The Bloom May Be Off The Crypto Rose

A rose by any other name would smell just as sweet, but it seems Bitcoin by any other name would be just as volatile. As the globe continues to wrestle with the FOMO (fear of missing out) surrounding cryptocurrency, beyond its simple volatility, it seems as though some of the bloom is off the crypto rose as the public (and more importantly, the establishment), are taking a closer look at what’s behind this modern-day tulip mania.
 

As in all things relating to economics, a number of factors move constantly and simultaneously to shift the market equilibrium; so while there is no single reason for the great crypto rise and fall of 2021, there is one underlying factor in all of those various inputs: control.

Cryptocurrencies were created as a decentralized alternative to traditional currency (i.e., not controlled by the government). And while the idea that a completely independent consumer-based currency is ungoverned except by the people sounds good as part of a Twitter hashtag campaign, inevitably the lack of control could ultimately be its downfall. Cryptos have been around for over a decade, yet the ending may be nigh, and there are key factors as to why it could be sooner rather than later.
 

It was inevitable that crypto was going to be exploited by shady individuals and as we recently saw with the Colonial Pipeline hack, crime can certainly pay. In order to get the pipeline back online, CEO Joseph Blount authorized 75 Bitcoin to be transferred to the hacker’s anonymous wallet address. And because cryptocurrency isn’t a security, the ransom paid was completely untraceable by traditional financial forensic accounting. The recently gained public notoriety of shutting down half of the East Coast’s fuel supply by a cyber-attack finally shone a spotlight on crypto that much of Washington (and the world) had been ignoring.
 

But China has certainly been paying attention.

The CCP is vastly ahead of the rest of the world on crypto, rolling out its own digital yuan earlier this year. Not only does this move allow China to be the ''first to market” with a national-backed cryptocurrency, but it also gives it unprecedented control of its country’s finances and even possibly the world's.

While you may be thinking most currency is digital these days, it isn’t. Digital banking is merely efficient digital representations of transactions utilizing traditional and accounted for physical currencies. Cryptocurrency, however, actually is digital money, which means unlike brown paper bags of cash, it can be programmable, traceable and even instantaneously reportable; and for a communist country like China that thrives off of control, this could be just the type of thing the CCP is looking for.
 

Through the utilization of the digital yuan, China’s policymakers will know every consumer choice made in the economy, and they will be able to wield tremendous influence over how money is spent, even going so far as making the currency expirable by a certain date in order to directly encourage spending. In addition, given China’s level of foreign investment along with a desire to expand the use of its currency as part of the global reserve, China could have the opportunity to see the digital yuan put into broader circulation as many nations struggle to repay their debt.

Don’t expect this newfound power to belong ignored by other countries either. As more nations become privy to the amount of control digital currency affords, expect them to roll out their own cryptocurrencies soon in an effort to exert that control over their own finances (and citizens).

Buyer beware, however, as nation-backed digital currencies are not protected by the blockchain like existing models such as Ethereum and Bitcoin (i.e., safe from manipulation). These new sovereign digital currencies are, by design, able to be modified and even manipulated; so it’s not difficult to comprehend the problems with that (yep, looking at you, China). Given this, as more nations look to roll out digital currencies, one could expect to see credit ratings to swiftly follow suit.
 

Ironically, cryptocurrencies were developed to evade centralized national control and influence, yet they ultimately may be directly responsible for inspiring even more controllable money by the world’s governments.

Regardless, monetary bodies do not like instability and truly abhor a vacuum. Whether it’s the control or the fact that market value can quickly be impacted by a celebrity tweet, the government will tolerate the lack of regulation for so long. Whether it be more state-backed digital currency or simply the extermination of this craze, when nations coordinate their efforts, they can exert insurmountable influence upon the world. As more and more governments turn against the tide of unregulated crypto, expect to see crypto break upon the waves.