In recent years, there has been an influx of interest in cryptocurrencies. The investor base is diverse: tech-savvy traders, aggressive speculators, hedgers prophesizing the doom of fiat currencies, Elon Musk fans, and even large institutions seeking to supplement their investments in alternative assets. This list is not all-inclusive nor is it mutually exclusive. The insatiable demand for cryptocurrencies has wrought massive price increases. The price of Bitcoin, for example, skyrocketed to well over $60,000 earlier this year before paring some of the gains. The volatility associated with cryptocurrency can cause the value to drop precipitously; yet many people like the idea that it is not controlled by a government or financial institution.
Despite the strong appreciation for decentralized currencies, Chinese regulators have continuously attempted to ban them. In 2013, the Chinese government defined Bitcoin as a virtual commodity rather than legal tender. Later that year, China banned banks from providing any bitcoin-related services. Four years later, in 2017, China banned initial coin offerings and cryptocurrency exchanges. However, investors found many ways to get around this through offshore exchanges and over-the-counter platforms. China’s numerous attempts to ban cryptocurrency have shown the immense technological challenges of regulation due to crypto’s decentralized design. Still, on September 24th of 2021, China once again launched a crackdown on cryptocurrency, and this is their most powerful attempt yet.
The cryptocurrency industry has come under scrutiny for various reasons including money laundering, energy consumption, and the safety of peoples’ assets. China’s new ban restricts cryptocurrency transactions and mining, making all crypto-related activities illegal in China. One reason for this ban is to allow China to reach their goal to become carbon neutral by 2060. The cryptocurrency mining process uses highly sophisticated hardware and a substantial amount of energy. Often, miners spend more money on electricity costs than what they mine is even worth. Since China is home to many crypto miners, China believes this has contributed to the power crisis that has interfered with their carbon goals. This electricity shortage has caused energy prices to increase along with blackouts across many of China’s provinces. However, some researchers suggest that most of the coins that are mined in China are generated by green energy. Proponents argue that Bitcoin mining incentivizes renewables due to the high energy costs. However, this is still somewhat controversial.
Some of the world’s largest cryptocurrency exchanges such as Huobi and Binance have already made drastic changes. Huobi is retiring all existing accounts of mainland Chinese users and will end account registrations for new users in mainland China by midnight of December 31st, 2021. Huobi announced that this is to protect the current users’ assets, and they will continue to announce more details of these changes in the future. This resulted in the token price of Huobi to slide down to an 8-month low. Binance has also complied with these new regulations and has blocked all account registrations with mainland Chinese phone numbers. A spokesperson from Binance explained that they take their compliance obligations seriously, and will follow regulatory requirements wherever they have operations.
While Chinese agencies are working together to make this ban successful, in the U.S., the Fed is considering its own digital currency. It is important to note that this is not the same as cryptocurrency. Cryptocurrencies are decentralized whereas a digital currency would fall under the control of the Fed. During the same week of China’s crackdown, the Fed made several comments about a potential digital currency. These comments are not new, however, since the Fed has been talking about creating a digital currency for quite some time. Chairman of the Federal Reserve, Jerome Powell, explained that the Fed is moving forward with their research into implementing their own digital currency and will soon release a whitepaper on the topic. There has been no final decision announced on this as the Fed officials want to ensure they make an informed decision and “do it right the first time.”
Some of the benefits, the Fed claims, of issuing its own digital currency would be to provide services to people who do not use banks and to quickly get payments to people, especially in times of crisis. For example, digital currency could allow for a faster and cheaper way to issue stimulus checks compared to the paper stimulus checks issued by the U.S. government during the COVID-19 pandemic. Opponents argue that the Fed creating a digital currency could have serious repercussions for the financial system. Banks may see a digital currency as a source of competition. Furthermore, since this is digital, there are chances of hackers and fraud. If the government does not protect the digital currency from major cyber attacks, people will begin to lose trust in the “lender of last resort.”
Although the Fed has been considering this for a while, many people believe they have fallen behind in a “global race for digital currency.” However, Powell does not agree as he states, “I think it’s more important to do this right than to do it fast.” It seems that the US was once a leader in technological innovation but now may be lagging. Places around the world are beginning to realize the importance of digital integration. The Bahamas have integrated a digital Sand Dollar, and other countries such as Australia and Malaysia are in the process of creating a cross-border central bank digital currency exchange program. El Salvador just recently became the first country to accept Bitcoin as legal tender, and even China has created a digital version of its paper currency called e-RMB. The world is experiencing technological improvements every day, and countries are starting to change aspects of their economies. The US establishing a digital currency could allow for easier banking while also keeping their technological edge and influence.
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