China may be the first to ban bitcoin, but it won’t be the last

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A bitcoin sign with a graph in the background.

STR | NurPhoto via Getty Images

I have noted in previous comments that sovereign nations have the power to regulate and eliminate any competitor to their own currency. One country took this step on Friday.

China’s central bank just made all cryptocurrency-related activities illegal. The value of bitcoin plunged more than 5%, while other digital coins are also trading lower on this day.

What China has done may well be repeated in other countries.

Regulators in the United States have previously expressed notable disdain for replacing the U.S. dollar, the world’s reserve currency, with any crypto except a central bank digital currency.

In other words, the only way to replace the dollar is to create a digital version of it, with the support of the Federal Reserve, the US Treasury, and Congress.

Securities and Exchange Commission Chairman Gary Gensler, who himself taught a cryptocurrency course at MIT, has suggested that decentralized finance and the world in which bitcoins and other cryptos reside have no place. legitimate place in the US financial system without significant oversight and additional regulations.

This may well be a precursor for the United States to take action that makes bitcoin and other cryptos, but not the underlying transformational blockchain technology, effectively illegal or unusable.

So-called “stablecoins,” backed by interest-bearing securities on a dollar-for-dollar basis, may also be at risk as they depend on the US dollar itself to support their values ​​and may well invest in securities. risky securities to offer a return.

This archery in China may well be the first in a series of similar moves around the world.

Crypto bulls have long argued that DeFi and alternative currencies are beyond the reach of sovereign nations but, as we have seen today, that is far from the truth.

While outright bans and tighter regulations reduce the value of cryptocurrencies, they also send a message that the fundamental tenet that crypto is built on is flawed at best.

In a recent talk at a Washington Post event, Gensler highlighted the period in the United States when individual state-chartered banks issued their own certificate or currency.

He called those days the era of “wild banks”. Bank certificates had no intrinsic value, except for how individual banknotes were valued against each other, based on perceived safety and soundness.

This experiment did not end well and ultimately forced the United States to centralize its financial system, led to the creation of a single currency, the US dollar, and ultimately the creation of the Federal Reserve.

Countries do not and will not let their institutions or their currencies go down the drain because an independent group of coin makers decides it has to be.

The US Constitution grants Congress the power to print and coin money. Obviously, this power has been challenged several times in our history.

But nations lean towards centralization and control, especially when it comes to money.

China may be the first to ban bitcoin and other currencies, but I’m sure it won’t be the last.

While there are big differences between the United States and China when it comes to revolutionary technological advancements, challenging the existing order is not one of those differences.

If it can happen there, it can happen here.

Bitcoin buyer, beware.

—Ron Insana is a CNBC Contributor and Senior Advisor at Schroders.


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