins are not forbidden in the US and the UK It is out
there and will continue to be out there. It just needs to be regulated.
The challenge for us is how to do that.”
Currently,
Denmark’s FSA doesn’t have the legal authority to prevent trade in
bitcoin rendering it unable to stop a company that exchanges real
currencies for bitcoin.
A report
from the Bank of France said: “Even if bitcoin does not today meet the
conditions to become a credible means for investment that could
therefore threaten financial stability, it represents a clear financial
risk for those that hold it.”
Warning that the use of bitcoins as
an investment tool is limited because there is no underlying asset and
the virtual currency is subject to high volatility, the central bank
said speculators are at risk, as they would have no legal recourse if
there is a loss of confidence in the cryptocurrency or if they are
victims of theft from hackers.
According to the Bank of France report:
“The
system can collapse at any moment if investors want to unwind their
positions but find themselves holding portfolios that have become
illiquid.”
In Norway, the director general of taxation, Hans Christian Holte, said
the currency “doesn’t fall under the usual definition of money.”
Instead, the Norwegian government decreed bitcoin to be an asset upon
which capital gains tax can be charged.
Even the European Banking Authority (EBA) weighed in with its own report on virtual currencies
warning consumers that they are not protected through regulation when
using virtual currencies as a means of payment and may be at risk of
losing their money.
These various warnings from around the
world have not yet affected the larger price discovery mechanism for
bitcoin which still occurs in certain jurisdictions. But, what if
exchange-based price discovery for bitcoin was impeded in the future.
What would be the price setting mechanism for conversion in and out of
national currencies?
Just as with other restricted or ‘banned’ goods around the world, bitcoin trade would react by going local and going to a person-to-person model,
such as LocalBitcoins.com. Additionally, small exchanges in certain
countries would still cater to a local population in jurisdictions where
crackdowns were not prevalent.
It might not be easy to chart aggregated price quotes from hundreds of small operators, but price discovery finds a way like water finds a way to flow downhill.
These
global authorities are genuinely afraid of something like bitcoin with
its limited issuance model and distributed trust architecture not
requiring intermediaries.
However, they don’t fear it because of
the potential for money laundering, terrorist financing, or harm to
unsuspecting consumers. Authorities fear bitcoin because it threatens
the adherence to their fabricated monetary illusion.
The genie is
out of the bottle and centralized banking institutions are no longer
seen as necessary for the provision of an exchangeable monetary unit.
This cuts to the core of government’s power and prerogative of issuance,
making bitcoin primarily a central bank concern – not a money
laundering concern.
Some may attempt to harness the genie in the
name of innovation and consumer protection, however the power of bitcoin
will prove too difficult to contain. The best solution from authorities
will be to accept the changes and to modify political behavior around a
forthcoming model of decentralized currencies.
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