From dismissive to damning, central bankers have run the full gamut of attitudes towards Bitcoin and cryptocurrencies and instead of regulating, are leaning towards cracking down, but can they?
In November of 2018, and in the depths of the crypto winter, warmth for cryptocurrency maximalists came from an unlikely place, the IMF.
Then head of the International Monetary Fund, Christine Lagarde, in a speech at the Singapore Fintech Festival, offered these warm words of comfort to the cold crypto-faithful who at the time may have been questioning their life choices,
“We float through a world of information, where data is the “new gold” — despite growing concerns over privacy, and cyber-security. A world in which millennials are reinventing how our economy works, phone in hand.”
“And this is key: money itself is changing. We expect it to become more convenient and user-friendly, perhaps even less serious-looking.”
Whether that reference to “less serious-looking” was a prescient take on the eventual rise of Dogecoin is anyone’s guess, but Christine, Lagarded on with praise for cryptocurrencies,
“Even cryptocurrencies such as Bitcoin, Ethereum, and Ripple are vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement.”
That these words were uttered by one of the most pivotal characters in the global financial system, whose very role was to foster global monetary cooperation would have no doubt been seen by some more traditional voices in the central banking community as blasphemy.
For the millions of diehard cryptocurrency maximalists, they provided cold comfort at a time when Bitcoin was languishing at under US$6,400.
Just a fortnight after Lagarde’s speech in Singapore, Bitcoin would fall further to below US$5,500 and capitulate to US$3,400 before the end of 2018.
If Bitcoin was to pose any threat to the global monetary system, that threat was yet to be apparent in the depths of the winter of 2018.
While Bitcoin miners took the coal from their socks to generate electricity to mine Bitcoin that winter, central bankers slapped each others’ backs in congratulations on another record year for their economies and the governments they worked for.
At the time, the prevailing attitude towards cryptocurrencies was dismissive, especially from the western democracies which saw no threat to their seemingly unassailable position at the very pinnacle of global finance.
The world ran on the dollar, and while some central banks were quite content to consider a central bank issued digital currency as a thought exercise, there was no urgency to replace the paper bills and coinage that had come to dominate global economic life.
Except for one central bank.
Power is nothing without control — try strapping on a Ferrari engine to a lawnmower and it becomes immediately apparent.
And no central bank understood the challenge that Bitcoin bore to seigniorage and sovereignty more than the People’s Bank of China.
Which is why even as other central bankers were luxuriating in the wood-paneled safety of Davos, thousands of miles away in Beijing, engineers and economists were busy at work creating China’s very own digital currency, the digital yuan.
Then the pandemic hit.
Without missing a beat, governments and their enabling central bankers reverted to tried-and-tested means to keep their economies afloat, slashing interest rates (to negative in some cases) and flooding their financial systems with monetary and fiscal stimulus.
That orgy of liquidity, the very impetus which led to the writing of the Bitcoin whitepaper and the birth of cryptocurrency in 2008, worked.
Markets took a sharp dive, but then bounced back almost within weeks and have been on a relentless rally ever since.
But this time the difference was cryptocurrencies had come along for the ride and none more so than Bitcoin.
Because the very premise that had led to the birth of cryptocurrency, was now being seen as a potential failsafe should government profligacy go unchecked, an initially fringe cryptocurrency movement now captured mainstream attention.
Fast forward to our current epoch, and it’s apparent to central bankers that cryptocurrencies are no longer the innocuous experiment in private decentralized digital currencies from the tech fringe, but a potential existential threat.
And the language used to describe cryptocurrencies has also changed dramatically.
In 2018, then-IMF head Lagarde was of the view that the world needed to be more open to technological advances, even in the realm of currencies,
“My message is that while the case for digital currency is not universal, we should investigate it further, seriously, carefully, and creatively.”
“More fundamentally, the case is about change — being open to change, embracing change, shaping change.”
“Technology will change, and so must we. Lest we remain the last leaf on a dead branch, the others having decided to fly with the wind.”
“In the world of Fintech, we need to harness change so it is fair, safe, efficient, and dynamic.”
But compare Lagarde’s speech in 2018 to one of her more recent criticisms of Bitcoin, now as the head of the European Central Bank.
Speaking at a recent online event organized by Reuters, Lagarde was acerbic in her calls for regulating Bitcoin,
“For those who had assumed that it might turn into a currency — terribly sorry, but this is an asset and it’s a highly speculative asset which has conducted some funny business and some interesting and totally reprehensible money-laundering activity.”
But the reality is far more nuanced.
According to blockchain analytics firm Chainalysis, just 0.34% of all cryptocurrency transaction volume in 2020 consisted of illicit activity, or around US$10 billion, down from 2.1% in 2019.
In contrast, the United Nations estimated that between 2% and 5% of global GDP, or approximately US$1.6 trillion to US$4 trillion annually is associated with money laundering and illicit activity.
If criminals and bad actors are reaching for cryptocurrencies, the numbers don’t seem to suggest that.
And should that come as any surprise?
There’s a reason why the dollar is king — it’s globally accepted, easy to launder and easy to spend.
Far from being bulwarks against a flood of criminal activities, the legacy financial institutions actually acts as enablers, with authorities only stopping a small fraction of the illicit flows that course through the global financial system through regulated entities.
If central bankers were genuinely sincere about cracking down on illicit fund flows, they’d start with their own banks.
But they’re not.
What central bankers are more concerned with than anything else is any threat to the significant seigniorage enjoyed by their governments — the difference between the face value of money and the amount it costs to print it.
Any potential threat to central banks’ control of monetary policy, and with it their sizeable clout in the global financial system, is what underpins their sudden antagonism towards cryptocurrencies.
It’s one thing to speak of cryptocurrencies in platitudes when Bitcoin is languishing at just US$3,400, but quite another when it’s worth ten times that amount and some of the biggest companies in the world have piled it into their balance sheets.
Bank of Japan Governor Haruhiko Kuroda is just the latest central banker joining that chorus of central bank voices that have been critical of cryptocurrencies.
At a recent interview, Kuroda said,
“Most of the trading is speculative and volatility is extraordinarily high. It’s barely used as a means of settlement.”
Big words from a central bank that’s been responsible for negative interest rates on Japanese government bonds for years.
Bank of England Governor Andrew Bailey warned earlier this month that cryptocurrencies have no intrinsic value and that people should only buy them if they’re prepared to lose their money, which is ironic given that the same criticism could also be leveled at fiat currencies, including the British pound.
From the U.S. Federal Reserve’s Jerome Powell dismissing cryptocurrencies as simply vehicles for speculation, to European Central Bank Vice President Luis de Guindos arguing that tokens shouldn’t be seen as real investments, there’s no shortage of central bankers who have been lining up to hate on cryptocurrencies.
But why all the hate now?
Because it’s already too late.
Tough talk on cryptocurrencies from Beijing to Brussels and calls for greater regulation may have hurt Bitcoin’s short term price momentum, but the cryptocurrency genie is out of the lamp and there’s no stuffing it back in.
And because mimicry is the greatest form of flattery, it’s small wonder that just as central banks are blasting Bitcoin and its brethren, they are also rolling out their own competing versions of the future scape for finance.
According to the Bank of International Settlements, no fewer than 86% of central banks are either exploring or have already issued their own digital currencies.
But copying isn’t enough, the goal must be to nib the cryptocurrency threat in the bud as well with the most high profile broadside against Bitcoin coming from Beijing.
A push to rein in cryptocurrency mining in the Middle Kingdom was ostensibly triggered by concern over a surge in illicit coal extraction to deliver the electricity needed to fuel the power-hungry cryptocurrency mining industry, but insiders say that concerns over the use of Bitcoin to facilitate capital flight may have been the true motive.
For decades since China opened its economy to the rest of the world, billions of dollars of capital have been spirited out of China (the actual amount is hard to determine), whether in cash bundles strapped to bodies across China’s porous southern border with Laos or through the gambling hubs of Macau.
When the Chinese first discovered Bitcoin, they took to using it to send money offshore like a pair of chopsticks take to dipping into a bubbling hotpot and Beijing’s counter to cryptocurrencies was its very own digital yuan.
And on the eve of a more widespread launch of its digital yuan, Beijing is not taking any chances when it comes for Bitcoin, going for the jugular.
Northern China’s Inner Mongolia region has been quick to fire the first shot, with local party chiefs eager to reassure apparatchiks in Beijing that even in the far reaches of the Chinese Communist empire, fealty to the central government is not far from the front.
In an escalating endeavor to assure colleagues in the capital, Inner Mongolia has drafted tough new rules that propose harsh punishments for anyone engaged in cryptocurrency mining, a move that will surely send the practice offshore.
If the new regulations are passed (they are almost certain to be), individuals who flout the ban on cryptocurrency mining could be put on a social credit blacklist barring them from getting loans or even using the country’s transportation system, amongst other legal consequences.
And it is this Orwellian linking of China’s social credit system with its digital yuan that could prove to be the feather in Bitcoin’s cap.
For which Chinese national knows when they could one day unwittingly raise the ire of the Chinese Communist Party?
Whether it’s the re-sharing of a seemingly innocuous social media post or sending messages that are antithetical to the Chinese Communist Party’s unwritten greater goals, any number of seemingly small infractions could see someone “erased” and excluded from Chinese economic life, with dire consequences.
If the digital yuan is the currency of dystopia, then Bitcoin could ironically be seen as the bulwark of democracy, providing an alternative rail for Chinese to liquidate their money and ship if offshore should they face any unfortunate and unforeseeable reckoning.
In any event, a quick read of the Bitcoin whitepaper will demonstrate that the cryptocurrency was specifically designed for situations such as these.
Even if Beijing were to come after the cryptocurrency miners, nodes that secure the Bitcoin blockchain in other parts of the world would immediately fill in those gaps.
The complex mathematical puzzle that Bitcoin miners would need to solve would become simplified to cater for the fewer miners that are securing the Bitcoin blockchain.
In other words, nothing would change — and therein lies the beauty of decentralization.
And while not everyone understands the threat posed by a globally movable decentralized currency, you can bet your bottom Bitcoin that Beijing does — the rest of the world’s central bankers are only just beginning to catch up to that threat and being extremely vocal about it in the process.
Patrick is an innovative entrepreneur and a lawyer passionate about cryptocurrencies and the business world. He is the CEO of Novum Global Technologies, a cryptocurrency quantitative trading firm. He understands the business concerns of founders and business people helping them to utilise the legal framework to structure their companies to take advantage of emerging technologies such as the blockchain in order to reach greater heights. His passion for travel, marketing and brand building has led him across careers and continents. He read law at the National University of Singapore and graduated with Honors in the Upper Division and joined one of Singapore’s top law firms, Allen & Gledhill where he was called to the Singapore Bar as an Advocate & Solicitor in 2005. He created Purer Skin, a skincare and inner beauty company which melds the traditional wisdom of ancient Asian ingredients such as Bird's Nest with modern technology. In 2010, his partner and himself successfully raised $589,000 from the National Research Foundation of Singapore under the Prime Minister’s Office. He has played a key role in the growth of Purer Skin from 11 retail points in Singapore to over 755 retail points in Singapore and 2 overseas in less than a year. He taught himself graphic design, coding, website design and video editing to create the Purer Skin brand and finished his training at a leading Digital Media Company.