What’s Up With Cryptocurrency? – Stanley Charles
Cryptocurrency, once an obscure concept coined by a programmer in the 1980s, is now rapidly gaining attention from the media, the tech industry, the financial industry, and the government. While much of this attention is positive, there has also been a significant backlash to cryptocurrency. This backlash seems to be rooted in skepticism about cryptocurrency’s safety and its viability as a cash alternative. These concerns are certainly not groundless. According to a report by cryptocurrency intelligence company, Ciphertrace, cryptocurrency scammers pocketed $4.26 billion dollars in 2019 alone. The venerated Bank of International Statements suggested in a 2018 report that it would be impossible for cryptocurrency to replace regular money because it is far too unstable to be widely adopted. Those that air these concerns often suggest regulation to fix these issues. While arguments for regulation are not inherently illogical, the facts about cryptocurrency should be considered before any new laws are passed. After deliberating on the nature of cryptocurrency, the conclusion seems to be that there are areas where cryptocurrency should be regulated, but regulation aimed at stabilizing the price of cryptocurrency should not be pursued.
In order to see how this conclusion was reached, it is important to first familiarize oneself with the history and workings of cryptocurrency. The idea of an online currency that was just as secure as regular money was first coined by David Chaum, a cryptology scientist. Chaum attempted to bring this idea into fruition through his 1989 company DigiCash, but the company failed in 1999. A decade later, Bitcoin appeared on the scene, succeeding where its predecessor failed. The main reason for DigiCash’s failure was that there was no market for it. In a 1999 Forbes article reporting on DigiCash’s failure, Chaum explicitly states that “no merchant would accept and no consumer wanted to use it”. Luckily for Bitcoin, it was adopted early on, with the first transaction taking place in 2010. Adoption is what gives Bitcoin its value. Cryptocurrency follows basic economics. The supply and demand are what influence its price.
If supply and demand are what gives cryptocurrency its value, where is the supply and demand coming from? The majority of cryptocurrencies, Bitcoin included, are based on a technology called blockchain. In the simplest terms possible, blockchain is a network of peer-to-peer connected computers that process transactions of information. The computers verify each transaction and record it on a digital ledger.
Each cryptocurrency unit is also created by this process. Due to this, there is a theoretical cap on how many cryptocurrency can exist due to the limitations of the blockchain network. In other words, there is a finite number of cryptocurrency “coins” that can exist for each cryptocurrency that uses the blockchain network. Bitcoin explicitly supports this because it protects against inflation, but some economists point out that this still does not mean that prices will stabilize. For this reason, some have called for regulation of cryptocurrency with the intent of stabilizing the value of cryptocurrency.
Why is there a need to fix the price of cryptocurrency? The reason why cryptocurrency has attracted the attention of the financial industry is that cryptocurrency constantly changes value, like a stock. Many financial institutions treat it as a stock. For example, the stock trading platform TD Ameritrade also contains an option to trade cryptocurrency. If regulation was implemented, this would lead to the demise of this option. Yes, cryptocurrencies do tend to wildly change in value, but those want to invest in cryptocurrency should be expected to know the risks involved. Consider this comedic video produced by Reason magazine during the height of the Bitcoin craze:
Due to Reason magazine being a libertarian publication, personal responsibility is being advocated over government regulation. The government does not need to regulate cryptocurrency to make it a safe investment. People should decide for themselves whether or not to invest, and should face the consequences of their actions.
Some proponents of regulation of cryptocurrency do not base their beliefs on the volatility of cryptocurrency price, but on the current state of the cryptocurrency market. As previously mentioned, cryptocurrency behaves similar to a stock. There are further similarities between stock and cryptocurrency. For example, a newly-public business may offer an initial public offering (IPO) to gain funding. Similarly, newly-created cryptocurrencies often offer an initial coin offering (ICO) to gain funding. These similarities between stocks and cryptocurrency have generated some controversy. Unlike cryptocurrency, stocks are regulated by the government. Before a company can begin selling and trading stocks, it must first register with the Securities and Exchange Commission, which heavily monitors companies to make sure they are not engaging in false advertising. Stockbrokers must be licensed by the Financial Industry Regulatory Authority (FINRA). All these regulations give the financial industry the title as one of the most strictly-regulated businesses in America. In contrast, the cryptocurrency industry faces significantly less regulation. There is no requirement for cryptocurrencies to register with the SEC. Regulation proponents point out that this lack of regulation has allowed for scams to arise and go unchecked. The most infamous of these scams was Bitconnect, which was branded by the media as a Ponzi scheme.
Regulation to protect against scams is necessary and will benefit both consumers and cryptocurrencies. Firstly, consumers will be protected from scams and cryptocurrencies will be viewed with more trust because cryptocurrency scams will not be allowed to proliferate unchecked. Just like public companies are tightly monitored for false advertising, cryptocurrencies should be constantly vetted to make sure they are legitimate.
Another controversy surrounding is its uses. Because cryptocurrency transactions are private, it is a popular form of payment for illegal activities. This is certainly a widespread problem. According to a report by Oxford University, nearly a quarter of Bitcoin users are involved in illegal activities and 46% of all Bitcoin transactions are used for illegal activities. These fears have allowed for bills intending to curb and investigate illegal activities done with cryptocurrency to be introduced in Congress and attract bipartisan support. Obviously, illegal activities should be tracked down, but how will this be done? Should the government have the ability to confiscate any computer suspected of being involved in criminal activity? A less intrusive alternative exists. There are now algorithms that can pinpoint Bitcoin activity to certain accounts, allowing for organizations to quickly pinpoint criminal activity. Although this technology means that the government can crack down on criminals, this can also mean that totalitarian regimes that forbid cryptocurrencies can crack down on citizens using cryptocurrency. It should be noted that cryptocurrency is steadily growing in countries with totalitarian regimes, like Venezuela and China. If the governments of these countries got their hands on this technology, they could further oppress their citizens. To conclude, this technology certainly is useful to crack down on criminals, but others can use it for malicious purposes.
In conclusion, cryptocurrency is a remarkable concept that has went from only being known on the fringes to the global limelight. This technology has attracted the attention of many industries and has the potential to revolutionize the global economy, but this technology should not go unchecked. Regulation is needed. Not all regulation is good. Regulation with the intent of stabilizing the price of cryptocurrency should not be pursued because it may dissuade people from investing in cryptocurrency. However, regulation to make sure each cryptocurrency is legitimate and not a cash-grab operation is necessary. This kind of regulation will benefit both the consumer and cryptocurrency because it will protect the consumer from scams and improve the image of cryptocurrency. It is true that cryptocurrency is significantly used in criminal activities, but cracking down on these activities is problematic because this technology can also be used to oppress people. Despite the controversies, cryptocurrency is still an ever-evolving technology. Only the future knows what is in stock for cryptocurrency. All proposed regulation must be carefully thought out.
Published at Tue, 26 Nov 2019 05:29:37 +0000
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