A Curse Worse Than Money By Kenneth Rogoff

While prominent cryptocurrency advocates are politically connected and have democratized their base, regulators simply cannot sit idly by forever. Malicious ransomware attacks targeting a growing number of businesses and individuals could prove to be the tipping point.

CAMBRIDGE – Ransomware – a type of malware that restricts access to a computer system until a ransom is paid – is not a good choice for cryptocurrencies. Supporters of these digital coins would rather point the finger at famous investors such as Tesla founder Elon Musk, Dallas Mavericks owner Mark Cuban, star football quarterback Tom Brady or actress Maisie Williams (Arya in Game of thrones). But recent ransomware attacks and the central role of cryptocurrencies in activating them are a public relations disaster.

The attacks include the closure last month of the Colonial Pipeline, which drove gasoline prices up on the U.S. east coast until the company paid hackers $ 5 million in Bitcoin, and, again most recently, an attack on JBS, the world’s largest meat producer. Episodes like this highlight what for some of us has been a long-standing concern: Hard-to-locate anonymous cryptocurrencies provide opportunities for tax evasion, crime, and terrorism that make banknotes in large denominations seem harmless in comparison. While the main cryptocurrency advocates are politically connected and have democratized their grassroots, regulators cannot sit idly by.

The idea that cryptocurrencies are just an innocent store of value is astoundingly naive. Of course, their transaction costs can be large enough to deter most mainstream retail businesses. But for anyone trying to avoid strict capital controls (e.g. in China or Argentina), launder illicit gains (perhaps from the drug trade), or evade US financial sanctions (on countries, companies, individuals or terrorist groups), crypto can always be an ideal option.

After all, the US government has for many decades turned a blind eye to the role its $ 100 bills play in facilitating arms purchases and human trafficking, not to mention the capacity of poor country governments. to collect tax revenue or to maintain internal peace. While Bitcoin and its crypto variants have by no means surpassed the dollar to facilitate the global underground economy, they are certainly on the rise.

As even the largest U.S. financial firms seek to offer crypto options to their clients, one wonders what people are investing in. Contrary to the frequent claims that cryptocurrencies are little used in transactions and no underlying activity, there is one that is flourishing: Apart from being a bet on dystopia, cryptocurrencies offer a way invest in the global underground economy.

If governments will eventually have to dramatically increase their regulation of crypto transactions, why have cryptocurrency prices in general, and the price of Bitcoin in particular, skyrocketed (albeit with headline-grabbing volatility)? Part of the answer, as economic theory tells us, is that with zero interest rates there can be massive and sustained bubbles in inherently worthless assets. Additionally, crypto investors sometimes argue that the industry has grown so big and has attracted so many institutional investors that politicians will never dare to regulate it.

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Maybe they are right. The longer it takes for regulators to act, the more difficult it will be to control private digital coins. The Chinese and South Korean governments have recently started cracking down aggressively 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 curbing significant regulation of digital assets; This is evidenced by the recent decline in the United States of Facebook’s digital currency project in the face of the global regulatory decline orchestrated by the Swiss authorities.

To be sure, the administration of US President Joe Biden is now at least preparing to force the reporting of cryptocurrency transfers over $ 10,000 as part of its efforts to collect a larger share of the taxes owed. But, ultimately, reducing the potential liquidity of hard-to-trace crypto will require a high level of international coordination, at least in advanced economies.

In fact, it’s an argument as to why a cryptocurrency like Bitcoin could justify its high value of around $ 37,000 at the end of May (although its price changes like the weather). If Bitcoin is an investment in the transaction technology that underpins the global underground economy, and if it takes decades for even advanced economies to master money, then it can earn a lot of rents from transactions in the meantime. . After all, we don’t have to expect a business 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 countries or pariah states, although their valuations would be much lower if the coins could not be laundered in rich countries. And perhaps there are technologies to remove anonymity and thereby remove the main objection to cryptocurrencies, although it is suspected that this would also undermine their main selling point.

No one disputes the blockchain technology that underpins cryptocurrencies and has vast potential to improve our lives, for example, by providing an inviolable network of trust 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’.

Unfortunately for those who have invested their savings in cryptocurrency, ransomware attacks that target a growing number of businesses and individuals could prove to be the turning point when regulators finally develop a backbone and step in. Many of us know of people whose troubled small businesses have been wiped out by such extortion. While governments may have better cryptocurrency tracking tools than they suggest, they are in an arms race with those who have found an ideal vehicle to charge for crime. Regulators need to wake up before it’s too late.


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