Regulators around the world keep on struggling with cryptocurrencies. Just recently the ‘Banco de la Republica’ in Colombia, released a working paper on cryptocurrencies and bitcoin. It seems that the paper is a pivot away from the country’s official policy on bitcoin and cryptocurrency. Nevertheless, it is still dominated by the same kind of bias that has driven regulators elsewhere to hit a wall. If emerging bitcoin regulation in Colombia – or anywhere else for that matter – is based on the conclusions that this working paper draws, then regulators will inevitably keep on failing to achieve their declared goal of protecting their citizens.
The bias in this working paper is clear throughout the document. This working paper relies on the main assumption that the government and its agencies are the ultimate guarantor of consumer safety. Government cannot accept the fact that the consumer can be better at keeping their personal finances in sound shape and their funds safe with the advent of assets that no government can control. The very concept of having a trust-less system seems either too abstract to acknowledge, or too threatening to allow people to rely on it.
Working Paper Conclusions and Possibilities for Emerging Bitcoin Regulation in Colombia
Therefore, the conclusions of this working paper should not come as a surprise. It seems that emerging bitcoin regulation in Colombia will be shaped by this bias and the subsequent misunderstanding that it breeds. A summary of the conclusions of this working paper show as much:
- The decentralized and quasi-pseudonymous nature of assets like bitcoin serve to build a sort of digital cash that replicates the anonymity and lack of information that this instrument provides.
- Although digital assets like bitcoin provide advantages in terms of the efficiency and cost of transactions locally and internationally, its volatility and limited adoption rates expose its users to a high level of risk.
- Cryptocurrency’s relevance in terms of transaction volume and store of value is low, due to anonymity. Therefore, they are not widely accepted.
- Due to these characteristics, there is also a lack of consensus on how to regulate these assets.
- Should Colombia allow assets such as bitcoin to develop within its territory, the country faces the threat of tax evasion and money laundering using cryptocurrency.
- Consumers would also be threatened if specialized entities or actors start offering money transfer services and other financial services related to bitcoin or cryptocurrencies.
Misguided Regulatory Framework
The authors of this official working paper close their conclusions segment by reminding that under current regulation in Colombia, users of cryptocurrency bear all the risk for any kind of loss when buying, transacting, or negotiating with cryptocurrency. This warning just as the conclusions above, show how biased research strengthens prejudice. Should agencies rely on these misguided conclusions to frame emerging bitcoin regulation in Colombia, they will not achieve the goal of protecting the consumer.
Unbiased researchers who want to formulate regulation surrounding bitcoin or cryptocurrency, should be aware of how easy it is to refute the above conclusions:
- Bitcoin does replicate some characteristics of cash, but it is fundamentally different, or even superior because it is decentralized, internet-based and deflationary. Those characteristics make it more advantageous than cash.
- Users of any currency are exposed to risk and volatility. With traditional currencies, the risks are greater, because the currency itself is built upon an inflationary system in which big economic actors will always enjoy government backing at the expense of the individual. It is impossible to evaluate the risk involved in holding an asset like bitcoin without comparing it to the risk of holding a currency like the Colombian peso, which depreciated at an average rate of 14.46% between 1955 and 2017 and is subject to intangible political risks.
- The level of acceptance of bitcoin as opposed to the Colombian Peso is relative. It is possible to find international suppliers that accept bitcoin but do not accept Pesos. Researchers should look at the pace at which bitcoin and other cryptocurrency assets are gaining acceptance. In that realm, bitcoin clearly outpaces the Colombian Peso and many other national currencies.
- A lack of consensus at an international level or at any other governmental level, is not the reason why assets like bitcoin escape regulatory measures. The real reason why bitcoin hasn’t been regulated is because it cannot be Governments can regulate what they cannot categorize, but they cannot regulate what they can’t control. To be more precise, they can regulate what they can’t control, but doing so is pointless. The only kind of regulation governments can implement around bitcoin, has to do with the gateways between traditional currency and bitcoin.
- Tax evasion and money laundering in Colombia and in any other country do not depend on the kind of currency used. Authorities should acknowledge that they have failed to put an end to tax evasion and money laundering on their own monetary systems before they attempt to pin the problem on bitcoin.
- Regulated money transfer and financial service providers that work with traditional currency have been putting consumers at risk under the watchful eye of the government for decades now. These service providers have always enjoyed wide protection from the government, to the detriment of the consumer. The most glaring example of this in Colombia, is the 4 x 1,000 tax – essentially a 0.4% tax on any transaction a person makes, that was intended to shore up banks and prevent their collapse in the 90’s, but remains in place even today.
My 2 Satoshis
Not a lot of people will ever read these counter arguments. Nevertheless, they will serve to expose the kind of biases that regulators operate under. Emerging bitcoin regulation in Colombia and elsewhere will likely develop under these biases. In parallel, many governments and central banks are experimenting with blockchain technology. This is the real threat to the consumer, not bitcoin. National currencies on a blockchain will allow the government to monitor every single transaction made at any point in time, turning countries into police states. While these governments and government agencies work on developing their own blockchains, they will keep on condemning bitcoin and other cryptocurrencies, labelling them “crime enabling instruments.” The public in Colombia and elsewhere must be aware of this and fight the biases with which the governments that they fund with their taxes, attempt to regulate economic activity around bitcoin to erode their freedom.
Click here to read the working paper by Colombia’s Central bank.