Why Are Governments Against Cryptocurrency?

Why Are Governments Against Cryptocurrency?

A cryptocurrency is a form of virtual money or digital asset made with the help of encryption algorithms that can be moved from one account to another without the need for a middleman. That means a user can send or receive cryptocurrency without using a central bank, financial institution, or government body. 

Cryptocurrencies don’t come in the form of bills or coins; they only exist on the internet. You could think of them as virtual tokens whose value is set by market forces created by people who want to buy or sell them. 

While cryptocurrencies have gained some acceptance in most developed countries, many governments still treat them with a fair bit of wariness. Countries like Algeria, Bangladesh, Bolivia, China, Egypt, Iraq, Morocco, Oman, Qatar, Tunisia, and Vietnam have either implicitly or outrightly made the use of cryptocurrency illegal. In this article, we’ll look at a few reasons why governments generally don’t like crypto.

  1. Loss of Monetary Sovereignty

Central banks and other financial institutions help the government keep a tight grip on the country’s finances and economy. The government controls the ebb and flow of money in the economy through various monetary policy instruments. This is done to achieve a balance between economic growth and inflation.

If cryptocurrencies are allowed to develop into a powerful medium of exchange, fiscal regulatory authorities will have a much more difficult time using monetary policy tools to control the amount of money in circulation in a country. This will result in the country losing its economic sovereignty, which is an issue that is of concern to all of the major economies throughout the world.

Governments have the power to control fiat currencies. Managing the currency allows governments to monitor its movement, change the economy, and encourage financial transactions to earn taxes and profits. But many central banks are losing revenue due to crypto’s rise to prominence, which is ultimately a loss for the government. Because of this, governments and central banks are opposed to cryptocurrencies.

  1. Cryptocurrency Can Circumventing Government-Imposed Capital Controls

Capital controls are often put in place by governments to stop money from leaving the country. This is because exports could lower the value of a currency. Some people see this as another way for governments to keep an eye on economic and fiscal policy. In these situations, the fact that cryptocurrencies have no central authority governing them makes it easy to use them to get around capital controls and send money abroad.

For instance, in China, citizens can only buy up to $50,000 worth of foreign currency each year. But a 2020 report by the crypto forensics firm Chainalysis discovered that BTC wallets based in China, were used to move more than $50 billion to other countries. This suggests that Chinese people may have changed their local currency to bitcoin and moved it across borders to avoid government regulation. And for a government that keeps such a strict eye on the value of its currency, that level of crypto-aided capital subversion is unacceptable.

  1. Concerns About Crypto’s Ties to Illegal Activities

Cryptocurrency’s ability to get around a country’s financial infrastructure is a blessing in disguise for criminals because it lets them hide the fact that they are involved in illegal activities. Most cryptocurrency networks are entirely anonymous, meaning users are only known by their network addresses. 

It is hard to determine where a transaction came from or who the person or organization behind an address is. Aside from this, because crypto networks are based on algorithmic trust, there is no need for trusted contacts on either end of a transaction.

The Silk Road case was the most well-known example of a crime that used crypto. The Silk Road was a dark web marketplace where people could buy guns, drugs, and fake identification documents. Users could pay for these things with BTC. 

The digital currency was held in escrow until the buyer confirmed that they had received the goods. Police agencies had a hard time finding the people involved in the transactions because all they had to go on was their blockchain address. But in the end, the FBI shut down the site and recovered at least 174,000 BTC from it.

Cryptocurrencies can also be used to help people avoid paying taxes or to launder money. Because they are anonymous and hard to censor, investors and people with a lot of money can use crypto to hide their income from the government.

Additionally, it is believed that terrorist groups also use cryptocurrency to trade weapons and move assets, which is a much more serious thing and one of the main reasons why many governments are afraid to make cryptocurrencies legal.

  1. Cryptocurrencies Are Highly Volatile

Even though crypto has the potential to change the way the current financial system works, it still has many issues. The concept is still relatively new and the value of crypto is barely stable, making it hard to use as a medium of exchange. Because of this, some countries would rather wait a few more years before fully accepting cryptocurrencies as an actual form of money.

Part of the government’s scepticism about cryptocurrencies comes from fear, and part of it comes from the fact that not enough is known about how they work. And those fears are not unfounded. Government think tanks and independent cryptocurrency analysts are still trying to figure out the relationship between the prices of crypto and financial or geopolitical developments worldwide. This is because the price of cryptocurrencies goes up and down quickly and often, and seemingly without provocation. 

Final Thoughts

No one knows if cryptocurrencies will become universally accepted or not. But the fact that more and more people are interested in them shows that they have the potential to change the way money works in the future.

But many governments feel the crypto ecosystem is still young, unstable, relatively opaque, and a law unto itself. Because of this, governments and other established authorities will continue to dislike and be wary of cryptocurrencies until they mature, stabilize, and become better regulated.

Julius Mutunkei

Julius is a blockchain reporter skilled at synthesizing all crypto-related information to make articulate texts easy for anyone to grasp. With a beginner's level certificate in Financial Analysis, Julius can read, interpret and report crypto findings to help investors exercise the best judgment in their decision-making process. When he is not caught up in the crypto frenzy, Julius likes playing a game of FIFA with his online buddies.