Bitcoin's dizzying 2021 rally tumbled last week after both U.S. and Chinese authorities announced plans to reign in the mostly unregulated crypto-space.
China's lead financial regulator Vice Premier Liu He pledged to "crack down on bitcoin mining and trading behavior" due to concerns over its environmental impact and financial risk, while the U.S. Treasury Department said all transfers worth $10,000 or more must be reported to the IRS, taking aim at crypto's unique ability to skirt taxation and government scrutiny.
"Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion," the department said.
In concert with the new regulations, however, U.S. monetary authorities are now exploring the possibility of adopting the technology underlying cryptocurrencies for their own purposes.
Federal Reserve Governor Lael Brainard on Monday championed a central bank digital currency, which is essentially a Bitcoin-style token but for government-backed fiat currency. Her comments came after Fed Chair Jerome Powell's announcement last week that the bank plans to release a research paper over the summer looking into the possibility of a digital dollar.
China, meanwhile, started minting "digital yuan" back in April, making it the first large economy in the world to launch its own central bank digital currency, rolling out pilots in major cities such as Shenzhen and Chengdu and experimenting with cross-border payments. The eventual goal is to internationalize the digital yuan and potentially compete with the U.S. dollar globally.
Regulation vs. Adoption
So how does the recent crackdown from the world's leading economies jibe with their growing interest in launching homegrown cryptocurrencies?
"I think the two efforts are quite mutually complementary," said Robert Hockett, a professor at Cornell Law School who has written extensively about monetary policy and the history of money. "It makes sense to do both at once."
Hockett argued that monetary authorities, by offering an alternative to the likes of Bitcoin and Ethereum, can isolate what works well with private cryptocurrencies, such as security and speed of payment, while nixing the negative elements, such as a lack of accountability.
"The central banks are trying to come up with the means of satisfying the legitimate demands of those who are attracted to crypto, while at the same time not allowing for the development of a private sector space that basically serves as a giant safe haven for crime," he said.
A similar process has played out before in U.S. history, Hockett explained. Prior to the 1860s, paper currency was issued by private banking companies. This created a situation in which people used to carry around notes from multiple banks, and any proprietor who wanted to accept those notes had to cross-reference their value to determine what the buyer owed.
It was a messy, fraud-ridden system, but it all changed during the Civil War when Congress passed a series of bills creating the Greenback dollar — a federally-issued national currency — that eventually made the privately-issued "wildcat currencies" obsolete.
Hockett, a champion of central bank digital currencies, said that ideally a similar phasing out of private cryptocurrencies would take place today.
"The preference is that you simply drive the private sector cryptos out of business automatically just by offering the public alternatives, because the public option will be superior in every way, if for no other reason than it would be universal and free," he said.
More Money, More Regs
But some argue that the need to regulate private cryptocurrencies won't disappear overnight, even if a digital dollar or yuan is widely adopted.
"The increased scrutiny that we're seeing isn't necessarily related to the CBDC [central bank digital currencies] specifically, but more so the uptick in broad adoption, whether you're talking about retail or institutional engagement," said Amy Davine Kim, chief policy officer for the Chamber of Digital Commerce, which has pushed for greater adoption of blockchain technology.
Kim stressed that she sees efforts to regulate existing cryptocurrencies and the push to roll out government-backed digital money as related, but ultimately independent, trends.
"I view it as a confluence of events that we were anticipating for some time," she said, especially in light of what she sees as the Biden administration's more aggressive approach to regulation.
She also cautioned against governments cracking down too hard on the private crypto space, as it's been a source of innovation that could serve future government adoption.
Regardless, more regulations are likely on the horizon. Even long-time proponents of crypto are starting to call for targeted interventions from government authorities.
"If cryptocurrencies continue to grow, they have to be regulated, and this regulation has to become more and more sophisticated," said George Bachiashvili, CEO of the venture capital firm Mission Gate and an early crypto investor. "Otherwise we'll have a lot of scams."
However, Bachiashvili stressed that the recent regulatory measures, from China in particular, are not the comprehensive crackdowns many have made them out to be, but rather an understandable push to reign in a market that has ballooned in size.
"They are not really cracking down on the cryptocurrencies," he said of China. "They are trying to stop the capital flight. That's why there's no outright ban on cryptocurrencies."