Bitcoin: Booming or Banned?

Bitcoin has certainly become all the rage in the past few years. Its price captures the world’s attention, whether it rockets upwards or plummets downwards.

But now that Bitcoin’s price has been hovering around $60,000 between April 10 and April 18, 2021—higher than ever before—legendary investor Ray Dalio predicts that the United States government will likely ban the cryptocurrency. (Billy Bambrough, Forbes). He claims that no country, including the U.S., wants to compete with another currency for monetary hegemony. Id. A quick dive into the history and law surrounding Bitcoin and American currency itself will help clear up Mr. Dalio’s surprising claim.

Bitcoin’s mysterious origins have shaped how it became a central focus in the modern conversation about FinTech. Bitcoin first emerged in 2009 after Satoshi Nakamoto—whose identity is unknown to this day—released a 2008 white paper introducing the concept of an anonymous, decentralized, peer-to-peer virtual currency that is used as money. (Bernard Marr, Forbes). Mr. Nakamoto’s mysterious brilliance symbolizes his goal and what Bitcoin has developed into today: an avenue for any person around the world to make transactions securely and anonymously. (SEC Investor Alert ).

That freedom behind Bitcoin is a reason why banning the cryptocurrency would be a poor choice and why the U.S. government may do so. Bitcoin’s position in the current economic and political climate shows similarities to that of gold in the U.S. in the 1930s. (Billy Bambrough, Forbes). President Franklin D. Roosevelt made private gold ownership illegal in order to preserve gold for the Federal Reserve and justify printing more American dollars. Id. A similar ploy could be at hand today as the Federal Reserve and Secretary of the Treasury have both voiced concerns over the growing influence of Bitcoin. Id.

However, it is unclear which regulatory body would handle a regulatory overhaul of Bitcoin. Recent events have shown the lack of firm regulations on cryptocurrency trading. The IRS defined Bitcoin as property in 2014 and it is federally taxed as such. (IRS Virtual Currency Guidance). However, many, including former Chairman of the Securities and Exchange Commission (“SEC”) Jay Clayton, believe that Bitcoin and other cryptocurrencies do not pass the Howey Test and thus are not legally securities because they are currencies. (S.E.C. v. W.J. Howey Co., 328 U.S. 293 (1946); Jake Frankenfield, Investopedia; Rakesh Sharma, Investopedia). Because the SEC does not regulate non-securities, much of cryptocurrency regulation is attempted by private industry players like Robinhood and, in complex institutional cases, the Commodities and Futures Trading Commission instead.

The SEC warns that owning and using Bitcoin can expose investors to “unique risks” that could allow for SEC intervention. (SEC Investor Alert). Those risks include theft, fraudulent investment schemes, limited ability to recover in the event of fraud or theft, as well as unique issues such as lack of insurance, volatility, illegality, and lack of security. Id. Nevertheless, there is still little direct governmental regulation of Bitcoin. The vacuum of regulation could signal an alternative to Mr. Dalio’s prediction: Congress passing laws to establish a clearer regulatory framework for the burgeoning cryptocurrency market. (Chris Matthews, MarketWatch).

Because part of Bitcoin’s purpose is to decentralize monetary power and anonymize transactions, it may seem as though there could not be any major players in the space. However, this is not the case, as numerous cryptocurrency exchanges have popped up since the birth of Bitcoin, some of which have become quite influential. (Coin Market Cap). Coinbase, for example, is a cryptocurrency exchange and storage provider with over fifty-six million verified users, $335 billion in quarterly transactions, and over $223 billion in assets. (Coinbase). Coinbase is only one of many exchanges, and these institutions may have a voice in any upcoming cryptocurrency legislative scheme. (Ephrat Livni, New York Times).

As hinted at earlier, banning Bitcoin could have commercial and privacy ramifications for American consumers moving forward. First, doing so would stifle attempts to facilitate more convenient transactions in the American economy. Besides Coinbase and other exchanges, industries outside the financial services sector are increasingly involved with using and investing in Bitcoin. Elon Musk’s revolutionary car manufacturer Tesla recently began offering vehicles for purchase via Bitcoin. (Billy Bambrough, Forbes). When well-known companies like Tesla use new technology, other companies tend to emulate them in order to compete, which could lead to more test cases that prove Bitcoin can survive as an alternative to American currency. (Federal Trade Commission). An outright ban on Bitcoin could potentially waste a new way for American and international economies to function. 

Second, in an uncertain time when people are not sure whether they will need COVID-19 vaccination cards to get around in the future, privacy is a cherished commodity. However, privacy is harder and harder to come by in the Digital Age. Assuming a ban on Bitcoin would encompass a ban on cryptocurrencies in general, Americans would lose one of their last means of remaining anonymous in the financial world. (Geoff Goodell & Tomaso Aste, Frontiers In).

While Mr. Dalio’s claim is certainly valid in that the U.S. government may take action against Bitcoin, questions remain as to what form that action will take and when. With the lack of current governmental bodies and statutes to regulate cryptocurrency, curtailment of its usage via enforcement appears unlikely. However, Bitcoin and its fellow cryptocurrencies pose numerous risks both to American investors and existing American currency. A ban could circumvent any difficulties in establishing a new regulatory framework and law enforcement bureaucracy. Therefore, stricter regulation against or an outright ban on Bitcoin in the near future would come as no surprise.