What's Wrong With Crypto? Part II

A week ago, I started looking into why governments get so nervous when they hear the word "cryptocurrency", what exactly they see as so bad about it, and why operations involving it should be restricted or banned. In the first part of the article, I talked about the economic threats posed by cryptocurrencies: risks to banks, the protection of unsophisticated citizens from losing money, taxation, and competition with central bank digital currencies (CBDCs).

But if you think that is the full list of complaints, you are underestimating regulators' imagination. Today, different arguments are on the table - arguments voiced from UN podiums and behind the doors of intelligence agencies.

Let's go.

5. "You Are Boiling the Oceans"

Some of the trendiest arguments against cryptocurrencies are related to energy consumption and environmental issues.

The official narrative sounds roughly like this: cryptocurrency mining (especially Bitcoin mining) consumes a monstrous amount of electricity, increases carbon emissions, and prevents states from achieving their climate goals.

And the numbers really are impressive. The Bitcoin network consumes around 100-140 TWh per year. That is more than the entire annual consumption of Argentina or the Netherlands.

Here are some examples of how governments have reacted to these figures:

• China. One of the official reasons for a complete ban on mining was precisely its energy consumption. China was aiming for carbon neutrality, while miners were burning cheap coal.
• Russia. The authorities banned mining in certain regions during the winter, when electricity is needed to heat buildings. Miners take up all available capacity, leaving no electricity for hospitals and schools.
• New York. A moratorium was introduced on opening new mining farms if they run on fossil fuels.

This argument deserves attention, but using it often looks hypocritical.

First, miners are ideal buyers of "excess" energy. They rarely consume electricity where demand is high, because high demand usually comes with high prices. On the contrary, mining facilities are often located where hydroelectric plants generate electricity that would otherwise go to waste (for example, during flood seasons), and they monetize this surplus.

Second, Bitcoin can be compared not only to Argentina and the Netherlands but also to its direct competitors. The global banking system (offices, servers, cash transportation, ATMs, air conditioning in skyscrapers) and the gold mining industry consume no less energy than Bitcoin, yet no one proposes banning banks to save polar bears.

Third, many cryptocurrencies don't use mining at all. Popular blockchains based on Proof-of-Stake consume very little electricity and have no negative environmental impact.

6. "Money for Bad Guys"

This argument appeals to strong emotions: anger and fear. Once an official says that cryptocurrencies are used by terrorists (for some reason they are mentioned more often than any other criminals), society nods in agreement: "Ban it!"

Officials claim that the anonymity of cryptocurrencies makes them an ideal tool for drug trafficking, terrorist financing, and money laundering.

For this reason, the US Treasury regularly blacklists crypto mixers, claiming that North Korean hackers launder money through them. The European Union goes even further: under AML rules, it bans large transfers to unknown crypto wallets.

But do you know which type of currency is actually the most popular among drug cartels and corrupt officials worldwide? Cash. Fiat cash. Preferably dollars. A suitcase full of cash leaves no digital trace, while the blockchain remembers everything, and nothing can be erased from it, no matter how hard you try. If a criminal launders money through banks and has influential patrons, they can theoretically arrange for all traces of their banking transactions to be wiped. That trick does not work with blockchains.

Even if blockchain transactions cannot be fully traced at the current level of technology, no one can guarantee that new de-anonymization methods will not be invented in a few years - methods that could unravel even the most complex schemes, whose traces are permanently recorded on the blockchain. That is why the money laundering argument looks ridiculous to crypto enthusiasts. If criminals truly understood cryptocurrencies, they would never use them for shady business.

7. "Sanctions Don't Work!"

Cryptocurrencies deprive states of leverage in international relations. This point is rarely used as a reason for bans aimed at ordinary citizens, but at the level of global politics, it is one of the key issues.

The core of the problem is that the global financial system is built on correspondent banking relationships. This allows states that host the largest banks to freeze the assets of other countries or disconnect entire nations from financial flows, as has happened with Iran, Russia, and some others. Cryptocurrencies, however, make it possible to build an alternative financial system, without SWIFT or US banks.

In some cases, this can have a positive effect on cryptocurrencies. One of the first countries to fully legalize cryptocurrencies in 2017 was Belarus, which was under sanctions from several states. Venezuela, Russia, and Iran have also legalized the use of cryptocurrencies for foreign trade to varying degrees in order to bypass restrictions.

On the other hand, states that impose sanctions are extending them beyond the banking system. They increase pressure on crypto exchanges and introduce secondary sanctions to close these loopholes.

As a result, cryptocurrencies have become a hole in the fence that states have been building for decades. If anyone can send a million dollars anywhere in the world in 10 minutes for a fee of 1 dollar, economic pressure tools stop working. Because of this, states lose global influence and control on the international stage.

8. What About Domestic Control?

This is the deepest fear of those in power.

If a country's population loses faith in the national currency, people start switching to dollars. The state bans dollars, and people move to stablecoins. And if the national currency is the dollar itself, and people stop trusting it, they can move into tokenized gold or Bitcoin.

During the collapse of the Turkish lira and the Argentine peso, stablecoin purchase volumes in those countries hit global records. People were saving their salaries. In response, authorities tried to block access to exchanges and introduced bans on blockchain-based payments.

When the monopoly on money belongs to the state, authorities can easily strip us of our savings. All of us at once - through inflation, or selectively - through social credit systems. The latter becomes possible when money is digital. That is why, when Nigeria attempted to introduce the digital naira and severely restrict cash circulation, Nigerians rushed to buy Bitcoin. On P2P platforms in January-February 2023, Bitcoin could be sold for naira at a premium of at least 60% compared to exchange rates against other currencies.

If there are businesses willing to accept cryptocurrencies instead of official state money, governments lose an important tool of control. That is why, even when they formally legalize cryptocurrencies, they may explicitly ban accepting them as payment for goods and services.

Moreover, when legalizing cryptocurrencies, states may restrict legal crypto activity to intermediaries that hold a government license. Just this week, it became known that a citizen of Uzbekistan faced criminal prosecution simply for carrying out 2,400 cryptocurrency trades on the Binance and Bitget platforms. What is wrong with trading cryptocurrencies on exchanges that lack a license in some specific country? The problem is that without a license, there is no control, and the state cannot interfere in any of these transactions. Hence the bans and criminal prosecution of those who violate them.

Conclusion of Both Parts: So What's Actually Wrong With Cryptocurrencies?

If you put together all the pieces from both articles, the picture becomes clear. In one way or another, the reasons for bans and restrictions that do not provoke laughter or confusion all boil down to a single issue: loss of control. States do not hate technology, but they definitely dislike losing control.

• They do not like that you can store savings without state-controlled banks (the taxation and protection argument).
• They do not like that you can transfer money without asking permission (the money laundering and capital control argument).
• They are afraid that someone else can create money (the CBDC argument).

What happens next?

A total ban works poorly: people go underground, use VPNs, and rely on nominees. That is why many states have chosen the path of "suffocating embrace":

• 1. Allow cryptocurrencies, but tax them heavily.
• 2. Ban fully anonymous coins.
• 3. Declare legal only those crypto operations that involve intermediaries registered in state registries.
• 4. And eventually, if possible, ban any interaction with non-custodial wallets altogether.

I have a question: what good will remain in cryptocurrencies after that? The ability to speculate on price movements?

Now that cryptocurrencies are legal in most countries around the world, try something simple and intuitive: stablecoins or tokenized gold. Send tokens to your loved ones, pay for something with them. Feel what it is like to truly own your money again.

And when you get a taste of that freedom, head over to Rabbit.io and exchange your tokens for truly "grown-up" cryptocurrencies - the kind that no one, ever, under any circumstances, can forbid you to own. Bitcoin, Monero, free stablecoins like DAI and LUSD, and many, many others. Swap into whatever interests you most - without limits or bans.