In the last eighteen months, cryptocurrencies have stormed onto the financial scene with a very loud bang. The cryptocurrency market is now valued at north of $500 billion and growing exponentially every year. At this rate, the cryptocurrency market will be worth trillions of dollars in just a few short years. This multi-trillion-dollar pot of gold is now firmly entrenched in global finance. As a result, what was once scorned, ridiculed, and considered little more than a pipe-dream is now being taken very seriously by almost every major financial institution worldwide.
Whether governments and financial institutions like it or not, the cryptocurrency market is now so large that they are going to have no choice but to find a way to deal with it. The question for cryptocurrency enthusiasts, institutional investors and government agencies is how they will address the issue. The more complex issue at hand is the interaction that governments are going to have with each other – an issue that we will focus on in this article.
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Winner Takes All
Cryptocurrency is emerging as one of the most interesting international political issues of the decade, and it is going to be a first-to-the-punch, winner-take-all situation for governments. What I mean by this is that because of the fluid nature of cryptocurrencies and because they are by design digital, they can be accessed anywhere the internet exists – and the internet is now everywhere.
Cryptocurrencies do not need a home, because they are parallel networks and payment systems unconstrained by current financial systems. As a result, they do not need the same type of acceptance from the authorities that most other technologies require for success. That means that they can be developed, managed, upgraded, hosted and maintained literally anywhere and everywhere the internet exists. Those simple truths make clear that there is a unique power disparity between the crypto community and the governments of the world.
So, we now have a technology that does not require the acceptance or permission of traditional authorities, and there is nothing that those authorities can do to stop it. Moreover, the more pressure they apply to this technology the more value it gets as it forces those within its ecosystem to rely on that ecosystem even more than they otherwise might. Because of its structure, governments are going to be strong-armed into accepting it even if they really don’t want to. The thing is, though, that they should want to accept it. The first country that truly embraces this technology is likely to be rewarded with an economic boost measured in the hundreds of billions of dollars. And that boost is likely to grow to trillions of dollars within the next few years.
Cryptocurrency technology is still essentially in its infancy stage and the infrastructure it’s developed has been primarily digital – at least so far. However, it is very shortly going to want or need a physical home for development, support, maintenance teams. and - most importantly - greater mainstream legitimacy. It will need these things to both integrate with and stand alongside corporate entities, financial institutions and other industries. There are currently a handful of countries making some indications of doing this, as a minister in Switzerland recently revealed:
“The Canton of Zug, the Cryptovalley, has come a long way. There we can gain experience. If the experiences in Zug are positive, we can extend that to the nation. Therefore, the statement: It does not need to stay with Cryptovalley, it should become the crypto-nation.”
My guess is that this attitude will become more commonplace in the near future. Why? Because the race to the multi-trillion-dollar pot of gold for western governments has essentially begun. And once cryptocurrencies have a secure home and the infrastructure required to sustain and grow, why would the industry leave that nation?
Think of it this way, imagine the internet 30 years ago, but as large and ubiquitous as it is today. Now imagine that the first country to embrace the internet and allow it to flourish within their country would get all the benefits we now enjoy from that technical marvel. The first country to do that with this technology will become the next ‘Silicon Valley’ of cryptocurrencies. Cryptocurrencies and blockchain technology represent the next great technological step, and we can either embrace it or lose out to those who do.
As a New Zealander. I very much wish that New Zealand would be the first to act and become the winner of this race. It could very well be the biggest economic boon to ever happen in our country, simply due to the size of today’s cryptocurrency market. Government could accomplish this embrace with minimal effort, but the benefits could easily amount to a sizeable portion of the cryptocurrency market cap.
Crypto Value Proposition Overview
The value that cryptocurrencies can offer major international companies has not even begun to be actualized (you can find a more in-depth overview of that topic here). The ability for companies to significantly reduce foreign exchange risk, reduce banking fees, significantly reduce bad debt, improve security via the blockchain - and many other benefits are going to be a real challenge for traditional institutions to compete with worldwide.
With these threats to major international institutions now being realized, they are going to attempt to do what they have always done with emerging threats by either taxing, regulating or banning it outright. However, their efforts are going to be unsuccessful, due to the fact that cryptocurrency design is resistant to such threats - as I noted in a previous article:
Crypto is ‘Anti-Fragile’ meaning the more pressure put on crypto, due to it being a parallel system rather than a part of the traditional system, the more power exerted over it by traditional institutions the less incentive people will have to go back to the traditional systems.
Because cryptocurrencies are digital, no one government, institution or region of the world is going to be able to successfully regulate, contain, or tax it efficiently. Due to the structure of cryptocurrencies, they are going to be an ever-growing boon for those institutions who embrace them, and they are going to become increasingly problematic for those who reject them. Those countries who reject the technology will only see ever-increasing problems because of that decision – problems that they will not even be aware of due to it being a parallel system rather than within their systems. As I mentioned previously:
So, for crypto users and holders, ironically the best thing that could happen would be for the IRD (NZ Tax Authority) and central government to clamp down and attempt to ban it and regulate it. As this will force the current holders and users into staying within the parallel system and thus raising the value even further of your crypto holdings. This is where the crux of the issue lies for government, if they do nothing crypto will do fine. If they clamp down on crypto, tax it, regulate or ban it like they have in China, it will do even better. The anti-fragility of crypto is what governments are going to need to come to terms with and the fact that they no longer hold the power in this discussion.
Alongside the ever-expanding size, influence, usability and improvements that comes with technological advancements of any kind, cryptocurrencies are creating an ever increasingly large sum of money, investment, jobs, development and security. Eventually, this is all going to become so lucrative that someone is going to move to take advantage of the opportunity. The multi-trillion-dollar pot of gold that crypto represents is going to be simply too lucrative for every government to reject. And in the unbelievable case that every government works together to regulate, ban or tax it, such efforts will only improve and strengthen the existing cryptocurrency ecosystem – an ecosystem that enjoys a market cap large enough to place it in the top 20 countries in the world, as measured by GDP.
In recent weeks and months we have seen a dramatic shift in attitudes from some of the largest names in finance towards both cryptocurrencies and the technology itself. That further increases the likelihood of both institutional adoption and acceptance globally, or in at least one country – which, thanks to the digital nature of cryptocurrency, is all it needs. With the recent political trend of things like “America-First”, countries now moving towards the idea of acting in their own best interests. How long until one country reaches out to grab the cryptocurrency market?
Big level CEO’s like Schultz of Starbucks have finally been briefed on the potential use of cryptocurrencies in international companies with small transactions to consumers. Jamie Dimon of J P Morgan has finally backtracked from his previous statements about cryptocurrency and is now taking it very seriously. Larry Fink, CEO of Blackrock recently said:
“It’s going to transform how we do our business. We should not turn our backs to it; we should embrace it and work toward a global solution because if we don’t work toward a global solution it will create systemic risk.”
Those comments are coming from some of the largest investors, CEOs, and bankers in the world, rather than just from enthusiasts and true believers in the crypto world. These financial and corporate giants are starting to take it seriously. They have obviously been briefed on the issue and are now fully aware of just how powerful blockchain is and how efficient cryptocurrencies can be compared to the current systems.
At the world's largest economic forum in Davos, Switzerland, there was a palpable amount of negative opinions and misunderstanding about cryptocurrencies., At the same time, however, many of the highest institutions in the world are also calling for global regulation and taxation of cryptocurrencies. Be it world leaders at Davos) or the IMF, the global elites are starting to call for regulation, and I expect the rest of the major financial players to make similar calls and signals into 2018. This represents a shift from rejection to fear, and it is something many in the cryptocurrency community have been expecting for some time. What these elites either don’t understand or simply refuse to believe is that there’s no way for them to put this genie back in the bottle.
The fact is that the starting gun has sounded. The race is now on to see which western country becomes the first to accept and embrace digital currency – and enjoy all the benefits that come from that decision.
It’s no longer a matter of “if” that happens; it’s a question of “when.”