You must have all heard of Bitcoin by now, the first and predominant cryptocurrency, launched in 2009. One Bitcoin is currently worth U$9.409, with a market capitalisation of U$168 billion (as of 28/10/19). It is the digital currency, one of over 2,900 out there, that, according to media reports, is only used by drug traffickers and money launderers because it is anonymous. This is incorrect. It is not currently anonymous but I believe it will become anonymous. Here’s why.

Bitcoin is pseudonymous. Instead of your name you have a secure bitcoin address, comprising numbers and letters, which is available for all to see, as all transaction are published on a public ledger. A bit like your bank account or credit card numbers but publicly listed for each transaction.Those numbers cannot be used by anyone else but they are traceable back to you by various authorities. In my view this is not an issue as 99% of bitcoin users are not undertaking nefarious transactions.

The real issue with bitcoin and all cryptocurrency for that matter is control. There is no central control. There is no central bank, no issuer of bitcoins, no third party custodians (banks) and no legislative control (financial authorities). It is a completely independent store of value determined by its own protocol and hosted on any and every computer in the world that wishes to do so. In short, you cannot remove bitcoin (or any other cryptocurrency) from a country. You have to remove the country from bitcoin.

No central control means that the authorities and their agents, the banks and regulators, can no longer determine who has and where funds may be sent. Personal wealth can no longer be easily audited. Restrictions on the transfer of wealth can no longer be imposed. Transfers can be traced but not stopped. Monetary policy is nullified. What then happens when a state loses control of its currency or its currency becomes unvalued and replaced by another that it no longer controls? Sovereignty is lost. We have seen the effect in fiat currency with the Euro on Greece, Spain and Italy, who no longer have monetary control over their currency. States around the world are very concerned about this loss of control. The issues surrounding Facebook’s Libra is a prime example. Even though it’s not a true cryptocurrency, in that it will be centralised with intermediaries, so more akin to a digital paypal, the USA does not support it and the EU wants it banned.

Control of a currency allows economic influence. The US Dollar is the global currency. It is a medium of exchange, a store of value, a unit of accounting and, just as importantly, it is a economic weapon. Control over it allows the imposition of global restrictions on individuals and states. The USA uses this power over its currency to exert global sanctions; North Korea, Venezuela, Iran and Cuba, to name a few. None of these countries are allowed to transact in US Dollars and in some cases Euros.  This situation may very well give rise to Bitcoin becoming anonymous.

These countries have issued public notices that they will be adopting regulations to promote cryptocurrencies. Their natural resources, particularly Venezuela and Iran, are currently traded in dollars. It would not be too difficult to evade economic sanctions by trading these commodities in Bitcoins. To be able to do this, at state level, in the amounts required, three conditions need to be met;

1. Liquidity
2.  A Large market capitalisation and
3. Privacy

Currently Bitcoin has 2 out of 3. The privacy issue is missing. Transactions are traceable and so economic sanctions can be enforced. But there is now a way to make Bitcoin transactions anonymous, it’s called CoinJoin.

It is a technology application that mixes Bitcoin transactions so that the sender and receiver are not identifiable. It has become such a concern that the EU recently banned similar technology. In fact a number of analysts are looking at the metrics on CoinJoin and seeing spikes of large uses, a forward indicator of adoption by big players. If these rogue states adopt Bitcoin for international transactions it will have an effect, baring the fact that you cannot shut down Bitcoin.  There may then be more restrictions imposed on an individual’s use of cryptocurrencies, which will lead to greater technology applications for increasing their privacy and the use of other dedicated privacy coins, such as Monero, TIXL, Zcash  or DASH .

The more States squeeze and restrict the use of cryptocurrency, the more likely they will become anonymous, just like cash, which I surmise is used in far more illegal transactions than cryptocurrencies. We may then end up with a ‘Napster, Livewire to uTorrent scenario’, as Bitcoin morphs from a benign, acceptable and transparent digital currency to one that is completely untraceable, as well as uncontrollable.

In this projected reality, those States, by trying to restrict cryptocurrencies, enhance its characteristics, push rogue states and then others to adopt it, thereby creating greater international use. The exact opposite of what they wanted to achieve.

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