Last Friday, China imposed its maximum ban on cryptocurrencies. Cryptocurrency exchanges and other service providers have already been technically banned by the Chinese government, but a loophole has allowed Chinese people to trade cryptocurrency using offshore accounts. Friday’s notice leaves no room for interpretation and makes it clear that cryptocurrencies are not welcome in China. China has banned crypto transactions regardless of where exchanges and accounts are set up . Chinese regulators say they are ready to enforce the ban, with the full support of nine different government agencies including the Supreme Court, the police and the central bank. The People's Bank of China says the new rules are necessary to "maintain national security and social stability". Now, China has had tools to curb the rise of cryptocurrency since at least 2013, but with the gradual launch of the state-backed Chinese digital yuan, the government is getting more serious about its crackdown, and I 'm sure many of you are wondering what that is. The Chinese government has it against the people of El Salvador and their national currency.
But, it is not only China, the US regulators are also setting their sights on cryptocurrency. Gary Gensler, Chairman of the Securities and Exchange Commission, spoke at length about cryptocurrencies at an event hosted by The Washington Post. He stated that he does not believe there is a "long-term viability" and later said the SEC is working " overtime" to create new regulations for the cryptocurrency markets that are potentially somewhat more aggressive than what is already on the books. Why is this happening, is it reasonable, and will thererest the world to do the same? Well, the reasons China has given for ever-severe bans on cryptocurrencies range from their role as a vehicle for money laundering andsmuggling, to the environmental pollution and the electricity-intensive used in bitcoin mining.
These are criticisms that have been around for some time, let's start with energy – and why China might care about energy consumption. Yesterday, Goldman Sachs announced that they have lowered their growth forecast for China as the country struggles with energy shortages. There have been major cutbacks in industrial production recently due to power outages in China. Goldman estimates that up to 44% of Chinese industrial activity has been affected by blackouts. China has also come under international pressure to meet environmental targets for energy consumption and energy intensity. For this reason alone, it is not surprising that China banned cryptocurrency mining earlier this year. If energy is scarce, the government would rather use it for factories, ports and people's homes than use it for cryptocurrency mining. As the world becomes more serious about energy use and environmental protection, we can likely expect an increased focus on more energy-intensive cryptocurrencies. The crypto community seems to be well aware of this issue and has taken significant steps towards increasing energy efficiency in the public space, and another big issue raised by the Chinese government is money laundering and smuggling. One of the things crypto enthusiasts love about crypto is that it can facilitate cross-border payments, which can be surprisingly complex and expensive in the world of traditional finance.
In China it can be extremely difficult to getyour money outside the country, and that is how the Chinese government desires to keep, so from the Chinese government’s point of view restricting citizens’ access in cryptocurrencies makes sense.The Chinese government’s move to rein in cryptocurrencies has a lot to do with its desire to exercise Greater control over economic activity in the country. I covered this idea in a recent article on Evergrande and the Chinese economy. The Chinese central bank will be interested in the rise of any decentralized currency that makes it easier to transfer money in and out of the country because this reduces the ability of the central bank to adjust domestic monetary policy.
The easier it is to transfer capital across borders, the more difficult it is for monetary authorities to manage currency stability and independent monetary policy. This is the solution for all central banks. Now, many would argue that this is a strength, not a weakness, in encryption. They might argue that some form of digital gold would impose discipline on central banks, limiting their ability to manipulate the value of their currencies for political reasons. While I may sympathize with this argument, my point here is not to agree or disagree but simply make it clear that this issue should be important to the Chinese central bank, but also that central banks will take it seriously. The world, as you know, China is in the process of creating its own government-backed digital currency, but this digital currency has only superficial similarities to what we think of as a cryptocurrency.
They don't use blockchain, ledgert technology at the heart of all cryptocurrencies, so let's step away from China for a moment and take a look at what's out there in the world and ask why other countries might want to regulate cryptocurrency. You might start by looking again at the international remittances and payments business. Why is it so expensive and complex, both in terms of transaction costs but also in terms of time and paperwork requirements? Someone answered this question that a small group of financial institutions control cross-border transfers and have kept these costs high to maximize their profitability.
I think most people would agree that breaking up this monopoly is a good idea, long overdue, and another (more noble) reason international transfers are so slow and expensive is that there are huge regulatory requirements in time to control the flow of illicit money earnings within countries and across borders. Despite what you might think, banks today are high-tech companies that hire huge numbers of programmers to improve the way their businesses are run. They seek whatever advantage they can find to do things faster and cheaper, but there are plenty of regulations in place to prevent money laundering, tax evasion and terrorist financing, and that's a major bottleneck in the world of traditional finance that slows both down payment and makes moving money around the world more expensive. . Foreign Account Tax Compliance Act (or Foreign Account Tax Compliance Act) – A US law passed in 2010 that requires foreign financial institutions to report the accounts of all US citizens or green card holders to the IRS to ensure that these people do not evade US taxes.
Many Americans residing abroad or doing international business find themselves trapped by foreign financial institutions that have chosen to get rid of all American customers rather than submit to these reporting requirements. Boris Johnson, UK Prime Minister, fell into contravention of these regulations in 2014, when he received a tax bill from the IRS for capital gains on a home he sold. Boris was born in New York, but has lived in the UK ever since.
He allegedly paid the tax bill but later renounced his US citizenship to avoid further complications, and KYC (or Know Your Customer) requirements also apply to all financial institutions. This requires them to know who their customers are, verify their identity, verify the source of their funds and update information about them. Financial institutions are required to ensure that they do not have any financial dealings with persons on certain lists suspected of taking bribes or engaging in criminal activity. In some cases, financial institutions are expected to know their customers. As you can imagine, these requirements are time consuming and expensive to do right.
If an organization turns out to be negligent in its analysis, it can act with heavy fines and lose regulatory permission to do business. Perhaps it will be clear to you that it does not make sense for regulators to impose these requirements on international money transfers in the traditional financial system and then allow the crypto exemption. So, if crypto today is faster and cheaper than traditional financial institutions in moving money around the world, it is because the crypto world simply ignores all these regulations. Regulators are not happy with this, and now, new Chinese regulations will likely mean that central and large regulated exchanges will stop accepting new Chinese clients (and quickly cancel their existing Chinese accounts). Chinese customers will essentially be treated the way American customers are treated by “cryptocurrency exchanges outside the United States” today (many exchanges refuse to deal with American customers in order to avoid a confrontation with US regulators.) But the bigger question is whether This crypto ban was because cryptocurrencies are decentralized, it is very difficult to ban them completely in practice .
In theory, anyone in China with a cryptocurrency wallet could start trading on decentralized exchanges without permission as there is no Know Your Customer (KYC). Even if some websites are blocked in China, only cryptocurrency traders can use VPNs to get around these restrictions. Moreover, millions of Chinese live and work abroad. Preventing these people from buying cryptocurrency and bringing them back to China might be impossible, so what about the US and their plans to regulate crypto? Gary Gensler – Chairman of the Board of Directors of the recent Economic and Social Commission has made clear his intention to use the full powers of the US Securities and Exchange Commission to curb illegal behavior in the cryptocurrency market.
He hoped that Congress would step in and plug any loopholes in the existing legal framework so that crypto could be fully regulated, and Gensler's initial focus appears to be on what's known as decentralized finance, or DeFi. DeFi platforms aim to replace financial intermediaries such as banks or brokers with software known as smart contracts, which would automate crypto market activity. An example of this is a contract that can be funded by crypto investors who then create a market between two different cryptocurrencies by following strict crypto rules, without human intervention. A smart contract like this can eliminate the need for exchanges or intermediaries. The appeal is that this technology can cut costs and speed up circulation. The reason regulators are focusing on this area is that DeFi platforms will replace the capabilities that governments currently rely on to enforce laws against money laundering and tax evasion. In particular, they avoid all Know Your Customer (KYC) regulations. Just to be clear, money launderers don't need cryptocurrency to do what they do. Most can handle traditional methods – such as mixing illicit money into trade flows or plowing it into assets such as property or art.
So while it is difficult to assess the extent of money laundering in the cryptocurrency markets , there is no doubt that regulators are focusing on it. Janet Yellen, the US Treasury Secretary, recently described the “misuse” of cryptocurrency as a “ growing problem.” Christine Lagarde, president of the European Central Bank, has linked digital assets to " absolutely reprehensible money laundering activity" . In order to get your money from illegal sources and convert it into cryptocurrency, you still often have to deal with a financial institution like a bank that has traditional anti-money laundering requirements in place. Likewise, exchanging cryptocurrencies for money that can actually be spent involves going through traditional financial channels, and over time, if cryptocurrency starts to be used for daily spending, it will be very easy to avoid any checks. The fact that these internal and external slopes are regulated does little to prevent money laundering. If you are the criminal mastermind and you want to show the source of your wealth, you can draw a small digital picture , like NFT, and have someone buy it from you for say $100 million, and now you can not only show the relevant authorities where your money came from, but you are also a famous artist and you can Go to glamorous arts parties and drink champagne, instead of going to the criminal parties you're used to.
You might even get to hang out with LoganPaul – one of the great artists of your generation…not my generation… you… well, even if the SEC was to crack down on encryption, or at least try to bring itinside the current regulatory framework, what they will? It looks like they will probably start with crypto and DeFi exchanges and work from there. The US Department of Justice has been hunting the exchanges for some time for violating KYC rules. It is not clear at this time whether the Securities and Exchange Commission has the legal authority to enforce anti-money laundering rules on the software developers behind the DeFi protocols.
The automated exchanges I mentioned earlier, given the current legal framework, would likely try to find a corporate link in DeFi platforms to which legal obligations could be attached. Gary Gensler, head of the SEC, alluded to this in a recent interview with FinancialTimes where he said DeFi platforms remind him of the "peer-to-peer" lending business that developed in the earlier part of the century. Just as there has been a “ company” in the middle of “peer-to-peer lending,” he said, DeFi has “a fair amount of centralization,” including governance mechanisms, fee models, and incentive systems. “A lot of developers want to suggest that they don’t They do more than develop software. ” “It is a misnomer to say that DeFi platforms are just software being rolled out on the web.” The world will surely watch what China does in this space. It might be impossible to ban cryptocurrencies, but almost everything is about Cryptocurrency goes against the direction in which regulators are moving over time It is pretty much guaranteed that there will be a confrontation The question is whether the slow process of creating new rules and passing laws will be able to keep pace with the rapidly evolving world of cryptocurrency, if you find this piece interesting You will probably really enjoy my article on John Law, the man who invented paper money and TheMissippi Corporation.
Have a nice day and see you soon. Bye.