As described in an earlier Comment Section article, Blockchain is the system in which cryptocurrencies like Bitcoin are exchanged. Recently, many bankers have denounced Bitcoin as a fad or bubble that is likely to die out. This includes JPMorgan CEO Jamie Dimon who referred to Bitcoins as similar to the Tulip Bulb Crisis in the 1700’s. He stated to CNBC “Governments, the first thing they do is form a currency. They like to control the currency. They control it through a central bank. They also like to know who has it, where it is, [and] where it’s going. And you see china is closing down the bitcoin exchanges… Wait until someone gets hurt, wait until it’s used for elicit purposes, which it is [already]. They’ll close it down…. That’s my point.” Dimon makes a good argument since there is no doubt at some point the government will institute harsher guidelines to try and manage the ‘wild west’ that is the digital currency market place. However, two facts diminish Dimon’s point, firstly that Bitcoin directly threatens the Big Bank’s bottom line, thus making their opinions of Blockchain and Bitcoin highly biased. The second point being how difficult it actually is to regulate anything that runs on a Blockchain system.
Rainer Michael Preiss, executive director at Taurus Wealth Advisors stated in a separate interview to CNBC “Of course, if you run a very large U.S. bank, most probably you are afraid of blockchain and bitcoin.” Rainer is right for several reasons. Bitcoin is totally anonymous, which makes it non taxable and easy to keep off of business accounting ledgers. People can take money out of banks (and hold them in bitcoin wallets) which can totally nullify any transactional taxation when they are used in a purchase. Money made in cash businesses can also directly be converted to bitcoin and stored to avoid paying what they would normally have to pay in income taxation if this money was stored in a bank. Furthermore, bitcoin can be used to trade in any country, even in countries that the US government has sanctions against. There are no limits to how much can be traded in a day, so millions can be taken in or out of an account at a click, without interference or regulation. It is also decentralized, so it cannot fall if a single country’s economy crashes. This means that people living in volatile areas, where the government can’t be trusted, are likely to diversify into bitcoin to protect their money. These are just a few of many situations why someone would opt to use bitcoin over holding their money in the banking system.
In 2013, the small Country of Cyprus ran into a huge problem. Cyprus was too insolvent for any bailouts because of an enormous amount of accrued debt. Due to the fact that it was a part of the eurozone, it was also impossible for the small island nation to print its own money as a temporary solution. Cyprus, which had been a tax haven for the extreme wealth of Europe, Russia and China up until that point, then decided to do something quite scary- seizing everyones bank accounts. Every Cyprus citizen along with thousands of millionaires and billionaires in the eastern world lost what was in their bank accounts overnight, or were frozen out of their assets for a very long period of time. A crisis (and really despicable act) like what the Cyprian government did in 2013, is the exact type of risk that cryptocurrencies like bitcoin negate.
Dimon is right that to protect against the negative consequences of bitcoin, such as its rampant uses in black markets, the government is going to be forced to implement further measures of regulation. But another strong incentive the government has to impose regulation is even more obvious- its ability to diminish the U.S. Dollar and the Federal reserve. Bitcoin being unregulated would certainly threaten the value of the dollar besides just putting the banks in turmoil (banks that in 2008, were too big to fail).
So, bankers and analysts (many of which are in the bank’s pockets) make a strong case that the government will regulate bitcoin into oblivion. Due to the nature of bitcoin however, and the fundamental nature of the blockchain in general, regulation is easier said then done. When you have systems that work on a global scale bouncing off of ip addresses throughout the world, this is not such an easy task. Even if the government proposes a complete ban of bitcoin, in which it is illegal to trade or possess them, people will still do so using services like TOR, which mask your computer’s identity on the web (and thus make it very easy to purchase them). Also, now that the blockchain platform is here to stay, if bitcoin is taken out of the picture, it doesn’t stop other types of cryptocurrencies from being created using blockchain methodology.
One’s best guess is that they [the heads of the big banks] are too smart to not know that the blockchain cat is already out of the bag, even if they won’t express that to the media. The Banks will continue to do just fine, just not as lucrative as they once were. Many of the largest will have enough liquid on hand to diversify into the cryptocurrency if they really start losing. But speaking long-term, blockchain is going to be a problem for them no matter what.
A couple predictions, besides hurting banks bottom lines? Firstly, I believe that this will lead to higher interest rates. It will finally become somewhat of an investment for people to leave their money in banks because the banks will have to offer some type of incentive to retain customers. Secondly, I believe this will be beneficial to many third world nations that are starving because of the weakness of their respective domestic currencies. For example, Venezuela is currently going through a crisis because their currency doesn’t buy shit. According to the International Monetary Fund, prices are set to rise 720% (720%!!!!) this year. This is do to the free fall of Venezuelan currency, making it impossible for citizens to buy basics like toiletry items or food. Raul Gallegos, a senior analyst at Control Risks told CNN Money, I’d describe it as the result of a government that prints money like it’s confetti..The government has simply employed the wrong policies to stay in power.”
Now Imagine for a second that Venezuela’s current regime is overthrown (which is highly possible if they don’t turn this boat around). If the people want to build a system that limits corruption and manipulation of domestic currencies, they can build their monetary system off of Bitcoin. I know this seems far fetched, and do to the volatility of cryptocurrencies this isn’t a recommendation for first-world nations with highly rated currencies. But for countries that have a history of instability and currencies that tragically put their people in constant poverty? A Blockchain managed cryptocurrency might be exactly be what they need to add a layer of stability to a broken system.