I have mentioned in previous comments that sovereign nations have the power to regulate and eliminate any competitor to their currencies. One country took this step on Friday.
China’s central bank just made all cryptocurrency-related activities illegal. The value of bitcoin has fallen more than 5%, while other digital coins are also trading lower during the day.
What China has done can be replicated in other countries as well.
Regulators in the United States have expressed notable disdain for replacing the U.S. dollar, the world’s reserve currency, with any crypto except the central bank’s digital currency.
In other words, the only way to replace the dollar is to create a digital version of it with the support of the Federal Reserve, the US Treasury, and Congress.
Securities and Exchange Commission Chairman Gary Gensler, who himself taught a cryptocurrency course at MIT, suggested that decentralized finance and the world in which Bitcoin and other cryptos live can be implemented in the US financial system without significant oversight or additional regulation. Not the right location.
It may be a precursor to the US that predated bitcoin and other cryptos, but it lacks the underlying transformational blockchain technology, which is effectively illegal or unusable.
So-called “stablecoins” backed by interest-bearing securities on a dollar-for-dollar basis can also be at risk as they only depend on the US dollar to support their values and riskier securities to produce positive results. can invest. Yield.
This archery shooting in China is perhaps the first in a series of similar moves around the world.
Crypto bulls have long argued that DeFi and alternative currencies are beyond the reach of sovereign nations, but as we have seen today, that is far from the truth.
As sheer restrictions and strict regulations reduce the value of cryptocurrencies, they also send a message that the fundamentals on which crypto is built are flawed at best.
In a recent talk at a Washington Post event, Gensler highlighted a period in the United States when individual state-chartered banks issued their own scripts or currencies.
He called those days the era of “wild banks”. Bank certificates had no intrinsic value other than how different banknotes were priced against each other based on perceived safety and soundness.
This experiment did not end well and ultimately forced the United States to centralize its financial system, which led to the creation of a single currency, the US dollar, and ultimately the creation of the Federal Reserve.
Countries will not and will not strengthen their institutions or their currencies, as an independent group of currency makers decides to do.
The US Constitution gives Congress the power to print and coin money. Obviously, this power has been challenged several times in our history.
But nations lean towards centralization and control, especially when it comes to money.
China may be the first country to ban bitcoin and other currencies, but I’m sure it won’t be the last.
There are big differences between the United States and China when it comes to revolutionary technological advancements, challenging the current system is not one of those differences.
If it can be there, it can happen here too.
Bitcoin buyers, beware.
—Ron Insana is a CNBC Contributor and Senior Advisor at Schroders.