Last October, life became Kafkaesque for Enogieru Osasenaga. Having recently been recruited for a job in Lagos, Osasenaga needed a place to stay before finalising his move to the city. An Airbnb apartment seemed the most straightforward solution. There was only one problem: capital controls imposed by the Nigerian government meant that Osasenaga could only spend the equivalent of $100 per month on his debit card.
“Either I would have to wait until the next month or, somehow, get several persons to give me their cards, and use several cards to book the apartment,” says Osasenaga. Then, a close friend suggested a solution: why not pay in bitcoin?
It worked. Before long Osasenaga started using cryptocurrency to pay for all his temporary accommodation. His new strategy even resulted in a small windfall over Christmas when, after having deposited $200-worth of naira into his wallet, Osasenaga found that it had doubled in value. After that, “I started using cryptocurrency for transactions, for receiving payments, for services,” he says.
Osasenaga was not alone. Amid the economic chaos inflicted on Nigeria by the pandemic, millions of his countrymen had looked to cryptocurrency as a reliable hedge against the crumbling naira. Eager to prevent the currency from devaluing any further, the Nigerian government banned the banking sector from facilitating cryptocurrency transactions outright in February. Now, crypto-enthusiasts like Osasenaga have to disguise their bitcoin use as best they can. If there’s any clue that a transaction was used to buy cryptocurrency, he says, the banks “freeze your account immediately”.
Nigeria is not unique in its stance against cryptocurrencies. This year, countries including Turkey and Ghana joined Bolivia, Nepal, Algeria, Vietnam and Egypt in banning cryptocurrencies or severely restricting their use. India may soon follow, drafting legislation that aims to collapse the market for crypto later this year. Even in Western economies, attitudes have grown notably hostile. In January, European Central Bank chief Christine Lagarde condemned bitcoin as a “highly speculative asset” heavily associated with money laundering. Her comments were echoed in testimony from US treasury secretary Janet Yellen that cryptocurrency transactions were used “mainly for illicit financing.”
While a ban on crypto in the United States or the EU doesn’t seem imminent, some investors believe that its days are numbered. Cryptocurrencies, they argue, present a clear and present danger to the authority of central banks over the money supply in their respective jurisdiction. If trading volumes were to increase at the rate predicted by cryptocurrency advocates, that threat may become intolerable.
“Every country treasures its monopoly on controlling the supply and demand” of currencies, prominent investor Ray Dalio pronounced in April. “They don’t want other monies to be operating or competing, because things can get out of control.”
To ban or not to ban bitcoin
Danny O’Brien, director of the Electronic Frontiers Foundation, is not surprised that governments have begun to move against cryptocurrencies. If anything, he says, “I guess I’m surprised it took so long”.
That this is happening now is down to two factors, explains O’Brien. The first is the growing number of crypto scams – they grew 40% in 2020 and are forecast to increase by 75% this year – and its links to illicit finance. In theory, restricting the mining and use of cryptocurrency should eliminate this problem. Practically speaking, however, bans do little to dissuade criminals. Scammers will scam, and outlawing cryptocurrencies merely provides “an illegal onramp” for these digital assets in a given jurisdiction, says O’Brien. “And that, I think, will lead to more people being led down the garden path.”
The second reason for banning cryptocurrency, O’Brien says, is the threat it poses to government-directed monetary policy. While bitcoin or Ethereum may provide citizens with a useful hedge against a plunging national currency, cryptocurrencies undermine central banks’ ability to use monetary policy to fix the problem underlying the currency depreciation, and diminish their influence over investment, spending, or inflation within their jurisdictions.
Both reasons were cited in Turkey’s ban on crypto transactions and in the prospective restrictions outlined for India. There is little evidence to show that such measures work. For one thing, the decentralised nature of cryptocurrencies means that a ban is technically difficult to enforce. Doing so would require a level of control over the internet that few populations would tolerate, says O’Brien.
If you ban every Indian cryptocurrency company, people will just use cryptocurrencies outside India.
Danny O’Brien, Electronic Frontiers Foundation
“If you ban every Indian cryptocurrency company, people will just use cryptocurrencies outside India, because it’s the very nature of these digital systems that they don’t need to be geographically close to you,” he explains. “In order to prevent that, you’re going to have to build something that monitors all the traffic going in and out of India. And, in order to do that, you’re talking about erecting a Great Firewall-like system. And if you’re doing that, you’re turning the Indian digital world into a very China-like model.”
Short of blocking cryptocurrencies at a technical level, the threat of prosecution might deter their use. But this will only work if there is an attractive alternative, says O’Brien, who sees parallels with their usage to digital piracy in the early 2000s. “In the case of stolen music online, it wasn’t draconian laws that attempted to ban the MP3 player, or throwing file-sharing teenagers in jail, that actually ended up solving a lot of the problems that people were worried about,” says O’Brien. “It was the development of streaming services.”
So far, there are few attractive alternatives for citizens saddled with depreciating national currencies. Faced with the impossibility of convincing citizens to adhere to crypto bans, then, why do so many governments continue to persist with them? For O’Brien, it’s partly down to their conviction that bitcoin is merely a vector for scams and money laundering, which betrays a fundamental misunderstanding of how cryptocurrencies work and their potential as financial instruments.
Mixed in with that is a desire among some to extend their control over the digital lives of their citizens. “I think what’s interesting about Turkey and India is, we have administrations that are tottering on the edge of both maintaining democratic institutions and falling into a much more authoritarian model,” says O’Brien, who argues that severe restrictions on crypto should be seen in the context of similar attacks on encryption and public dissent. “And the sad truth is, I think you only consider placing these blanket bans when you see that authoritarian model as within reach.”
While some developing economies are cracking down on cryptocurrencies, in the West they are riding high. Demand for bitcoin among institutional investors is soaring, according to Goldman Sachs, while billionaires tout joke coins on popular sketch comedy shows.
Even so, some believe that cryptocurrencies’ days are numbered in the developed world too. One factor is the environmental cost involved in mining bitcoin, the reason recently cited by Tesla in its announcement that it would no longer accept bitcoin as payment (although how many carbon emissions mining generates remains disputed.) A more immediate threat, however, lies in the emergence of central bank digital currencies (CDBCs). These reassure citizens that their digital cash is backed by a national institution, and promise to grant governments’ almost total control of monetary policy.
According to one survey in April, some 86% of the world’s central banks are exploring the possibilities of CBDCs. The Bank of England is busy investigating the possibility of a so-called ‘Britcoin,’ while the US is quietly testing the waters for its own ‘e-dollar.’ Other nations have moved into the experimental phase, with Sweden testing its own ‘e-krona’ and China conducting a pilot of its ‘e-yuan’ involving half a million of its citizens. The Bahamas, meanwhile, has already introduced its own digital currency.
Could crypto co-exist peacefully with CBDCs? If you believe Michael Burry, then the answer is no. In February, the hedge fund manager of ‘Big Short’ fame predicted that ‘governments will move to squash competitors in the currency arena,’ refusing to tolerate citizens hoarding alternate sources of value like gold or bitcoin during an inflationary crisis while central banks scramble to resolve the situation using monetary policy. The temptation so may become irresistible, others predict, when CBDCs afford central banks minute control of the money supply and citizens flock to cryptocurrencies as a secure and ultimately more private alternative.
Hester Peirce believes that this future is unlikely. Known to her supporters as ‘crypto-mom’ for her advocacy of smarter cryptocurrency regulation (“This is my only claim to motherhood, so I’ve got to embrace it”), the SEC commissioner is confident that bitcoin et al have now acquired legitimacy in the eyes of regulators and investors alike. “There’s been a lot of maturing of the crypto industry,” says Peirce. “Almost every day, you get news of some other institutional attempt to engage with crypto.”
That, in turn, has spurred US regulators to think about how they can accommodate cryptocurrencies, rather than thwart their further spread across the financial ecosystem. Any talk of outlawing it completely, says Peirce, is ludicrous in the current environment. The precedent often cited for a prospective ban in the US – Executive Order 6102, which banned the sale and storage of gold above a certain weight – occurred at the height of the Great Depression, and was criticised as an unusual restriction even at the time. It was also “easier to do than a ban on bitcoin,” adds Peirce.
Indeed, there are signs that emerging markets previously hostile to crypto are growing more open to its use on a limited, heavily regulated basis. In Vietnam, where approximately one million people use cryptocurrencies, the government has commissioned its own research group to investigate how they may be regulated, while Russia is exploring crypto-related financial services.
Even in Nigeria, there are signs that the ban on cryptocurrency trading may be relaxed, with its central bank soft-pedalling its February announcement and launching talks with the country’s SEC on new regulations. In the meantime, citizens continue to defy the restrictions. According to a recent survey, there has been a 27% increase in peer-to-peer bitcoin trading since the ban was announced in February, with trades amounting to $1.5bn last month alone. “As we speak, everything is back to normal,” says Osasenaga. “And we are doing many more transactions with cryptocurrencies.”