Now Central Bankers Are Making the Case for the Crypto Revolution

Back in 2014, most of the world’s central bankers were warning people of the risks of using cryptocurrency. Some remain skeptical to this day; the Reserve Bank of India, in particular, has taken a very tough stance on crypto.

But many others are now apparently on board with the crypto revolution.

Last week at the Economic Policy Symposium in Jackson Hole, Bank of England Governor Mark Carney suggested that a digital currency developed by a coalition of central banks could possibly replace the U.S. dollar as the world’s reserve currency.

Central bankers have long recognized the threat that cryptocurrencies – particularly those like Bitcoin that fall under no central authority – pose to their power. But for a long time they dismissed that threat.

A number of central banks have been toying with the idea for a while of creating their own digital currencies – tied, of course, to their fiat currencies.

Facebook Inc.’s (NYSE: FB) proposed Libra coin, which would be based on the value of a basket of top fiat currencies, showed how urgent the threat has become.

Now we have the Bank of England governor thinking out loud about how to beat Facebook to the punch.

Meanwhile, the People’s Bank of China announced earlier this month that it is “close” to releasing its own digital currency linked to the yuan.

These developments tell us several things.

For one thing, cryptocurrency is not a “fad.” It isn’t going away. Exactly how it plays out is yet to be determined, but digital currencies most certainly are destined to be an integral part of the financial world.

It’s also becoming clear that “stablecoins” – digital currencies with values pegged to a fiat currency – will play a major role. Stablecoins give the central banks a response to decentralized cryptocurrencies like Bitcoin and Ethereum.

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But at the same time, the efforts of the central banks to “head off” the crypto revolution won’t succeed in eroding interest in cryptocurrencies outside their control.

If anything, these efforts will reinforce the belief that decentralized crypto options – those that do not require trusting a third party like a bank – are needed. This “independent” digital money will grow in importance as physical cash gives way to government-issued digital currency that can be monitored, tracked, and confiscated.

In addition, cryptocurrency – especially Bitcoin – has become a legitimate investible asset class. Stablecoins, because their value is tied to fiat, aren’t useful as investments.

I suspect that infighting and mistrust will foil any attempt at the sort of universal stablecoin Carney is talking about – opening the door to the possible adoption of Bitcoin as the world’s digital reserve currency.

And if that happens, you’re looking at a Bitcoin value in the neighborhood of $1 million. As they say on crypto Twitter, just HODL.

Regulators Step It Up

Last week we also saw a lot of activity from U.S. government regulators:

  • The SEC fined a Russia-based analytics company, ICORating, $268,998 for activity from December 2017 through July 2018. The SEC said the firm had raised money via initial coin offerings (ICOs) that the SEC considers securities. ICORating agreed to pay the fine.

  • The Federal Trade Commission (FTC) settled charges against the operators of a crypto-based pyramid scheme in Florida. The ringleaders, Thomas Dulca and Eric Pinkston, were fined $453,932 and $461,035, respectively.

  • The U.S. Treasury Department of Foreign Assets (OFAC), working with the Financial Crimes Enforcement Network (FinCEN), sanctioned three Chinese nationals, accusing them of drug trafficking as well as breaking money laundering laws. The OFAC froze the U.S. assets of the accused and blacklisted their Bitcoin and Litecoin addresses.

These actions follow several others earlier this month, including a temporary restraining order obtained by the SEC against the chief organizer of the Veritaseum (VERI) cryptocurrency, Reggie Middleton. The SEC called the Veritaseum ICO the sale of an unregistered security and accused Middleton of manipulating the price of the crypto after the initial offering. 

I consider this increase in regulatory activity a positive. The job of regulators is to protect the investing public, and that’s exactly what they’re doing.

While some in the cryptocurrency community would prefer no regulation, I don’t see that as practical.

If left unregulated – a financial “Wild West” scenario – the sector would sooner or later be completely overrun with scammers and fraudsters to the point where no one will bother with it. Even cryptos like Bitcoin that are mined rather than sold in an ICO – and don’t risk violating securities laws – feel the backlash.

The risk is that regulators will go too far, creating restrictions that will hamper innovation. But so far the SEC and other regulators have suggested that they are consciously trying not to do that.

Based on what we’ve seen this month, I think the regulators are getting it mostly right.

Now, getting back to Libra…

More Trouble for Libra

Facebook Inc.’s (NYSE: FB) proposed Libra cryptocurrency took another hit last week.

Several of the companies that had agreed to be a part of the project were said to be getting cold feet as global regulators turned up the heat on Facebook’s attempt to create a universal stablecoin based on a basket of fiat currencies.

Politicians, regulators, and just about everyone else are leery of putting a company like Facebook – with its tattered record on security and privacy – in charge of a digital currency that, if implemented, would become widely distributed and very powerful.

I expect more roadblocks as time goes on. Frankly, it’s highly unlikely Libra will ever see the light of day.

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