Commentary: Cryptocurrency is powering the underground economy of vice and crime


CAMBRIDGE, Massachusetts: Ransomware - a type of malicious software that restricts access to a computer system until a ransom is paid - is not a good look for cryptocurrencies.

Proponents of these digital coins would rather refer to prominent investors like Tesla founder Elon Musk, Dallas Mavericks owner Mark Cuban, star football quarterback Tom Brady or actress Maisie Williams (Arya in Game of Thrones).

But the recent ransomware attacks and the central role of cryptocurrencies in enabling them are a public relations disaster.

Attacks include last month's Colonial Pipeline closure, which drove gasoline prices up on the U.S. east coast until the company paid the hackers $ 5 million in bitcoin, and, more recently, an attack on JBS, the world's largest Meat producers.

READ: Comment: Robocalls Reveal Weakest Link in New "Wave of Fraud"

Such episodes illustrate what has long been a problem for some of us: hard-to-track anonymous cryptocurrencies provide opportunities for tax evasion, crime, and terrorism that make large denomination banknotes seem innocent by comparison.

Although prominent proponents of cryptocurrencies are politically connected and have democratized their base, regulators cannot sit on their hands forever.

READ: Comment: Don't trust the hype - Bitcoin will never be a smart investment

NAIVE VIEWS

The view that cryptocurrencies are just an innocent store of value is startlingly naive. Sure, their transaction costs can be substantial enough to deter most normal retail stores.

But for anyone trying to avoid tight capital controls (e.g. in China or Argentina), laundering illegal profits (perhaps from drug trafficking), or bypassing U.S. financial sanctions (against countries, companies, individuals, or terrorist groups), crypto can still be an ideal option.

After all, for decades the U.S. government turned a blind eye to the role its $ 100 bills play in facilitating arms purchases and human trafficking, not to mention undermining or undermining the ability of poorer country governments to generate tax revenue to maintain inner peace.

A woman counts US $ 100 bills on August 28, 2018. (File photo: REUTERS / Marcos Brindicci)

While Bitcoin and its crypto variants have nowhere near outperformed the dollar in facilitating the global underground economy, they are certainly on the rise.

With even leading US financial firms trying to offer crypto options to their customers, one might well ask what people are investing in.

Contrary to popular claims that cryptocurrencies have little use in transactions and no underlying business exists, there is a thriving one: cryptocurrencies are not just a bet on dystopia, but also offer a way to invest in the global shadow economy.

READ: Comment: The year hackers and scammers took advantage of our COVID-19 fears to scam us

WHY IS THE PRICE OF BITCOIN RISING?

If governments ultimately need to dramatically increase their regulation of crypto transactions, then why have cryptocurrency prices in general, and Bitcoin in particular, soar (albeit with headline-grabbing volatility)?

Part of the answer, as economic theory tells us, is that zero interest rates can create massive and persistent bubbles in inherently worthless assets.

In addition, crypto investors sometimes argue that the sector has grown so large, and has attracted so many institutional investors, that politicians will never dare regulate it.

READ: Comment: Dogecoin and Why We Should Stop Taking Cryptocurrencies Seriously

Maybe you are right. The longer it takes for regulators to act, the harder it becomes to get a grip on private digital coins.

The Chinese and South Korean governments have recently started cracking down on cryptocurrencies, although it is not yet clear how determined they will be.

In the United States, the financial industry lobby has been relatively successful in withholding meaningful regulation of digital assets; Experience the recent withdrawal of the Facebook digital currency project to the US amid the global regulatory setbacks orchestrated by the Swiss authorities.

Facebook Chairman and CEO Mark Zuckerberg testifies to a projection of a "Zuck Buck" at a House Financial Services Committee hearing examining the company's plan to launch a digital currency on Capitol Hill in Washington, United States, to be introduced on October 23, 2019. REUTERS / Erin Scott

The government of US President Joe Biden is now at least trying to force the reporting of cryptocurrency transfers of over 10,000 US dollars in order to collect a larger part of the taxes owed. But ultimately, reducing the potential liquidity of hard-to-track crypto requires a great deal of international coordination, at least in advanced economies.

DIFFICULTY IN REGULATION MAKES IT ATTRACTIVE

In fact, this is an argument as to why a cryptocurrency like Bitcoin could justify its high value of around $ 37,000 in late May (although its price changes as the weather changes).

If Bitcoin is an investment in the transaction technology that underpins the global shadow economy, and if it takes many decades for even the advanced economies to curb the currency, it can earn lots of rents from transactions in the meantime.

READ: Comment: Elon Musk is relying heavily on Bitcoin to make Tesla strong

After all, we don't have to expect a company to be in business forever - think fossil fuels - for it to have significant value today.

Of course, there will always be a market for cryptocurrencies in war-torn or pariah countries, although their ratings would be much lower if coins couldn't be laundered to rich countries.

And maybe there are technologies to remove anonymity, thereby removing the main objection to cryptocurrencies, although it is believed that doing so would undermine their main selling point as well.

READ: U.S. regulators signal increased risk and tax oversight for cryptocurrencies

A SALVATION

Nobody argues against the blockchain technology that underlies cryptocurrencies and has enormous potential to improve our lives, for example by providing a trustworthy tamper-proof network to monitor carbon dioxide emissions.

And although the operation of the Bitcoin system itself requires enormous energy consumption, there are now more environmentally friendly technologies, including those based on "Proof of Stake".

READ: Comment: Elon Musk Wakes Up To Bitcoin's Environmental Impact

Unfortunately for those who have invested their life savings in cryptocurrencies, ransomware attacks targeting a growing number of businesses and individuals could prove to be a tipping point when regulators finally develop a backbone and step in.

Many of us know people whose small, ailing businesses have been decimated by such blackmail.

While governments may have better tools for tracking cryptocurrencies than they admit, they are in an arms race with those who have found an ideal vehicle to make crime pay. Regulators need to wake up before it's too late.

Kenneth Rogoff, former Chief Economist of the International Monetary Fund, is Professor of Economics and Public Order at Harvard University.

https://thedailytradingnews.com/commentary-cryptocurrency-is-powering-the-underground-economy-of-vice-and-crime/

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