Ransomware, a form of malicious software that restricts access to a computer system until a ransom is paid, is not suitable for cryptocurrencies. Proponents of these digital coins will likely point to celebrities such as Tesla founder Elon Musk, Dallas Mavericks owner Mark Cuban, football star defender Tom Brady, or actress Maisie Williams (Game of Thrones Arya). But recent ransomware attacks and the central role of cryptocurrencies in providing them are a public relations disaster.
The attacks include last month’s shutdown of the Colonial Pipeline, which pushed gasoline prices on the US east coast up until the company paid hackers $ 5 million (156 million baht) in bitcoin, and even more recently, the attack on JBS. , the world’s largest meat producer. These episodes highlight what has been a long-standing problem for some of us: hard-to-trace anonymous cryptocurrencies offer opportunities for tax evasion, crime, and terrorism that make high-denomination banknotes harmless by comparison. While prominent cryptocurrency proponents have political connections and democratize their base, regulators cannot sit idly by forever.
The notion that cryptocurrencies are just an innocent store of value is overwhelmingly naive. Undoubtedly, their transaction costs can be significant enough to constrain most of the mainstream retail trade. But for anyone trying to avoid tight capital controls, money laundering, or evading US financial sanctions, cryptocurrency may still be the perfect option.
After all, the US has for decades turned a blind eye to the role that its $ 100 bills play in facilitating arms purchases and human trafficking, not to mention undermining the ability of governments in poor countries to collect tax revenues or maintain internal peace. While Bitcoin and its cryptocurrency variants have by no means surpassed the dollar in contributing to the global shadow economy, they are certainly on the rise.
Since even the top US financial companies are eager to offer cryptocurrency options to their clients, one might well ask what people are investing in. Contrary to frequent claims that cryptocurrencies are little used in transactions and are not used in core business, there is a thriving option: as a dystopian bet, cryptocurrencies offer a way to invest in the global underground economy.
If governments ultimately have to dramatically increase regulation of cryptocurrency transactions, why have the prices of cryptocurrency in general and bitcoin in particular soaring? Part of the answer, as economic theory tells us, is that at zero interest rates, massive and persistent bubbles can occur in essentially worthless assets. Moreover, crypto investors sometimes argue that the sector has grown so large and attracted so many institutional investors that politicians would never dare to regulate it.
They may be right. The longer regulators stay in place, the harder it will be to take control of private digital coins. The governments of China and South Korea have recently begun to aggressively tackle cryptocurrencies, although it is not yet clear how decisive they will be. In the US, the financial industry lobby has been relatively successful in containing meaningful digital asset regulation; witness the recent US retreat of the Facebook digital currency project in the face of global regulatory resistance orchestrated by the Swiss authorities.
Indeed, the administration of US President Joe Biden is now at least moving to forcibly reporting over $ 10,000 worth of cryptocurrency transfers as part of its efforts to collect a larger share of the taxes owed. But ultimately, a decline in potential cryptocurrency liquidity, which is difficult to track, will require a high level of international coordination, at least in advanced economies.
In fact, this is one of the arguments for why a cryptocurrency like Bitcoin can justify its high value of around $ 37,000 at the end of May (although its price changes with the weather). If Bitcoin is an investment in the transaction technology that underlies the global shadow economy, and even if it takes many decades for advanced economies to rein in a currency, then in the meantime, it can receive a large rents from transactions. After all, we don’t need to expect a company to do business forever – think fossil fuels – for it to be of significant value today.
Of course, there will always be a cryptocurrency market in war-torn or rogue states, although their valuation would be much lower if coins could not be laundered in rich countries. And there may be technologies to get rid of anonymity and thereby remove the main objection to cryptocurrencies, although there are suspicions that this will also undermine their main argument.
No one objects to blockchain technology, which is at the heart of cryptocurrencies and has tremendous potential to improve our lives, for example by providing a secure, tamper-proof network to monitor carbon emissions. And while the Bitcoin system requires a huge amount of energy to run, there are now more environmentally friendly technologies, including those based on proof of stake.
Unfortunately for those who have invested their savings in cryptocurrencies, ransomware attacks targeting a growing number of businesses and individuals could be a turning point when regulators finally develop some framework and step in. Many of us know people whose small, troubled companies have been destroyed by such extortion. While governments may have better tools to track cryptocurrency than they realize, they are in an arms race with those who have found the perfect tool to pay for crime. Regulators need to wake up before it’s too late.© 2021 Project Syndicate
Former Chief Economist of the IMF
Kenneth Rogoff, former chief economist at the IMF, professor of economics and public policy at Harvard University.