Why we should ban cryptocurrencies

Few who are lucky or well-informed make it to the top.

One of those was Elon Musk’s former business partner Peter Thiel, whose venture capital fund sold out with a reported profit of £1.8 billion ($3.2 billion) just before the crash last year, although he still has the merits of crypto and ridiculously proclaimed “the end of the fiat money regime”.

Thiels Palantir Technologies, meanwhile, is bidding on a £480million NHS data deal – obviously this has nothing to do with crypto, but there’s another sheep to flee, one might think. In any case, there is a clear reluctance among Western governments and regulators to consider crypto just a sophisticated scam and, like China, to ban it outright.

Central banks should do that, but they hesitate.

Instead, they remain mildly reverent, preferring to see the crypto wild west as a systemically irrelevant distraction rather than the parasitic theft it truly is.

Rishi Sunak, the Prime Minister, still hopes to turn the UK into a digital currency superpower and has ordered the Bank of England to respond accordingly. Is that very wise? Others seem to hunt hard. Global financial luminaries like El Salvador and Central African Republic have even adopted Bitcoin as legal tender. Snooze and you lose.

Admittedly, crypto is a little different from tulips and other basically imaginary “assets” that tend to fuel past manias.

Instead, it represents an alternative to fiat currencies – and a more trustworthy one at that – as the amount of coins issued is theoretically strictly limited in most cases and therefore cannot be devalued.

There is a clear reluctance among Western governments and regulators to consider crypto just a sophisticated scam and, like China, to ban it outright.

There is nothing wrong with private currencies as such, but unfortunately crypto is not what it claims to be and never will be; I can’t think of any other “asset class” that is as volatile as bitcoin, prone to moves of up to 10 percent in a single day. This makes it practically worthless as a means of payment. The emergence of so-called stablecoins like Tether — crypto said to be backed by fiat currency reserves — hasn’t closed the credibility gap so far. In most cases, reserve coverage is, shall we say, a bit opaque and would almost certainly not cover withdrawals if everyone decided to withdraw at the same time.

Given all this, why is crypto suddenly making a comeback?

It may surprise you to learn this, but far from being the prison guards, central banks are actually the ignorant midwives of the entire crypto phenomenon.

It probably wouldn’t exist at all as anything but a curiosity were it not for the catastrophe of the financial crisis, which undermined trust in ordinary money and provided fertile ground for Kryptonians to spin their survivalist nonsense.

After the prudential failures that triggered the banking crisis, one might have thought that central banks and consumer protection agencies would be somewhat suspicious of these new forms of “financial innovation”, but instead they have stood aside and even allowed them to thrive as they hit the traditional banking sector hard .

While regulators were busy fighting the latest war, crypto thrived, unbound by the type of protection and oversight afforded much of the rest of the financial sector. From the start it was an accident waiting to happen. But Bitcoin, Ether and the rest could not have thrived without another crucial ingredient – ​​printing central bank money.

Crypto is just one of the most visible asset price bubbles that years of quantitative easing have helped fuel.

It is no coincidence that Bitcoin fever is at its most manic whenever the central bank print shop is most active. As soon as QE life support is switched off, as happened last year, the price collapses. However, now that monetary tightening seems to be drawing to a close, the price has started to revive.

As a rule of thumb, governments should never ban anything unless it is clearly causing active economic and social harm. We allow gambling despite its morally and socially questionable characteristics, so why not bitcoin?

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Additionally, some of the technologies associated with crypto — encryption, tokenization, smart algorithmic contracts, etc. — could have much greater utility in finance.

The UK government’s current plan is to regulate crypto in a way that makes it both politically acceptable and makes the city a globally trusted hub for trading the stuff. But what’s the point?

I wonder if crypto can even survive in a heavily regulated environment. Why bother trying to regulate the crypto rugs when it would be a lot easier to just ban them and let others do their destructive behavior?

Telegraph, London