The Crypto crisis means regulation will come sooner

With bitcoin values falling as central banks begin to hike interest rates, many questions if this is the start of the bubble’s demise. Maybe not yet. However, a higher opportunity cost of money drives down the values of assets whose primary uses are in the future. Crypto has benefited from ultra-low interest rates, and youthful investors are now getting a taste of what happens when interest rates rise.

What will happen when countries finally get serious about regulating bitcoin and its ilk? Only China has so far begun to do so among the major economies. Instead, most authorities have attempted to divert attention by discussing central bank-issued digital currencies. However, this is a bit of a non-sequitur. In contrast, one of the most appealing aspects of private cryptocurrencies is the ability to circumvent governments. True, bitcoin transactions are traceable via the blockchain ledger, but users often create accounts under pseudonyms and are thus impossible to identify without further information, which is costly to collect.

Some economists mistakenly argue that there is no need to regulate bitcoin and other cryptocurrencies because they are difficult and expensive to use for transactions. Try explaining that to authorities in underdeveloped countries, where cryptocurrency has become a popular way to circumvent taxes, restrictions, and capital controls.

Crypto is becoming a rising issue in poorer countries with inadequate state capacity. Citizens do not need to be computer wizards to get around the government. They only need to connect to one of several essential “off-chain” exchanges.

However, economic theory has long proven that the ultimate worth of any money is determined by its possible underlying uses. Although prosperous economies are the largest investors in cryptocurrency, the benefits – and risks – have been primarily in emerging markets and developing economies. One could even argue that investing in certain advanced-economy crypto vehicles is analogous to investing in conflict diamonds.

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