All humor is based on truth. When we recognize that truthful element in a joke, it becomes relevant to us. Here’s one that’s been going around the internet:
2010 – No one uses it.
2012 – Only computer nerds use it.
2013 – Only drug dealers use it.
2014 – Only money launderers use it.
2017 – Only gamblers use it.
2019 – Only a small percentage of the population uses it.
2020 – Only small companies use it.
2021 – Only small countries…
The answer to this riddle is obviously Bitcoin. But if we spin it out to include all cryptocurrencies and blockchain technology, the same hilarious point to the joke persists: the creation of a revolutionary new type of currency that was once the purview of geeks and nerds is finally entering the mainstream.
It seems that overnight we were presented with a decentralized currency that could enable the quick and efficient transfer of money between two people without the need for an intermediary, such as banks. In the decade plus since the mysterious Satoshi Nakamoto wrote his white paper on the subject, 4,000 new cryptocurrencies have been created.
One issue that has been blocking Bitcoin and cryptocurrencies in general from being adopted wholeheartedly by the mainstream is their well-known volatility. Many reputable investors, including Warren Buffet, have criticized them, calling them “risky” and “worthless.”
Bitcoin’s value has certainly been volatile. It was worth $1 in 2011 and currently stands at a value of $40,378 at the time of writing (June 2021), down from a high of $58,2138 per coin in May 2021. With a market value hovering around $1 trillion, Bitcoin has recently received more support as an increasing number of companies have jumped on the bandwagon, including Tesla (which bought $1.5 billion worth of Bitcoin in January), PayPal Holdings and Square, Galaxy Digital Holdings, Burger King Venezuela, Yum Brands (which operates KFC, Pizza Hut and others), XBox, and the famous auction house, Sothebys, all of which are now offering ways to transact in Bitcoin or other crypto.
Tesla subsequently announced in April that it had sold 10% of its Bitcoin holdings to “demonstrate the token’s liquidity,” yet CEO Elon Musk said that he has retained his personal investment in the cryptocurrency. He later announced on Twitter that Tesla had suspended purchases using Bitcoin amid concerns over the “rapidly increasing use of fossil fuels” used in mining the cryptocurrency.
El Salvador Embraces Cryptocurrency
Buying into the joke about Bitcoin, an historic first on the world stage occurred when the first small country adopted cryptocurrencies. In June 2021, El Salvador became the first country to formally adopt cryptocurrency after its Congress voted overwhelmingly to approve a law classifying Bitcoin as legal tender. President Nayib Bukele hopes this initiative will boost foreign investment, improve financial inclusion and generate jobs.
China Creates the Digital Yuan
In the meantime, China has created its own currency, the digital yuan. Its version of a digital currency is controlled by its central bank, which will issue the new electronic money. Unlike cryptocurrencies, the digital yuan is not based on the blockchain; rather, users download digital wallets in which they can store their funds, and which generate a QR code that can be scanned by payment terminals in stores. It is expected to give China’s government vast new tools to monitor both its economy and its people, and may be a catalyst for cracking down on and kicking out Bitcoin miners.
“By design, the digital yuan will negate one of Bitcoin’s major draws: anonymity for the user,” says The Wall Street Journal.
The US Joins the Fray
US Treasury Secretary Janet Yellen recently indicated that President Joe Biden’s administration would support research into the creation of a digital dollar. However, as recently as May 5, 2021, Yellen called the US crypto regulatory framework inadequate.
Amid threats of stiffer government regulations, President Biden has appointed Gary Gensler as Head of the Securities and Exchange Commission (SEC). Gensler worked for nearly two decades as an investment banker at Goldman Sachs, and is a professor specializing in cryptocurrencies and blockchain technology at the MIT Sloan School of Management. He is expected to be more hard-nosed regarding cryptocurrency regulations than his predecessor, Jay Clayton, an attorney appointed by former President Donald Trump to undo financial regulations that stifled investment in American companies. Gensler has committed to “strengthen transparency and accountability in our markets, so people can invest with confidence, and be protected from fraud and manipulation.”
Changes in opinion about digital money or cryptocurrencies have also been heard by Deputy Governor, Financial Stability of the Bank of England, Sir Jon Cunliffe who said in May that the Bank was considering the idea of creating a central bank digital currency (CBDC).
One of the things that proponents of cryptocurrencies say is that they are “trustless.” That is, they don’t rely on any national-state, government or institution. However, according to Joseph A. Grundfest, professor at Stanford Law School, cryptocurrencies are actually not really trustless at all.
“[Cryptocurrencies] are still reliant on the underlying infrastructure powering them, like Bitcoin, much of which is located in China,” Grundfest explains. “The Chinese government could theoretically make changes to cryptocurrencies at a fundamental level by imposing its will on the data miners who keep them running.”
Other criticisms of Bitcoin include that it requires too much computer power and electricity necessary to produce the crypto thereby preventing it from becoming sustainable.
Will Cryptocurrencies Continue to Enter the Mainstream?
The regulations for adopting cryptocurrencies often differ from country to country. The main reasons for trepidation in adoption are fear of fraud, money laundering, and financing of terrorism. Two recent incidents have shown that anti-terrorism forces can effectively track and stymie terrorist activity.
On May 7, 2021, an American oil pipeline originating in Houston, TX, suffered a ransomware cyberattack that affected computerized equipment managing the pipeline. The hackers demanded a ransom of 75 Bitcoin or $4.4M in order to restore the pipeline to operation. Colonial Pipeline, the carrier of gasoline and jet fuel to much of the southeastern United States, halted all of the pipeline’s operations, and paid the ransom request. A month later, the FBI and the Department of Justice announced that they had recovered 63.7 of the bitcoins (approximately $2.3M) from the ransom payment. The FBI remained secretive about how it had traced the money and outed the criminal hacking group DarkSide.
In Israel, the Defense Ministry says it has begun taking control of digital wallets being used by the Hamas terror group that contain virtual currencies from overseas donations.
“The intelligence, technological and legal tools that enable us to get our hands on terrorists’ money around the world constitute an operational breakthrough,” explained Defense Minister Benny Gantz.
According to Thomson Reuters Regulatory Intelligence, several countries are at the forefront of adoption and are establishing themselves as crypto-friendly: Bermuda, the EU, Singapore, and the UK among them. Yet, parts of Africa and India have taken steps to restrict or prohibit citizens from owning or using crypto.
The future outlook of Bitcoin and cryptocurrencies is no longer in question. With critics decrying substantial risks involved in implementation, proponents emphasize their limitless potential. As large corporations (and small countries) continue to incorporate the uses of blockchain and cryptocurrencies in the daily running of their businesses, the question is not whether but when there will be comprehensive adoption of blockchain.
The final decision, at least in the US, will most likely be shaped by the US Commodity Futures Trading Commission (CFTC) and the US Treasury Department’s Financial Crimes Enforcement Network (FinCen) which are expected to play a major role in shaping future crypto regulations.