Is Cryptocurrency a Threat to National Sovereignty?
For those interested in the world of investing, the growth in value of BitCoin in the past months and years have truly been exciting. The virtual currency is not only become well-known through its meteoric growth, but is gradually becoming accepted as a form of payment across multiple businesses in multiple countries. With increase in confidence that virtual currencies are now being treated much more than just an investment vehicle (like gold,silver, and other rare precious commodities) but a real currency with real transactional value in everyday life, the number of people holding cryptocurrency like BitCoin is bound to increase.
While BitCoin and other cryptocurrencies grow in value and popularity, there is one fact that cannot escape the minds of their investors. It is their identity as a holder of value lightly controlled and regulated by national governments. Monetary authorities do not issue BitCoins, nor do they buy or sell them (yet). As such, they have little abilities to smoothly control their market values without having to pressure private actors to behave in certain ways, or putting up outright bans or limits on the transaction routes, sizes, and frequencies of cryptocurrencies.
For proponents of the likes of BitCoin, this is precisely the virtue of purely virtual currencies. Because they exist independently of state interference, they can more precisely reflect real market conditions and financial values. Devoid of the heavy hand of state regulatory authorities, they are capable of achieving true potential, avoiding the fate of national currencies that must remain somewhat subservient to the state's economic agenda, whether it be intentional devaluation to stimulate exports, or hoardings to prevent capital flight. Cryptocurrencies only reflect investor desires and macroeconomic realities, not political manipulations.
For the exact same reasons, however, cryptocurrencies would make national governments nervous. Currency, after all, is not simply a tool for commercial transactions and a storage of financial value. For the state, it is more importantly a reflection of economic power on the international stage. To use the most extreme example, having the US dollar as the global reserve currency gave the US the ability to practically borrow at no interest and indefinite amounts. The result is an economy that can consume much more than it produces with little detriment, and enact international sanctions with real financial bite.
Having such a strong "hard" currency is pivotal for economic diplomacy. The issuing state of the hard currency can bring down smaller states by restricting access to the hard currency and thereby halting the ability of smaller states with little hard currency reserves from participating in international trade. The result is submission of the smaller states with little corresponding damages to the issuing state of the hard currency. Without having to launch expensive foreign wars, large economic powers can advance national interests on the international stage and preserve national sovereignty.
The rise of cryptocurrency has the potential to put an end to such economic diplomacy. If, say, the popularity of BitCoin continues unabated, it is conceivable that more and more buyers and sellers of products and services would recognize it as a legitimate transaction method. At some point, a critical mass will be achieved where national governments of smaller states would push for it as a medium of international transaction, a true substitute to hard currencies like the US dollar and the Euro. The reserve status of the US dollar, for instance, would be threatened as more and more international trade is denominated in BitCoin.
It is inconceivable that the US, for one, would allow the dominance to cryptocurrency to become a reality. It is, then, only a matter of time before the government steps in to "regulate" the usage and transaction of cryptocurrencies. There would be laws in place that limit its use in certain activities, its mining in certain frequencies and quantities, as well as fluctuation of value beyond certain percentages. All such measures will quickly put a damper on the growth of the currency's value as investors brace for more preventive actions from governments around the world.
When would such restrictions come in force? The rapid growth of BitCoin value would only intensify the attention financial authorities pay to it, and speed up the implementations of whatever restrictive actions the authorities will take. It is not in the interest of governments to wait until cryptocurrencies grow too popular among retailers and investors. There is risk of massive permanent economic damage would be sustained if too many people use cryptocurrencies in their daily lives. As such, government would not wait too long before nipping the BitCoin craze in the bud.
While BitCoin and other cryptocurrencies grow in value and popularity, there is one fact that cannot escape the minds of their investors. It is their identity as a holder of value lightly controlled and regulated by national governments. Monetary authorities do not issue BitCoins, nor do they buy or sell them (yet). As such, they have little abilities to smoothly control their market values without having to pressure private actors to behave in certain ways, or putting up outright bans or limits on the transaction routes, sizes, and frequencies of cryptocurrencies.
For proponents of the likes of BitCoin, this is precisely the virtue of purely virtual currencies. Because they exist independently of state interference, they can more precisely reflect real market conditions and financial values. Devoid of the heavy hand of state regulatory authorities, they are capable of achieving true potential, avoiding the fate of national currencies that must remain somewhat subservient to the state's economic agenda, whether it be intentional devaluation to stimulate exports, or hoardings to prevent capital flight. Cryptocurrencies only reflect investor desires and macroeconomic realities, not political manipulations.
For the exact same reasons, however, cryptocurrencies would make national governments nervous. Currency, after all, is not simply a tool for commercial transactions and a storage of financial value. For the state, it is more importantly a reflection of economic power on the international stage. To use the most extreme example, having the US dollar as the global reserve currency gave the US the ability to practically borrow at no interest and indefinite amounts. The result is an economy that can consume much more than it produces with little detriment, and enact international sanctions with real financial bite.
Having such a strong "hard" currency is pivotal for economic diplomacy. The issuing state of the hard currency can bring down smaller states by restricting access to the hard currency and thereby halting the ability of smaller states with little hard currency reserves from participating in international trade. The result is submission of the smaller states with little corresponding damages to the issuing state of the hard currency. Without having to launch expensive foreign wars, large economic powers can advance national interests on the international stage and preserve national sovereignty.
The rise of cryptocurrency has the potential to put an end to such economic diplomacy. If, say, the popularity of BitCoin continues unabated, it is conceivable that more and more buyers and sellers of products and services would recognize it as a legitimate transaction method. At some point, a critical mass will be achieved where national governments of smaller states would push for it as a medium of international transaction, a true substitute to hard currencies like the US dollar and the Euro. The reserve status of the US dollar, for instance, would be threatened as more and more international trade is denominated in BitCoin.
It is inconceivable that the US, for one, would allow the dominance to cryptocurrency to become a reality. It is, then, only a matter of time before the government steps in to "regulate" the usage and transaction of cryptocurrencies. There would be laws in place that limit its use in certain activities, its mining in certain frequencies and quantities, as well as fluctuation of value beyond certain percentages. All such measures will quickly put a damper on the growth of the currency's value as investors brace for more preventive actions from governments around the world.
When would such restrictions come in force? The rapid growth of BitCoin value would only intensify the attention financial authorities pay to it, and speed up the implementations of whatever restrictive actions the authorities will take. It is not in the interest of governments to wait until cryptocurrencies grow too popular among retailers and investors. There is risk of massive permanent economic damage would be sustained if too many people use cryptocurrencies in their daily lives. As such, government would not wait too long before nipping the BitCoin craze in the bud.
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