Why Are Governments Choosing to Remain Ignorant and Short-Sighted About Bitcoin?
And are they accidentally encouraging people to get on board?
Photo by Executium on Unsplash
In the closing months of his administration, Donald Trump was characteristically superficial in his analysis of Bitcoin, describing it as based on little more than “thin air”.
President Joe Biden has yet to go on record with his opinion.
Looking a few layers beneath the President in the Federal Government hierarchy, nobody else has added any substantial input to suggest how this administration intends to approach Bitcoin. Many key individuals have been open about sharing their perspectives but they offer little in the way of clarity. Instead, they continue to wheel out the same tired cliches.
And in the absence of a clear steer it seems that individual states are doing their own thing. Control is shifting outwards.
Is ignorance blissful or dangerous?
On 22nd March, Fed Chairman Jerome Powell was dismissive of Bitcoin, describing it as:
“…a speculative asset. It’s essentially a substitute for gold, rather than for the dollar.”
Nothing particularly controversial there, Jay. Many consider that a strength of Bitcoin though — an asset whose value that cannot be deflated or diluted simply by creating more of it at will.
In February, Treasury Secretary Janey Yellen criticised Bitcoin for being an “extremely inefficient” means of carrying out transactions. This is an acknowledged fact amongst the Bitcoin community if you insist on comparing it like for like with Visa or Mastercard transactions.
A better question would be whether the current model of transaction settlement (a series of promises and IOU’s that takes days to clear funds from one person to the other) is really comparable with the complete and immutable peer-to-peer exchange of value that happens in a Bitcoin transaction? Probably not.
In January Yellen was dismissive of Bitcoin, describing it as a tool of criminals and intrinsically linked with the funding of terrorists. This hysterical perspective is short-sighted, inaccurate and completely overlooks that the scale of illicit transactions carried out using US Dollars, dwarfs those using Bitcoin.
Democratic Senator Elizabeth Warren, an outspoken critic of Bitcoin appeared on CNBC’s “Squawk Box” in early March. She’d previously expressed concerns over Bitcoin as a potential means of the wealthy shielding themselves from future taxes, but the best she could offer the interviewer when asked about Bitcoin was to concur with Yellen’s remarks, addressing Bitcoin as:
“‘Speculative in nature and going to end badly — I don’t think Janet left a lot of room for ambiguity.”
Time and again, the commentary and opinions shared by those in positions of power resort to the same superficial and cliched headline statements that get rolled out daily across the media. These are key figures within the US Government who should know what they’re talking about by virtue of their roles. Instead they seem contented to accept tired rhetoric rather than seeking to learn more and objectively form opinions.
The problem isn’t merely among US politicians either. Christine Lagarde, president of the European Central Bank proved herself equally ill-informed recently, when commenting on Bitcoin’s intersect with the criminal underworld.
Digital dollars — a hidden agenda?
In recent days discussions have advanced about the possible creation of a Central Bank Digital Currency (CBDC) in the USA.
The idea of centralised digital currency isn’t that new — China is in the advanced stages of implementing the Digital Yuan in a bid to digitise more transactions and reduce the physical currency in circulation. The centralised administration and oversight of this pseudo-cryptocurrency has become intrinsically associated with government surveillance — the state has the facility to monitor the movement of each unit of currency, and to track the actions of its citizens via their money.
The US Federal Reserve are exploring means of introducing a digital dollar and a joint initiative between the Boston Fed and MIT is in advanced stages of developing technology to implement this — two prototypes are expected to be tested by the summer of 2021.
Concerns have been acknowledged by the Fed regarding how a CBDC could facilitate state-surveillance and impinge upon anonymity — consider that one of the key benefits of conventional cash (and proper cryptocurrencies like Bitcoin, by the way) is that value can be exchanged privately without the state being able to monitor or track it.
Such privacy concerns are likely to stoke worries over the erosion of constitutional rights amongst US Citizens.
The best (worst) of both worlds?
Jerome Powell has gone to lengths to address concerns including privacy, susceptibility to fraud and cyber attacks, and the impacts for monetary policy and cross-border trade. His position is clear, that while the digital dollar should not invade privacy as the Digital Yuan has. Yet, in a congressional session discussing economic recovery held on 25th March 2021 he went on the record as being against the creation of an anonymous digital dollar. Janet Yellen was less definitive in her remarks but essentially followed his lead.
It seems then that the Digital Dollar is where the Federal Government is focussed — trying to embrace the technological advantages of cryptocurrency while also clinging to centralised influence and control.
In the meantime, Bitcoin carries on being Bitcoin and further strengthening its place as a pillar of the future world of finance.
In the absence of decisive action from central governments it seems unsurprising that the leaders of individual states are making their own moves regarding Bitcoin and blockchain.
Could it be that the government is inadvertently enabling and encouraging decentralisation of control through its refusal to get educated and make decisions?
Bitcoin is complicated (but not impossible to understand)
It’s barely three months since I first invested in Bitcoin and began learning about it (in that order). I feel confident in saying that I know more about it than the aforementioned politicians and I’ve got far less of an incentive to understand Bitcoin and crypto than they have. Why is it then that those in positions of power deny themselves the chance to understand something so significant, relying on mainstream media headlines for their insight and exposing their ignorance in the process?
Bitcoin is a divisive subject at the best of times. Many are critical of its potential impact upon the environment as a heavy consumer of electricity. Others believe it’s simply a scam or an investment bubble waiting to burst and take with it the money that opportunist investors have staked in search of riches.
Meanwhile, the biggest and best-known cryptocurrency has been enjoying a surge in value and profile of late as its price hovers around $50,000. Companies like Tesla have publicly invested billions of dollars of their reserves in it, and Tesla has begun accepting Bitcoin in payment for their electric cars.
There’s a clear gulf between those who see it as an opportunity — for the potential it offers as a technology— and those who are skeptical and dismissive of it based on headlines and rhetoric.
I can understand why it may be a politically bold step to come down on one side or the other, but what about being informed on both sides of the argument at least?
Instead it seems like the US government (and probably the governments of other nations) are focusing on their own pet-projects and treating Bitcoin and other cryptocurrency and blockchain projects with suspicion — at their detriment.
It’s interesting to note that when faced with waiting for Federal Government to take the lead or provide a definitive steer, that states like Wyoming, New Hampshire and Kentucky, and cities like Miami are blazing their own trails and leading from the front as far as Bitcoin is concerned.
First mover advantage
As far back as 2019 Wyoming had enacted 13 blockchain-enabling laws which made it the only US state to establish itself formally as pro-cryptocurrency. The laws made it favourable for companies associated with cryptocurrency to base themselves in the state through financial breaks and laws that properly address the ownership and trading of digital assets. The effects of such forward thinking has been profound.
In late 2020 the Governor of Wyoming, Mark Gordon expressed his support for the state having declared its position as crypto-friendly. This has encouraged companies like Kraken (one of the major cryptocurrency exchanges — where customers buy and sell Bitcoin and other currencies online) to base themselves in the state. Kraken Financial have since applied for the appropriate licensing to become a Wyoming-based bank.
More recently in February of this year, formerly San Francisco-based Ripple Labs have also moved to base themselvesin the Cowboy State. Ripple, who offer payment processing solutions associated with blockchain technology and cryptocurrency have also seen Wyoming as the place-to-be when it comes to conducting business on the blockchain.
The effects that such moves will prompt are clear to foresee — boosts in state tax revenue and in new jobs that such corporations create are two such examples.
COVID-19 has prompted businesses to reconsider whether all employees need to work in a company office and home working will likely be more common in future. Competitor to Kraken and soon-to-IPO Coinbase has already announced it will be a ‘remote-first’ company going forwards.
Nonetheless, organisations still need corporate headquarters for core staff who aren’t willing or able to work from home. The ‘spiritual home’ that is the corporate headquarters isn’t going to disappear and it may just become a status symbol for crypto and blockchain companies to be headquartered in places like Wyoming rather than Silicon Valley or financial centers like New York where Bitcoin is still viewed suspiciously.
In the state of Kentucky, legislation has been introduced offering favourable energy tariffs to businesses associated with energy-intensive Bitcoin mining. The moves made by state leadership will likely encourage Bitcoin mining firms to move within the state to benefit and this may have circular benefits that stimulate the state’s move to use more sources of green and renewable energy.
With environmental concerns being one of the typical objections cited by cryptocurrency critics it’s foreseeable that Wyoming may follow suit. Cryptocurrency firms adopting the state as their home may help to progress the green agenda there too.
In 2020, 15% of the energy consumed in Wyoming was from renewable sources. With the smallest population of any state it is a net-energy supplier and produces 14 times more energy than it consumes. It is ideally positioned to increase the electricity generated from renewable sources by harnessing the wind (for example) — in 2020 the state doubled its wind-power generating capacity to 1,800 Gigawatts.
Besides wind-power Wyoming has initiatives in place to generate power from hydro-electricity, solar and geothermal sources too.
Those who lead and those who follow
In the absence of a clear steer from the Federal Government, states like Wyoming, Kentucky, New Hampshire and others are forming their own views and backing these up with laws and policies that position them at the forefront of Bitcoin and blockchain technology. It’s a bold move but also demonstrates that state leaders see potential for states and residents alike that are presented by this technology and which don’t necessarily conflict with future government initiatives like CBDC.
Economic benefits will come about as a result of the additional tax paid by businesses who see the state as appealing. New jobs will be created. Environmental initiatives are likely to receive a boost too. But aside from these direct benefits, there’s a strong likelihood of other companies following the lead of organisations like Kraken and Ripple. Such moves could signal a mass-movement away from conventional tech-centres like Silicon Valley.
When the Federal Government gets its act together and decides how it really feels about cryptocurrency and blockchain, there may be changes enforced upon Wyoming to come into line with the Federal lead. But even then, the positive moves taken to-date mean the state and others like it maintain their position at the front of the pack.
Note: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.
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