Some governments have understood the idea of cryptocurrencies, while others are still trying to grab at the wind.
El Salvador has made Bitcoin legal tender, Brazil may be looking to do the same and Forbes reports that the US state of Texas is poised to become a world leader in Bitcoin and blockchain technology. China, on the other hand, last month chose to ban all cryptocurrency transactions, even though the country was once responsible for about half the world’s supply of Bitcoin. The news was met with negative shocks in the market, followed by a fall in Bitcoin’s price, but the ban itself comes as no surprise. China has done so on seven occasions in the past, with little success. In fact, Bitcoin has boomed after every ban, and this time is unlikely to be an exception.
The reason Bitcoin is so desirable to so many people is that it is, essentially, a theory of money that promises the holder complete monetary freedom, autonomy and privacy. It is an innovative response to the regular printing of paper money by states and central banks. Whether or not states oppose Bitcoin matters very little, because it was designed to work outside the framework of government. Trying to ban it and assuming that doing so would make it disappear is like closing one’s eyes and pretending the sun doesn’t exist.
For anyone unfamiliar with cryptocurrencies – and there are still many such people – ownership of Bitcoin is total and direct. No one can access anyone else’s Bitcoin without first having the key to their wallet. What’s more, since the total global supply is fixed at 21 million Bitcoins, the value of one’s Bitcoin assets cannot be arbitrarily diluted by creating more of it. On the other hand, inflation, which can be the outcome of governments printing more money, dilutes one’s true wealth in terms of purchasing power. These advantages, along with guaranteed privacy and accessibility, make Bitcoin an attractive option for many.
But it is the liberating aspect of owning Bitcoin that worries authorities in many countries, including China, for it can effectively bypass state control over an individual’s finances and other aspects of daily life. Beijing’s ban also comes as it prepares to adopt the digital yuan, which – as the name suggests – is the digital version of the Chinese yuan. The promotion of the digital yuan is a critical component in China’s centralisation efforts, as it allows the government to exercise unprecedented monetary control over public and private finances.
The question remains whether China can indeed banish Bitcoin once and for all, especially with its value having risen astronomically since the first attempt in 2013. It so happens that banning something doesn’t make it go away. If anything, it can make it more desirable – and, crucially, can give the rest of the world an opportunity to invest in it at an advantage over investors in the country that bans it.
China’s previous bans have proved ineffective also because of the vast extent to which Bitcoin mining infrastructure already exists across the country. There are entire warehouses full of computers, many with their own power supplies, dedicated solely to mining the cryptocurrency. The Chinese market is credited with the lion’s share of mining activities and other crypto transactions. The ban could even drive up the local price of Bitcoin since there is now added risk involved for all intra-Chinese transactions. Traders tend to sell Bitcoin and other cryptocurrencies at a market-dependent markup; this will greatly increase in China. Studies indicate Chinese investors are now buying more Bitcoin in a roundabout way, using secondary cryptocurrencies.
Other countries have struggled to ban Bitcoin, too. One is Nigeria; but even there, it is booming. In fact, Nigeria currently has one of the world’s highest crypto adoption rates. Bitcoin is unaffected by government sanctions precisely because it was designed to combat state intervention in personal finances. Admittedly, entities such as Iran and its proxies have abused this feature for illicit activities, as I wrote in a previous article. But that is because, like any good tool, Bitcoin too can be misused.
But outright bans, as I explained, may not be an effective response. In China, there are indications that people are purchasing Bitcoin, having sensed that it might be best to buy now before the Chinese market gets over the shock and demand in the country begins to rise again. An increase in demand will lead to a price rise, which means we could be in for a bull market very soon. And that would be a gift to anyone who buys Bitcoin now, before the tide rises.