The market capitalization of cryptocurrencies grew to an unprecedented $800 bln this year, up from $20 bln barely a year ago. Never in history has an asset class risen this even remotely close to cryptocurrencies. While the government could afford to ignore it while it was still a niche market, it has become way too big to ignore. Smart governments better embrace this banking revolution, fighting it is pointless and will prove to be incredibly costly.
The Chinese way
While Chinese exchanges accounted for more than 90 percent of the traded volumes a year ago, this number has dropped to zero percent last November. The Chinese government had decided to shut down all the exchanges two months before that back in September, this caused the Bitcoin price to crash from $4,500 to $3,000 at the time as all the Chinese investors were running for the door at the same time. What happened next? Once again, the crypto market demonstrated its resilience and its antifragility. Despite losing the Chinese market, the cryptocurrency market recovered and Bitcoin is up 5x since it crashed to $3,000.
This ban cost billions of Yuans to Chinese investors as they missed out on a massive rally as they panic sold all of their holdings. But the party that lost the most, by far, is the Chinese government. By banning cryptocurrency exchanges, and by preventing its citizens from benefiting from the rise of cryptocurrencies, the Chinese government lost billions of Yuans in potential tax revenues and in additional GDP growth.
But the concern was elsewhere. The Chinese government was concerned that its citizens were using cryptocurrencies to bypass capital controls and to protect themselves against a possible Yuan depreciation. Economic history shows that capital controls always fail, eventually. If people want to get their money out, they will always find a way.
The problem with banning a business that people desperately want to be in is that it just does not work. The ban simply pushed the cryptocurrency market underground in China. Websites facilitating peer-to-peer exchanges have appeared everywhere in China. It is impossible to know for sure how big such a market is, but cryptocurrency trading is well and alive in China, the government has just lost all control on it.
The Japanese way
Japan, on the other hand, has taken the opposite direction. Faced with demographic and economic challenges and a public debt reaching 250 percent of its GDP, Japan had to find ways to generate more economic growth. So instead of ignoring or banning cryptocurrency exchanges, Japan decided to regulate them. In the same month as China was shutting down all its cryptocurrency exchanges, Japan issued licenses to 11 cryptocurrency exchanges. Japan’s goal is very clear: to become the global powerhouse for cryptocurrencies.
As a consequence of this friendly environment, cryptocurrency trading in Yen has grown exponentially and the first results are already there. Nomura recently estimated that Bitcoin alone could be responsible for 0.3 percent of GDP growth in Japan. Ironically, Huobi, which was once the world’s largest cryptocurrency exchange before being shut down by the Chinese government, is now relocating to Japan and plans to open two exchanges there.
The way forward for governments
Many governments still do not know what to do with cryptocurrencies, primarily because they do not understand them. One thing is for sure, weak, insecure and authoritarian regimes are very likely to fight cryptocurrencies as they are a very powerful tool for the people to regain their freedom. Democratically-elected, well-functioning governments do not have anything to fear and much to gain from cryptocurrencies, both in the form of additional economic growth triggered by this banking revolution and by the additional tax revenues that capital gains on cryptocurrencies will generate.
Cryptocurrencies are not going anywhere. It may not be Bitcoin, it may not be Ethereum, but a few cryptocurrencies will soon become ubiquitous. Would you have fought the deployment of email to protect your Postal Service 20 years ago? Well, fighting cryptocurrencies is the same thing, it just cannot be done. Shutting them down – as Jamie Dimon suggested – would require shutting down the Internet, how likely is that to happen? Sure the rise of cryptocurrencies can be slowed down, but it is only temporary, this situation is not sustainable in the long term as it will become prohibitively expensive for China to be left behind when the rest of the world moves forward.
Change may not come from where you would expect it, but it is coming. A prominent Ghanaian banker – Papa-Wassa Chiefy Nduom – recently publicly urged the Central Bank of Ghana to invest one percent of its foreign exchange reserves in Bitcoin. This is the next stage when central banks finally realize that they have lost their monopoly on currency issuance and that they have to live, coexist and compete with cryptocurrencies. Most of them do not know it yet, but the hegemony of fiat money is already drawing to an end.