The Regulatory Future of Bitcoin and Cryptocurrency by Benjamin Ai C’24
With Tesla’s $1.5 billion Bitcoin purchase, Paypal’s integration of cryptocurrency into its wallets, and the approval of the first cryptocurrency ETFs, 2021 has been an instrumental year for Bitcoin and other cryptocurrencies. Institutional adoption of Bitcoin specifically has increased optimism that the turbulent days of 30 percent crashes may soon come to an end, causing Bitcoin’s price to skyrocket to an all-time high of over $61,000 last week. However, as investors have turned to the unregulated markets of crypto, regulators have begun eyeing these digital currencies as well. As cryptocurrencies become adopted by the mainstream, the next hurdle for Bitcoin and other cryptocurrencies may be political rather than financial.
At the center of the rise of Bitcoin and other cryptocurrencies has been decentralization. Unlike conventional money, “Bitcoin uses peer-to-peer technology to operate with no central authority or banks.” Essentially, Bitcoin allows for monetary transactions between individuals without banks or any middle-men. Through the use of a technology known as blockchain, transactions can be recorded and verified digitally by a decentralized system. Beyond Bitcoin, these technologies have dominated the crypto markets, with most cryptocurrencies tracking transactions in similar ways.
However, the decentralization of Bitcoin and other cryptocurrencies does not come without significant issues. Since transactions are decentralized, they allow for a high degree anonymity between individuals. The anonymity of digital currencies has made Bitcoin and cryptocurrency popular for darknet drug markets, money laundering, tax evasion, and ransomware, among other illegal uses. In 2020, an estimated $10 billion in cryptocurrency transaction volume was from criminal activity, a significant cause of concern for government regulators.
Moreover, the unregulated status of cryptocurrencies also poses significant risks for investors. For example, in the United States, cryptocurrencies are not insured like bank deposits and do not offer the same protections as credit cards and debit cards. If a cryptocurrency wallet is hacked or stolen, the original owner could potentially have no way to get it back. Additionally, with daily price swings sometimes reaching percentages in the double digits, the volatility and financial risks of cryptocurrencies have also prompted many to call for regulatory enforcement.
Finally, the process of creating new cryptocurrencies, otherwise known as “mining,” has also become a cause of concern. While mining allows for the verification of cryptocurrency transactions, the process requires significant energy consumption. According to an analysis by Cambridge University, Bitcoin mining alone consumes more energy yearly than all of Argentina. The mining process involves having computers solve complex hashing puzzles, which cryptocurrency critics claim is not useful work. With these factors in mind, regulators have become increasingly worried about the environmental drawbacks of cryptocurrency as well.
Outside of the most established cryptocurrencies such as Bitcoin and Ethereum, the risks and issues surrounding cryptocurrencies are even more significant. Concerns with fraud and cryptocurrency scams have prompted various countries to adopt strict regulations. In 2017, China cracked down on cryptocurrencies as a whole through a ban on Initial Coin Offerings (ICOs), preventing new cryptocurrencies from entering the market. Earlier this month, China moved to shut down cryptocurrency mining operations within the country, citing the excessive energy waste associated with mining.
For cryptocurrency investors, however, the regulatory fears have only begun. Just last week, Reuters announced that Indian government officials were looking to propose an even more stringent series of regulations against Bitcoin and cryptocurrency. The bill would give cryptocurrency investors just six months to sell before severe penalties, estimated at upwards of ten years in prison for the possession, mining, or transfer of cryptocurrencies, are enforced. If the law were to pass, India would be the first major country to completely ban the possession of cryptocurrencies, potentially setting off a worldwide regulatory crackdown against decentralized digital assets. These new uncertainties have started to slow the bullish sentiments of Bitcoin. Since the announcement, Bitcoin has dropped over ten percent from its $61,000 all-time high to just above $54,000 as of March 26, 2021.
While the institutional adoption of Bitcoin and other cryptocurrencies has strengthened investor confidence, increased regulatory attention now poses a new and significant risk to cryptocurrencies worldwide. Complete bans such as the ones proposed by India may be too draconian, but the concerns made by regulators surrounding criminal activity, investor risk, and environmental sustainability are certainly legitimate. Undoubtedly, cryptocurrency has come a long way since its first introduction just over a decade ago. In the coming years ahead, as cryptocurrencies become increasingly integrated into the mainstream, finding the delicate balance between innovation and regulation will be essential.
Benjamin Ai is a freshman in the College studying political science and economics. Originally from Plano, TX, he enjoys learning about politics, policy, and their tangible applications. In his free time, he enjoys bowling, playing pool, and playing poker.