Forget Elon Musk: China and the US have just killed cryptocurrency decentralisation

I get the impression that in the frenzy that saw Bitcoin shed nearly half of its value and the entire market lost $1 trillion in market capitalisation, most people have missed the importance of the shifts caused by China and the United States (US) that crack the very foundations of crypto.

Of course, everybody acknowledged the impact China’s decision to restrict financial institutions from dealing with digital currencies (and announcement of a crackdown on mining) had, as it was one of the major drivers of the price drop.

However, less attention has been given to what it means for the future of digital currencies, and it’s not bright.

I.e. the key promise of decentralisation — that cryptocurrencies would offer an alternative to state-issued fiat currencies controlled by central banks — is, effectively, dead.

Any country in the world can introduce legislation barring the use of cryptocurrencies as legal tender.

It doesn’t matter that you can still hold it in your private, non-custodial wallet in secret. Your currency may remain “decentralised” — you just can’t do much with it because the government won’t let you.

What happens when cryptocurrency is outlawed?

No legally operating business is going to accept your BTC or ETH if their use is penalised by law. It doesn’t matter how good the technology is, how safe, secure and stable. If it’s outlawed, it’s gone.

And it’s not an issue specific just to autocratic China, and its Communist Party which has long shown its suspicion of crypto.

The US has fired its own salvos too, with the Treasury introducing a proposal to make it mandatory for all crypto transactions exceeding $10,000 in value, to be reported to the Internal Revenue Service (IRS).

What is your encryption and secrecy worth now, if the government can demand necessary information at will? 

When filing your taxes in America, you’re already asked whether you have participated in any virtual transactions and are now required to report capital gains accumulated from crypto trading. Yes, holding your prized digital assets comes with a tax bill in the fiat currency you loathe so much.

To make matters worse, it’s your responsibility to track the real market value of every transaction you made and calculate your tax liability, or face legal consequences. 

It’s only a matter of time when the rest of the world follows suit (EU is working on its own regulatory framework too).

It turns out then, that for all the promises of independence from the national authorities, cryptocurrencies can’t really escape them. Even worse, they can burden you with bureaucracy you didn’t even know existed.

Of course, “technically” you can keep your Bitcoin in an encrypted, private wallet and not disclose it to anyone, trying to show politicians and tax collectors the middle finger.

But if you do (most won’t, let’s be honest), you’re risking running afoul of the law. If you ever want to exchange the holdings for fiat, the information is going to bubble up somewhere, leaving you not only with a tax bill, but a painful penalty too.

Direct transactions won’t keep you safe either, particularly if other countries follow China’s example and restrict the use of non-public digital currencies — possibly rendering the contents of your wallet quite worthless in the process.

This brings us to another threat – the uncertainty about the future legal status of any cryptocurrency in any country in the world. 

It’s going to impact the value of your digital currencies

Every piece of legislation directly impacts the current and anticipated future demand.

Given the lack of obvious technical advantages (cryptocurrencies are currently both more expensive and slower to conduct transactions in, particularly for BTC) and incentive for use in illicit activities and tax evasion, most governments are likely to introduce additional regulation, which is going to impact the value of your crypto holdings. 

If you thought Elon Musk was bad — when all he had to do to shake the entire market is post a few tweets — think of the consequences of actual laws directly restricting the use of digital currencies. 

Parliaments are still unsure how to react to this novel technology and unlike in China, where the party sees it as a possible challenge to its grip on power, they are going to proceed cautiously.

Ultimately, they’re bound to set stricter rules on the use of decentralised crypto, whether you like it or not, because no challenge to governmental control will be allowed to stand. And the world’s leading superpowers are clearly keen on showing who’s really in charge.

Featured Image Credit: Blocktempo