What do China, India and Russia have in common? Collectively, these countries represent nearly 40% of the global population. But, despite cultural and religious differences, these giants of global affairs coordinate politically through the Russia-India-China (RIC) trilateral alignment founded in 2001. But whilst the rest of the world struggles to harmonise a reaction to cryptocurrencies, the three RIC countries have all opted to restrict or ban them.
The contest to control the future of money is ‘on’. The hitherto monopoly of money issuance and policy driven by nation-states is no longer a given. Disruption from new decentralised cryptocurrencies such as Bitcoin is beyond the traditional reach of regulators, tax authorities and governments. The oracle that is The World Economic Forum recently published a report on this issue earlier this year highlighting that the “growing adoption and decentralized nature of cryptocurrencies pose unique and unprecedented challenges”.
Opinion is split globally as to how best to leverage the benefits of cryptocurrency whilst mitigating the risks. Such risks manifest as tax evasion, fraud and illegal or nefarious activity. However, proponents of cryptocurrencies argue that our existing physical cash is the ultimate permissionless money that already suffers from such fragilities. This observation ultimately led to The European Central Bank (ECB) withdrawing the highest denomination note of €500 in 2016, citing the fact that 30% of all Euro cash in circulation could be attributed to such notes yet most people had never even seen one! The disproportionate use of the €500 note for criminal activity and money laundering was a clear driver in their decision-making.
But, in a world where the average money remittance transfer fee is a whopping 6.38%, it is understandable why technology oligarchs such as Mark Zuckerberg have asked why it, ‘should [not] be as easy to send money to someone as it is to send a photo’? Contrast this with the vanguard cryptocurrency Bitcoin, which has seen single money transfers in excess of $1bn performed for a transaction fee of less than $6. Such transactions are performed without banks or payment intermediaries and will typically clear and settle within minutes.
Central banks are rebutting this existential threat through the development of new central bank digital currencies, or CBDCs. Here in the UK, we are at the forefront of such innovation through organisations such as the Digital Pound Foundation, with whom I have worked. A parallel organisation to the not-for-profit Digital Dollar Project over the pond that is funded in part by Accenture Plc. A start, but Western Anglo-Saxon economies, save for France and Canada, are arguably someway behind the Chinese in particular, who have already begun the pilot implementation of their CBDC – the Digital Yuan, known officially as e-CNY.
But, for central banks, the headache that is Bitcoin (and other alternative cryptocurrencies collectively known as ‘alts’ or ‘altcoins’) will not be resolved with CBDCs alone. The carrot of a new CBDC incarnation of our existing fiat currencies must be accompanied by the stick of legislation. Just last month, India published a bulletin detailing a new piece of proposed legislation entitled; 'The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. See full details here.
Historically, India has had a flip-flop relationship with cryptocurrency stemming from The Reserve Bank of India (RBI) banning financial institutions facilitating services related to cryptocurrencies in 2018. This move was promptly overturned by the Supreme Court just last year.
Nonetheless, the newly proposed Indian legislation 'seeks to prohibit all private cryptocurrencies' whilst simultaneously smoothing the way for the launch of India's new CBDC. A crypto regulatory playbook almost identical to China's approach in attempting to bring cryptocurrencies to heel, or as a minimum to regulate rather than an outright ban.
Notwithstanding the actions of these two nations, others have followed with similar restrictions of cryptocurrency including (but not limited to) Columbia, Egypt, Indonesia, Iran, Iraq, Turkey and Vietnam.
Consequently, the price of Bitcoin and the alts continue to exhibit recent material sell-side pressure along with excessive price volatility. Stubbornly, for nation-states at least, cryptocurrencies are persistent and do not appear to be going away. Despite falling from its prior month all-time-high Bitcoin is still trading on the exchanges at almost $49,000 which represents a market capitalisation of some $913bn - a valuation making it worth more than the Russian Rubble or the Thai Baht.
Not too dissimilar to the crises of COVID-19, tax havens or climate change, cryptocurrency will require a global multilateral approach contrary to uniliteral motivations which are depressingly predictable using Game Theory modelling. As we saw with China’s recent restriction of cryptocurrency mining activity, the miners simply migrate elsewhere. This was a welcome move toward a more decentralised cryptocurrency ecosystem for many in the space.
So, is international cooperation required?
In my opinion, yes. This will likely be led by organisations such as BIS and their Innovation Hub on CBDCs. But, given that nation-states have an increasingly diverse love-hate relationship with cryptocurrencies, we must first agree a homogenous global optimal strategy before we can begin the much harder task of coordination and ultimately regulation.
Ironically, Bitcoin’s greatest ally may be the nations attempting to ban it. As some countries look to control Bitcoin with punitive restrictions, this may drive citizens increasingly into the arms of such decentralised cryptocurrencies as a stateless alternative solution for the liberation of the people’s money.
Gavin Brown is an Associate Professor in Financial Technology at The University of Liverpool and Fellow of the ICAEW as a chartered accountant.
ICAEW Insights opinion pieces are intended to be thought-provoking and stimulate debate. Views expressed in these opinion pieces are the author’s own and not necessarily shared by ICAEW.
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