FOMO (fear of missing out) cuts both ways. The crypto boom of the early part of this year has woken the dragon of government. As crazies cry “crypto will be the end of fiat,” while it languishes as a tiny asset, no one in the cosy halls of the public sector is going to raise a finger, but when it explodes and suddenly becomes a trillion dollar issue and a meaningful blip on the radar, the best way to regulate such an activity is to kill it.
The more work and risk a new activity begets, the bigger the urge to shut it down a government will have, and if it affects them directly in any negative way at all, once their inertia is overcome, the hammer falls.
This is where crypto is now.
The tension will be, however, if a country outlaws crypto, countries that embrace it will trounce the countries that don’t. It is the same with all technological breakthroughs. One way or another the technology will be absorbed and will upend the status quo, but history is full of early adopter countries ascending and laggards’ societies decaying into backwaters. Rome spurned the machine and fell into the mud of the Tiber; Venice rejected the sail and stopped being a world power and became a tourist spot with a subsidence problem.
However, the world is full of states that ban benign commerce for their own reasons, forcing their populations to suffer privations. In the main, proscription is a lot of what governments do.
Clearly the most authoritarian governments are on the leading curve of the move against crypto because in a strange way authoritarians are the weakest global group as they rule by diktat and violence rather than permission, consensus and reason. We have seen China driving out crypto, because even while bitcoin has made billions for their economy, it weakens the grip of their iron fist.
Weakness will be the driver of regulation against crypto, because the global economy is weak and its financial system fragile, and crypto seems like an escape hatch for what comes next. Huge unpayable debts have been built up because of Covid with no end in sight to the piling up of debt upon debt.
The whole system is at risk if the economies of the world are not forced to take the medicine of inflation and financial repression. There has to be a transfer from the savers to the borrowers and a free market won’t allow for this. Only market “corners” made by central banks can enforce the currency debasement and economic reset, that has already started to be dealt. “Transitory” inflation will be the key leveller, and will be transitory until GDP/debt/fiscal deficits get in line. Any escape hatch from that debasement is not going to get a smooth ride, and of course crypto is exactly the kind of mechanism that provides loopholes to get around the zero interest rate, QE infinity mechanism needed to smoothly drop living standards down to where Covid has put the world economy.
It’s a multi-year journey and likely the fly in the ointment that will hold crypto in its winter till the next halvening. Make no mistake, crypto is unstoppable no matter how much incumbents in financial services will lobby for it to be shuttered. It’s just a matter of time and timing.
Meanwhile, however, there will be serious regulatory headwinds with governance all around the world aping the Chinese state in trying to nip crypto in the bud. The power of governance should not be underestimated.
The dogs will get called off when crypto falls back further, when the numbers get small enough for crypto to be minor enough that all the other big problems spinning out of the new Covid-driven world will take the limelight.
Blockchain cannot be put back in the bottle, and while it might take 25 years to reach its potential, that potential will be reached and in the same way it took the internet a generation to dominate our world.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.