By: Garrett Derian-Toth & Matthew Ritter
Over the past decade, there has been an explosion of discussion, emphasis, and interest in the regulation and adoption of cryptocurrency in some way in the United States government, and in various governments across the world. This is in part because internet-based transactions have amplified the dependency on network communications. In commerce, the need for security and the need to reduce the stress of performing financial transactions through traditional mediums will be essential to ensure that transaction costs are as low as possible. Currently, in the United States, when commercial transactions are made between parties, financial institutions are the middlemen, and behind them is the federal government. The presence of these parties is not baseless, it keeps commerce running smoothly with minimal disruptions. However, as the number of transactions increases and technology develops, financial institutions’ current functions becomes less efficient. Cryptocurrencies may be able to improve the efficiency of internet-based transactions in a number of ways. Cryptocurrency transactions allow a decrease in the transaction costs. Also, there is almost no delay in moving funds and less of a dependency on potentially outdated federal payment systems.
Despite these benefits, many governments have raised significant concerns over broad adoption of cryptocurrency, leading to suspicion of those utilizing the currency and a slower adoption of the cryptocurrency as a valid payment method. These suspicions are not without merit. In fact, the lack of traceability of some cryptocurrency transactions and the use of cryptocurrency as the medium of exchange on black markets does pose a substantial issue if a national cryptocurrency were to be adopted. As of today, in fact, the United States continues to consider cryptocurrency, or virtual currencies as described by the IRS, as a form of property and not a form of legal tender. In short, the United States government does not view cryptocurrencies as currency, but rather as something more similar to securities or stock, which can be exchanged and have some value, but cannot be used as true legal tender. While governments seem slow to adopt this form of currency, private entities have been pushing for both development of their own cryptocurrencies and for less regulation of cryptocurrency in general. The contention of these private entities seems to be that the market efficiency and decreased transaction costs, if coupled with the correct regulation, outweighs the potential negatives of this form of currency.
One potential solution for the concerns of the governments and the desires of the private marketplace would be to institute some form of a national cryptocurrency made by adopting a polycentric approach in which the government and private institutions create and adopt a cryptocurrency backed by the United States Dollar. The idea of developing a national cryptocurrency has been kicked around by a number of countries and has been adopted, and rejected, by some countries. The technical term for this form of cryptocurrency is a central bank-issued digital currency (CBDC). One potential positive for a national cryptocurrency would be that governments could avoid the erosion of lex monetae. The adoption of a national cryptocurrency, along with a preclusion of private cryptocurrency, would enable the United States and other countries with similar agendas to maintain control over the marketplace in the same way they currently do. Furthermore, a federal cryptocurrency would be easier to regulate and track in many ways than its private counterpart would be.
Recent incidents, such as Mark Zuckerberg’s Senate hearing on Libra (Facebook’s cryptocurrency in development with numerous other companies), point towards general skepticism of cryptocurrency by the United States government. While it may not be on the near horizon, companies like Facebook could force the governments’ hand in some way by adopting private cryptocurrencies and driving the market forward by themselves. While the adoption of a national cryptocurrency is only one potential solution to the regulatory issues cryptocurrencies pose to sovereign nations, it may be the best way to both drive the market forward, provide private and financial institutions what they want in regards to marketplace efficiency, and avoid the potential downfalls of unregulated cryptocurrency.