Governments, Stability & Cryptocurrencies

 

Is bitcoin a security, a risk but potentially lucrative, or a parallel money universe that attempts to sidestep governmental scrutiny and creates a currency that is no longer subject to the vagaries of governmental monetary and fiscal policies? Is this form of payment a criminal’s paradise of money laundering, financing illegal transactions, or simply a modern-day digital convenience whose time has come? Increasingly, American companies are willing to accept bitcoin, the most prominent cryptocurrency, as payment, and some states are beginning to accommodate that rising trend.

“With the signing of Texas House Bill 4474 (‘H.B. 4474’), Texas becomes the latest state—joining Wyoming and Rhode Island—to recognize cryptocurrency and other blockchain-based virtual currencies (‘Virtual Currencies’) in its Uniform Commercial Code (‘UCC’). As Virtual Currencies become more common on corporate balance sheets, such statutory updates will ensure both borrowers and secured lenders have a clear understanding of the requirements for pledging Virtual Currencies as security for loans and perfecting against such Virtual Currencies to establish priority and facilitate orderly foreclosure if necessary.” September 9th Lexology.com article by O'Melveny & Myers LLP attorneys Sung Pak, Jennifer Taylor and Joshua Chow. And one step closer to having a viable parallel currency not subject to American monetary and fiscal controls.

Merriam-Webster defines “cryptocurrency” as “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.” This is very different from moving paper money and coinage into a mobile phone app (the m-pesa system common in Kenya today); it is an entirely separate currency. Bitcoin has thus become globally ubiquitous.

Ever since the United States went off the gold standard in 1971, when then President Richard Nixon realized that our gold reserves were insufficient to back the currency that we had issued, the notion of a monetary system, one that relies totally on the full faith and credit of the nation issuing their currency to determine trading value, is now standard globally. 

Wild gyrations in bitcoin values, evidenced as Elon Musk’s Tesla bought and sold volumes of bitcoins, sent the market into major upward and downward swings. Relying on little beyond “faith” and a desire not to be left out of the upside opportunities, bitcoin traders do not seem to be dissuaded by tales of serious loss and manipulation. The risks are everywhere. 

“Cryptocurrency investors in South Africa may have lost nearly $3.6 billion in Bitcoin following the disappearance of two brothers associated with one of the country’s largest cryptocurrency exchanges. According to Bloomberg, a law firm in Cape Town says it can’t locate Ameer and Raees Cajee, the founders of Africrypt. In April, the exchange told its investors it was the victim of a hack and asked them not to report the incident to the authorities on account it would “slow down” the process of recovering their missing money.” Engadget.com, June 23rd.  

Although governments have subsequently pushed back, “Virtual currency bitcoin hit the mainstream in 2014. Bitcoin ATMs started springing up all over the world … , allowing people to exchange cash for the cryptocurrency, a secure digital payment outside of conventional financial institutions.” Merriam-Webster. Secure? Blockchain encryption maybe. Unpredictable volatility not. In the United States, the cryptocurrency trade is currently the target of the Securities and Exchange Commission and the Internal Revenue scrutiny. There is a new notation on American tax forms that asks it the relevant taxpayer has engaged in cryptocurrency trades, an invitation to traders to commit perjury and/or tax evasion should they falsify their answer.

The obvious threats engendered in cryptocurrencies have moved other nations to act. For example, “China first moved in 2013 to restrict its banks from using Bitcoin as currency, citing concerns its inherently speculative nature threatens the country's financial stability. Over the years, the government has become even more wary. Since May, Beijing moved to effectively shut down all crypto mining operations in the country. In late June, the central bank also required payment firms and banks shut down the accounts of individuals involved in crypto transactions.” Voice of America News, July 6th.

But in purported narco-states, the desire to create a global exchange currency that is out of reach of governmental scrutiny and control, particularly of wary regulators in major nations everywhere, seems to have captured more than just than those in the narcotics trade. The Northern Triangle of Central America – Honduras, Guatemala and El Salvador – has become so violent, so unstable and dramatically under the control of regional gangs and cartels (government corruption from top to bottom) that the United States no longer trusts those governments to distribute American humanitarian aid to their people. For example, U.S. State Department spokesman Ned Price said in a statement that El Salvador’s “decline in democratic governance damages the relationship that the United States strives to maintain with the government of El Salvador and further erodes El Salvador’s international image as a democratic and trustworthy partner in the region.” Kate Linthicum in the Los Angeles Times, September 7th.

So many of those asylum-seekers knocking at our southern border are refugees fleeing the dire poverty and ultra-violence within this Northern Triangle. Their plight is directly linked to the continuing demand for illicit drugs in the United States and the tsunami of assault weapons easily purchased in the United States and funneled down to local gangs and cartels, criminal organizations with direct links, if not outright participation from the highest levels of their national governments. Funded in substantial part through the use of cryptocurrencies.

As the above quote from the U.S. Department of state suggests, the nexus between drug trading organizations (DTOs) and governments is particularly exemplified with the populist president of El Salvador, Nayib Bukele, who has overcome term limits and attempts to rein in his rising autocratic control of the nation. His alleged links to DTOs seem to be an open secret. He has systematically purged his government of any opposition, including dismembering the judiciary.

To keep his narco-state as far from U.S. regulations as possible in a state where the U.S. dollar is still an official currency, as of “Tuesday [9/7], El Salvador becomes the first country to accept bitcoin as legal tender — a controversial move pushed by its young, headstrong and exceptionally popular president, Nayib Bukele… [But] the bitcoin plan is unpopular. A recent survey by the University of Central America found that 56% of Salvadorans did not trust bitcoin, and 71% said they did not plan to use it.

“In June, Bukele pushed through Congress a law, drafted in part by the American chief executive of a bitcoin-based cash application, that businesses will be required to accept the digital currency for goods and services by Sept. 7. The law leaves the U.S. dollar as the country’s other official currency…

“But critics say bitcoin’s extreme volatility could devastate El Salvador’s economy overnight, bankrupting communities that are already among the poorest in the hemisphere. Then there’s concern that the plan will lead to illegal activity. The Central American Institute for Fiscal Studies said it would turn El Salvador into a ‘money-laundering paradise.’

“Under the new law, consumers can pay for anything — from a soda to federal taxes — using a variety of smartphone apps created for small bitcoin transactions. The law established a $150-million government trust fund that Bukele said would give Salvadorans the option to convert their bitcoin to dollars if they wish.” LA Times. Cryptocurrencies are the obvious trading value of choice for DTOs. El Salvador’s impact on bitcoin the day after: “Angry protests, technological glitches and a plummet in value marked the first day of El Salvador adopting Bitcoin as legal tender… The price of Bitcoin on Tuesday crashed to its lowest in nearly a month, falling from $52,000 (£37,730) to under $43,000 at one point.” BBC.com, September 8th. Get used to it!

But there are other macro-economic dangers inherent in the widespread use of cryptocurrencies, one that China seems to recognize but one that seems to elude American policymakers. Institutions like our Federal Reserve, a quasi-governmental controller of American monetary policy, and the Bank of England, plus the fiscal planning prerogatives of national legislatures all over the world, face the prospect of a parallel currency that is not subject to such governmental control. Attempts merely to regulate cryptocurrencies, treating them as securities, miss the point. Can they be legitimized at all?

Even overlooking the difficulty of enforcing tax laws, legitimate government interests in setting monetary and fiscal policies can be thwarted. Where governmental policies may require unpopular or controversial decisions (like debt ceilings or money supply), resort to a parallel cryptocurrency frees the user from such governmental control. The potential for undermining national currency values and destabilizing the national economies is obvious. While governments can step in to curtail cryptocurrencies, sooner or later, the longer such non-governmental currencies have to settle into the routine pathways of global commerce, legal and illegal, the more difficult it will be to control their impact later.

I’m Peter Dekom, and what passes for an inevitable modernization of global currency standards just might form the basis for massive global economic destabilization.