China may be the first country to ban the use of bitcoin, but it won’t be the last.
I've previously stated that sovereign countries have the authority to regulate and eliminate any currency that competes with their own. On Friday, one country took that step.
All cryptocurrency-related operations have now been declared unlawful by China's central bank. Bitcoin's value has dropped by more than 5%, and other digital coins are also trading lower on the day.
It's possible that what China achieved will be replicated in other countries.
Regulators in the United States have previously stated strong opposition to replacing the US dollar, the world's reserve currency, with any cryptocurrency other than a central bank digital currency.
To put it another way, the only way to replace the dollar is to establish a digital version of it with the help of the Federal Reserve, the Treasury Department, and Congress.
Chairman of the Securities and Exchange Commission Gary Gensler, who taught a class on cryptocurrencies at MIT, has suggested that decentralised finance and the world in which bitcoin and other cryptos exist have no place in the US financial system without significant oversight and additional regulations.
This might be a precursor to the US adopting efforts to make bitcoin and other cryptos illegal or unworkable, but not the transformative blockchain technology that underpins them.
Stablecoins, which are backed by interest-bearing securities on a dollar-for-dollar basis, may also be vulnerable because they rely on the US dollar to support their values and may be investing in riskier assets to generate a positive yield.
This provocation in China could be the start of a succession of similar acts around the world.
DeFi and alternative currencies have long been believed to be outside the reach of sovereign states, but as we have seen today, this is far from the case.
Outright prohibitions and tougher regulations are squeezing the value of cryptocurrencies, but they also send a message that the fundamental premise upon which crypto is built is, at best, incorrect.
Gensler mentioned the period in the United States when each state-chartered banks issued their own scrip, or currency, in a recent discussion at a Washington Post event.
He referred to those times as the era of "wildcat banking." Individual bank notes were valued against one another based on perceived safety and soundness, hence bank scrip had no inherent worth.
That experiment did not go well, and the United States was obliged to centralise its financial system, resulting in the development of a single currency, the United States dollar, and, later, the Federal Reserve.
Countries do not, and will not, abandon their institutions or currencies because an autonomous body of currency designers determines it is necessary.
Congress has the authority to print and mint money under the United States Constitution. Clearly, that power has been questioned countless times throughout our history.
Nations, on the other hand, want centralization and control, particularly when it comes to money.
China may be the first country to prohibit the use of bitcoin and other digital currencies, but I am confident it will not be the last.
While there are significant distinctions between the United States and China in terms of revolutionary technological advancements, one of those differences is the willingness to challenge the established system.
It may happen here if it happened there.
Buyers of bitcoins, beware.