Two Nightmare Scenarios For Bitcoin

Cryptocurrencies could be damned if they do get government acceptance, and damned if they don’t.

Yes, that’s right, there is a route to oblivion whichever way the cookie crumbles.

Government Crypto Ban?

He’s the obvious bad case — the government bans cryptos.

That may soon be the case in India, according to news agency Reuters. The report states:

• “India will propose a law banning cryptocurrencies, fining anyone trading in the country or even holding such digital assets […]”

Such a move goes far beyond that of the U.S. which required U.S. citizens and residents to disclose their ownership of cryptocurrencies.

India’s proposal, which isn’t yet law, would “criminalise [sic] possession, issuance, mining, trading and transferring crypto-assets.”

In short, it would be against the law to own Bitcoin and similar cryptos.

There are obvious reasons for governments to ban the cryptos. The first is that crypto currencies seem to be tailor-made for people such as drug dealers and terrorists wanting to make illicit transactions. Banning cryptos wont stop the drug trade or terrorism but no government wants such activities to be easy.

A recent report from Academy Securities sums it up as follows:

• “This subject is getting a lot more attention as countries like Turkey try and crack down on criminal behavior and the U.S. wrestles with how to impose sanctions effectively in the age of digital currencies. Taxation is also an issue that is garnering attention rapidly. Look for governments to try and crack down on how crypto is used and taxed.”

A crackdown could be catastrophic for crypto depending on who is buying and holding it.

Second, and perhaps more important, governments want their population to use the country’s money. That’s because of something known as seigniorage, which financial website Investopedia defines as “the difference in face value of money, such as a $0.25 quarter coin, and the cost to produce it. The state can print the money for a fraction of its value.”

The problem with seigniorage is that it only works if people use the money you print. Of course, if there are viable alternatives, such as Bitcoin, then the population might not use the home currency.

This seigniorage problem is true of many countries, not just India, so we might see other countries impose bans as well.

Crypto Gets Government Embrace?

What if governments suddenly get Bitcoin religion and embrace cryptocurrency?

That could be a problem.

U.S president Ronald Regan had it right when he said: “The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help. “

Now imagine, if you can, that countries start to embrace the use of cryptocurrencies such as Bitcoin.

• Consider the general desire by politicians the world over to enact burdensome regulations on it. What makes anyone think that wouldn’t happen with cryptos? If regulations can cripple vibrant industries why wouldn’t that happen with cryptos?
• Imagine the taxes that would be levied. Increasingly, politicians get elected by making promises of future services they’ll provide to the population and they need some way to pay for it. Maybe cryptos will get taxed heavily and hence the benefit of holding them gets diminished.
• Think about what would happen if the government could have a blockchain record of every transaction you ever made. In countries with totalitarian regimes such phenomenon would be terrifying. Would you want the government to be able to pry so deeply into your financial life?

All these issues are the exact opposite of what most crypto fans adore about Bitcoin and similar coins. That could easily mean that government embrace of cryptocurrency could be as bad an an outright ban.