Here’s Why Governments Fear Losing Control if Crypto goes Mainstream

Cryptocurrencies have gained widespread acceptance as an alternative payment instrument that can facilitate near-instant transactions, store value, and hedge portfolios against inflation. 

The Age of Decentralization

The digital currency movement continues to gain traction due to its capacity to free people from financial repression and circumvent bottlenecks in the conventional banking system.

Virtual coins such as bitcoin can operate without the need for any centralized authority. As a result, the asset class continues to face relentless backlash from world governments desperate to maintain the status quo in the global economy. 

Many central banks and government bodies have ramped up efforts to stifle crypto adoption, fearing that the technology could destabilize the existing financial system. This article looks at why governments are determined to prevent the digital asset class from marching into the mainstream.

Governments Are Taking Notice of Crypto’s Growing Popularity

Cryptocurrencies have become a threat to the world’s official currencies and state-based financial institutions. As various decentralized digital assets continue to gain mainstream acceptance, financial watchdogs are moving to halt their rampant growth and usage.

According to a Law Library of Congress report, numerous central banks are desperate to defend their monopoly on currency issuance and control access to financial services. The study shows that over forty-two countries have taken steps to suffocate the crypto sector by prohibiting exchanges and banning financial institutions from dealing in the asset class.

Nations like Egypt, Morocco, Algeria, Iraq, Qatar, Bangladesh, and China are determined to muscle aside virtual assets by imposing a blanket ban on crypto-related activity.

Even governments that haven’t cracked down on crypto are taking notice of its rising popularity and are calling for more regulatory oversight of the sector. In March 2022, President Joe Biden issued an executive order on crypto assets that requires regulators to rein in the technology’s ‘Wild West’ aspects.

Meanwhile, governments wary of crypto stealing the spotlight from their legal tender are designing their own Central Bank Digital Currencies (CBDCs). According to analysts at banking giant Morgan Stanley, as many as 60 central banks are developing or exploring CBDCs to rival anti-establishment digital assets like bitcoin. 

Why Governments Are Cracking Down on Crypto

The creator of bitcoin, the world’s first crypto, structured his invention to supplant sovereign currency that had long been the lifeblood of the global economy. The game-changing technology boasts the ability to conduct secure and private financial transactions beyond government monitoring or control.

For these reasons, many states view crypto as a severe threat to their geopolitical power and financial oversight. This next section explores why some governments are opposed to the rise of cryptocurrencies.

A Threat to Government Control Over the Financial System

The biggest threat that governments attribute to digital assets is their ability to end their control over domestic payment systems. 

Essentially, crypto allows for private and anonymous peer-to-peer exchanges of value outside government surveillance. Consequently, national governments and central banks are becoming increasingly fearful of cryptocurrencies destabilizing their financial systems. 

The transparent, decentralized, and censorship-resistant qualities of crypto mean that financial institutions cannot monitor or track the behavior of users as they can in the legacy financial system.

Many world powers fear crypto will eventually go mainstream and overtake sovereign currency as the go-to medium of exchange. Oppressive regimes view the asset class as a source of turmoil because it can upend state-imposed capital controls, giving financial power back to the people.

Another concern financial regulators like the US Federal Reserve have over crypto and stablecoins is that the virtual currencies can help evade restrictions on international remittance flows.

Crypto Is a Risky and Speculative Asset Class

Many cryptocurrencies have hit new record highs over the past year. Their parabolic growth inspired a counterculture that attracted billions of dollars in speculative investment from institutional players.

However, the prospect of people putting their hard-earned money into a purely speculative digital asset class is worrying to many governments. Regulators cite crypto’s lack of intrinsic value as problematic, arguing that investments in the sector leave people vulnerable to high volatility and a bursting of the speculative bubble. They also warn that users could endure huge losses from dubious projects designed to trick the general public.

Crypto is facing pushback from jurisdictions that are keen to protect their citizens from the dangers of speculative trading. For instance, India recently issued clarifications on crypto trading to reduce speculative trading and protect folks from pump and dump scams.

Similarly, the Financial Conduct Authority (FCA) has issued multiple warnings about fraudulent crypto investments that siphon money from vulnerable consumers. The UK financial watchdog advises its citizens not to jeopardize their financial futures by dabbling in risky digital asset investment products.

The Use of Crypto in Illicit Activity

Many governments have moved to ban crypto due to suspicions that the asset class facilitates illegal activities such as tax evasion, terrorist financing, and money laundering.

According to the ‘Crypto Crime Trends for 2022’ report published by Chainalysis, crypto-based crime surged to a new record high in 2021. The blockchain analytics platform found that illicit addresses received a whopping $14 billion over the past year, although illegal usage of virtual assets is on the decline.

The lack of precise regulation of digital assets has promoted criminal use of crypto assets, prompting more governments to impose strict regulations on the industry. In March of 2022, the EU’s Economic and Monetary Affairs Committee imposed a comprehensive legislative framework to curb threats associated with digital assets.

Most market experts agree that effective regulations could foster legitimacy and stability in the industry and promote legitimate cryptocurrency usage.

Conclusion

Crypto’s growing appeal as a replacement for fiat money sets it on track to become a major player in the future of global finance. Some countries view the asset class as groundbreaking innovation that holds great potential to drive the online economy.

However, some states fear that crypto’s mainstream adoption could undermine their tight grip on domestic payment systems and capital controls. While the future of the nascent industry is still murky, its intuitive tech promises to transform the traditional banking system and usher in a new era of financial inclusion for all.