Government Crackdowns and Regulation Could Take Shine Off Cryptocurrencies
Bitcoin has risen meteorically in recent months. Many investors call cryptocurrency the “new gold.” But at least one analyst sees trouble on the horizon for cryptocurrencies in the form of government crackdowns. A recent announcement in China lends credibility to his warning.
Bloomberg reports emerging markets fund manager Mark Mobius warned that governments will begin clamping down on digital currencies because of their use in illicit financing, terrorism, and drug trafficking. He said that’s going to mean a rush back to gold.
Cryptocurrencies are beginning to get out of control and it’s going to attract the attention of governments around the world. You’re going to get a reversion back to gold because people are going to wonder, can I really trust these currencies?”
As if to confirm Mobius’ prophecy, on Monday the People’s Bank of China announced initial coin offerings (ICOs) are now illegal and ordered the halt of all related fundraising activity. In an ICO, digital currency based on blockchain technology is sold publicly and often traded on secondary exchanges.
According to Bloomberg, the Chinese central bank said it will “strictly punish offerings in the future while penalizing legal violations in ones already completed.”
The regulator said that those who have already raised money must provide refunds, though it didn’t specify how the money would be paid back to investors. It also said digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies. Digital tokens can’t be used as currency on the market and banks are forbidden from offering services to initial coin offerings.”
The next day, an adviser for the People’s Bank of China called generally for tighter regulation of cryptocurrencies.
A large number of individual investors, including ‘da ma’ (middle-aged, retired women) entering the market was a signal that ICOs have entered the regulation phase,” PBOC advisor Sheng Songcheng said. “This rectification is mainly to warn of risks and protect investors’ rights.”
Bitcoin fell 10% after the PBOC announcement.
Bitcoin specifically, and cryptocurrencies in general, have been the darling of the investment world over the last several months. Many investors have treated Bitcoin as a safe-haven as geopolitical tensions have risen. It’s decentralized nature and anonymity makes it difficult for governments to control. Even with the 10% sell-off, Bitcoin is still up more than 350% on the year. According to data from Coinmarketcap.com, the dollar value of the 20 biggest cryptocurrencies currently stands around $150 billion.
Mobius said investors need a means of exchange they can trust. He made his comments before the Chinese announcement.
Right now the trust is good — with bitcoin people are buying and selling it, they think it’s a reasonable market — but there will come a day when government crackdowns come in and you begin to see the currency come down.”
Precedent in the War on Cash
Governments don’t like anything that empowers individuals and diminishes their control. We’re seeing this in the ongoing “war on cash.”Just last spring, the International Monetary Fund (IMF) published a creepy working paper offering governments suggestions on how to move toward a cashless society, even in the face of strong public opposition.
There are strong parallels between cash and cryptocurrency that make it seem likely government will eventually try to crack down on digital currency as well.
The excuse for the war on cash is always fighting criminals and terrorists. As the argument goes, the seedier elements of society like the anonymity of cash. By eliminating it, governments can crack down on crime and protect the general populace. But there is a more basic reason behind the war on cash.
By controlling access to your own money, banks and governments increase their control over you. They can collect maximum taxes and fees, they can track purchases, and they can even manipulate your spending habits by imposing negative interest rates that effectively charge you for saving.
For the same reasons, those waging the war on cash also hate Bitcoin and other cryptocurrencies. Both put control back into the hands of the individual and take it away from bureaucrats, bankers, and politicians.
Now we’re beginning to see the same arguments against Bitcoin as we’ve seen against cash. Consider this from a Bloomberg article headlined Are Bitcoins the Criminal’s Best Friend?
Does this mean you should avoid Bitcoin and other cryptocurrencies completely?
Bitcoin has significant upside. BTC and precious metals both offer alternatives to government monopolized fiat currency. They play a similar role as free market, sound money. But as with any financial instrument, there are potential pitfalls. Diversifying your cryptocurrency portfolio with precious metals can help mitigate some of the potential downside and put you in an overall stronger financial position.
Just consider the old adage – you don’t want to put all of your eggs in one basket.
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