Author: Ignas, Crypto KOL
Compiled by: Felix, PANews
What if the government decides to “ban” cryptocurrencies?
After Durov was arrested for failing to prevent crime on Telegram, the next target may be cryptocurrency.
It sounds far-fetched, but politicians have claimed that cryptocurrencies facilitate crimes like terrorism financing and money laundering. So what if cryptocurrencies were really banned?
The government could attempt a 51% attack on Bitcoin because two mining pools control more than 50% of Bitcoin’s mining power.
Mining pools combine computing power, share costs, and improve the chances of rewards. This results in consistent payouts, lower barriers to entry, and shared financial risk.
Chainalysis reports that Iran, Lazarus Group, and scammers use mining pools to launder money by mixing illegal funds with legitimate mining rewards. When funds are sent to CEX, it is difficult to detect. Therefore, the government may try to censor these mining pools.
However, in practice, a 51% attack on Bitcoin is almost impossible due to the huge amount of computing power and coordination required. Andreas Antonopoulos (note: author of "Mastering Bitcoin") explained as early as 2014 why nation-states can no longer use Bitcoin.
A more realistic scenario is a regulatory crackdown. Cryptocurrency privacy is already under attack. For example, Tornado Cash founder and Samourai Wallet CEO and CTO was recently arrested and accused of money laundering by providing a “mixing” service.
Several countries, including Japan, South Korea, and even the UAE, have banned privacy coins like XMR and ZEC. The European Union is also considering such a ban.
In practice, this means that these privacy coins will be delisted from CEXs, resulting in lower token liquidity, reduced adoption, and reduced possibility of redeeming to fiat currencies.
China is a clear example of a country that has banned cryptocurrencies. In 2021, China declared all crypto transactions illegal, prohibiting trading, mining, and related financial services. The government also required online platforms and social media to stop publishing crypto-related information and advertisements.
At its peak in 2019, China accounted for 75% of the world's bitcoin mining operations. The crackdown caused the computing power that protects the bitcoin network, known as hash rate, to drop by nearly 50%. However, the computing power quickly recovered as mining moved to other countries.
Reuters reported how users used small rural commercial banks to buy cryptocurrencies through grey market dealers and capped each transaction at $7,000 to evade scrutiny.
The ban still hinders the development of cryptocurrencies in China. Although China has a much larger population than South Korea, it lags behind South Korea and Japan in terms of trading volume. Recently, China seems to be changing its mind about cryptocurrencies, or at least becoming more open, which is good news.
Banning self-custodial wallets would be a major blow. CEXs are likely to only interact with regulated custodial wallets, thus discouraging self-custodial wallets.
This would take away financial sovereignty and make users dependent on third parties who could freeze their accounts. In practice, global cooperation among all countries would be required.
Banning self-hosted wallets in one country will push users to regions that do not enforce such a ban. Despite FUD that the EU will “ban” self-hosted wallets this year, there is no actual ban.
Other simpler and more effective bans include:
Ban banks from servicing crypto businesses
Requiring crypto businesses to obtain licenses, but not issuing them
Blocks encrypted websites and VPNs
Think “Operation Chokepoint 3.0.”
The worst-case scenario is a total ban on cryptocurrency holdings in the U.S. Citizens would likely have to exchange cryptocurrencies for dollars, and violators could face fines, jail time, or asset seizures, with blockchain tracking used for law enforcement.
Banks will ban crypto transactions and require reporting of suspicious activity. Increased surveillance of those who hide cryptocurrencies could force other countries to cooperate. The United States could launch a central bank digital currency (CBDC) as an alternative.
Sound far-fetched?
The United States banned private gold holdings in 1933. But studies show that only 20% to 25% of privately held gold is actually turned over to the authorities.
Interestingly, the dollar lost more than 40% of its value against gold between 1932 and 1934. The price of gold soared from $21 to nearly $35 an ounce. Those who decided to hold gold saw their wealth increase dramatically.
If the United States and other countries ban cryptocurrencies, it may be due to key economic control issues. Such bans could cause prices to plummet and force the market to go underground. But Bitcoin will continue to produce blocks and exist in a "sanctuary" that is not controlled by the government.
