The Latest Crypto Bull Run Advanced the Industry Hugely. Are There Any Downsides?

By Domenic Carosa, Founder and Chairman of Banxa

The original vision of cryptocurrency was to build an ecosystem independent of the legacy financial institutions—one that could thrive without the need for intermediaries and become more inclusive. In short, to democratize finance. But, when things move too fast, they don’t always go according to plan.

Crypto prices doubledtripled, and even quadrupled during this latest bull run, which hasn’t yet necessarily come to an end. Everyone wanted a piece of the new alternative to the stock market, and the global financial system took notice. Institutions that had spent years trashing Bitcoin were suddenly adding digital assets to their balance sheets and adopting cryptocurrencies. This led to further government regulation and, in some cases, reactionary policies. It seems the regulators are still a few years behind the movement of the market. In the U.S., investigations of EOS and BitMex are either recently wrapped up, or still ongoing—yet those companies were the standouts of the 2018 bull run. Crypto is moving too fast for market players and regulators. Or, you can’t put the genie back in the bottle. 

Although China has “banned” the use of cryptocurrency and mining, the Chinese recently implemented a pilot test of a digital yuan. The central bank digital currency (CBDC) runs on blockchain, but since it is controlled by the People’s Bank of China, it remains centralized. The government has been actively promoting the new currency throughout Beijing and says it intends to distribute 40 million digital yuan ($6.2 million) to Beijing residents, allowing them to spend digital currency prizes through June 20. Workers in Chinese banks have quotas of how many people they need to sign up - this incentivized adoption will allow China to make their numbers for certain - what is less certain is whether this adoption will lead to “stickiness” and long term viability. As regulation continues to ramp up, many Chinese crypto mining companies are moving their operations overseas. So far, 26 companies in Sichuan have been shut down by authorities. Everyone who’s been in crypto for a while recognizes this game of regulatory “Whack-a-mole”.

Instead of exploring ways to incorporate the benefits of blockchain, near instantaneous money transfers, immutable transaction history, energy efficiency and control over your own finances, , many governments, including the U.S., are looking to implement their own CBDCs and prevent a turn toward decentralized currencies. Blockchain is highly secure and records transactions cheaper than traditional data-storing technologies. The technology itself, they argue, offers advantages that must be harnessed. The philosophy that comes with it, exemplified by Bitcoin, isn’t all that appetizing to existing political and financial institutions, but the train has left the station. 

The world eagerly watches as China continues its CBDC roll out—an experiment in taming the push toward decentralization that will serve as an example for other governments looking to harness the power of blockchain in a way they can control. 

The U.S. Security and Exchange Commission’s latest regulatory agenda was published without any mention of bitcoin or cryptocurrency. SEC Chairman Gary Gensler has, however, continuously discussed the need to protect investors and regulate crypto exchanges. He has even gone as far as urging Congress to pass cryptocurrency legislation, adding that cryptocurrency exchanges need more regulation. Another area that analysts think will be of interest to regulators are stablecoins—as digital representations of government backed assets, they benefit from the reputations of the currencies they represent. No one is releasing a stablecoin for the Zimbabwe (RTGS) Dollar.

Within the last few months, the SEC has brought 75 crypto-related enforcement actions, while cautioning investors about funds trading in bitcoin. Gensler is not the only one urging for more regulations. Federal Reserve Chairman Jerome Powell echoed his thoughts about regulating stablecoins during testimony before the U.S. House Committee on Financial Services, comparing stablecoins to money markets and bank deposits. “If [stablecoins are] going to be a significant part of the payments universe—which we don’t think crypto assets will be, but stablecoins might be—then we need an appropriate regulatory framework, which frankly we don’t have,” he said.

These developments pose a paradox to cypherpunks and crypto true believers. On one hand, they pose a threat to Satoshi Nakomoto’s vision of a world in which decentralized money blossoms free from government interference. On the other hand, the fact that the world’s largest economies appear to be afraid of cryptocurrency is a testament to its long term viability. It’s a new world, and there’s a new currency to go along with it. 

Bitcoin will officially be a legal tender in El Salvador alongside the U.S. dollar as of September 7, making this Latin American nation the first country to implement cryptocurrency as a dual national currency. President Nayib Bukele has insisted the use of the cryptocurrency will be optional and citizens will be able to easily transfer bitcoin payments into dollars. Bukele hopes Bitcoin will help counter the country’s low banking penetration rate of 29% and cut remittance costs, he said. Athena Bitcoin invested more than one million dollars and plans to install 1,500 ATMs across El Salvador, specifically to help those who send and receive remittance from abroad. The ATMs will be used to buy Bitcoin or to sell it for cash. 

There is a growing push for crypto support across South American countries, with various lawmakers supporting and planning to place bills before their government’s lower houses for review. Since the decision in El Salvador, politicians in Argentina, Paraguay, Brazil, and Panama all took to Twitter to endorse the decision. Originally, there was speculation that Paraguay would follow suit, though a new bill shows a stark contrast. The draft bill states, “The purpose of this draft law is to establish legal certainty, financial and fiscal in the businesses derived from the production and commercialization of virtual assets.” It will also regulate mining and trading through exchanges to give the currencies more validity within the country.

Yet at the same time as we see these positive steps in advancing digital assets, the World Bank stated it was “unable to help El Salvador with its implementation of bitcoin” while the IMF spokesperson said “Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis… We are following developments closely, and we’ll continue our consultations with the authorities.“ Crypto Twitter cheered the announcement as, finally, proper government reaction to the phenomenon that is Bitcoin.

Digital assets can be compared to other unregulated markets that have attempted the shift towards legitimacy, a recent example of which is the marijuana industry. When cannabis was legalized in many U.S. states, mom and pop dispensaries opened all over, especially in big cities. As dispensaries became more popular, the same issues of monopoly and scale that can be seen in other sectors, from grocery stores to online stores began to emerge. The mom and pop shops, and minorities, are forced out by corporations who can play the “economies of scale game” more effectively. We see this with cryptocurrencies and exchanges worldwide. While Bitcoin, Binance, Ether, and Coinbase are all practically household names for many that dabble in the cryptosphere, many others have come and gone without so much as a peep. 

As blockchain based start-ups continue to flourish, only companies that demonstrate maturity and the ability to negotiate the regulatory issues associated with a firming government position on digital assets will survive. Many governments will be watching China’s CBDC launch with interest, but with the knowledge that in most democracies getting the same level of buy-in as China can will be a challenge. In Australia, the Reserve bank has indicated that the country will be “cashless” by as early as 2025, the global pandemic has helped accelerate this. Either blockchain based or centralized, digital currencies are the future.

In a twist of irony, the very vessel designed to be the savior of the financially hopeless can become a tool of financial titans if we’re not careful. Looking forward to the next bull run, or the continuation of the last one, advocates and key supporters of true decentralization will have to be vigilant, steering the ship through the regulatory hurdles and political assaults into the decentralized promised land Satoshi envisioned.

About the author

Domenic Carosa is the Founder and Chairman of Banxa. Domenic is a tech pioneer, having founded or invested in more than 50 technology companies throughout the last 25 years, both private and public. He holds a Masters of Entrepreneurship and Innovation (MEI) from Swinburne University Australia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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