Why Isn’t Bitcoin Controlled?
To make sense of the recent return of attempts to control Bitcoin and other digital currencies, it is vital to know why they were created. The creation of Bitcoin ended governments’ sole control over money. For example, the economic crisis in 2008 proved that control does not prevent financial market abuse.
Meaning, controllers cannot be completely trusted with currency control. Bitcoin was created to offer money that is free from control. As such, it acts as a new option from the old system. Bitcoin does not have external control because it does not have a centre and was created to be free.
A New Kind of Money
Governments through central banks control fiat currencies or money. They decide when to issue new money depending on economic, social, and political reasons. Money, such as the American Dollar, Japanese Yen, and the Euro which is not backed by goods like gold, is easy to abuse.
Such abuse results in crises like those seen in Germany after the world war, Zimbabwe after its land reform program, and Venezuela after the global oil price slump.
Bitcoin has no focused center which can be directly controlled and or shut down. The Bitcoin protocol runs on a peer-to-peer system. The limited number of Bitcoin on offer also makes it a more stable and valuable money option.
Bitcoin only gives out new coins every four years. The number of new coins given grows smaller with each time. This event is commonly called ‘Bitcoin halving’. Bitcoin halving means that as the Bitcoin demand grows there will not be a matching growth in supply. This will result in a lower supply, over time, which will drive up the demand and in turn the price. Bitcoin is a good store of value because of this feature. As a result, Bitcoin value is expected to continue to rise and surpass the value of gold within the next 5 years (according to Stock-Flow Ratios).
Read Also: How does Bitcoin work?
Bitcoin’s Control Rules
No one controls Bitcoin, but some argue that a high number of miners in one country is a potential threat. The creator of Bitcoin (Satoshi Nakamoto), however, put in a rule that makes Bitcoin pay miners for working to protect the system. Bitcoin pays miners with new coins in return for adding new blocks to the blockchain.
The high computing energy used and the effort needed to fight off other miners make attacking the system too costly. When miners add a new block to the blockchain, they earn new coins as a reward. This means that with a limited number of Bitcoin, miners will get more money from the system.
This very nature of the system is what makes it so tricky to control by normal means. With no center of control, there is no one to hold accountable. No one to charge for abuse, and no server to shut down. Thus, these features have been the main barrier to external control.
Past attempts to control or ban Bitcoin, for example in Russia, only served in the growth of the black market and dark web activity. Control prevents real businesses and people from enjoying the benefits given by Bitcoin and other digital currencies. While failing to similarly affect illegal and criminal activities.
Some of the benefits that businesses stand to lose include:
- Bitcoin has a fast transfer speed. Transfers reflect instantly without being affected by distance or location.
- Low transfer costs. Although Bitcoin transfers are not free, they cost a small fee. There is no ‘central bank’ to help with transfers and therefore ‘no one’ to pay. Miners earn the transfer fees included in nodes contained in the blocks they work to add. The system, thus, primarily works to reward miners for adding new blocks. Miners earn more for adding blocks than through transfer costs.
- Bitcoin transfers are flexible which makes them easy to make from anywhere, anytime, and with anyone. That is as long as someone has a wallet and internet access. This allows real-time transfers that help businesses work anytime while avoiding the usual paperwork and time.
- Secrecy is probably one of the most desired benefits of using Bitcoin. With growing legal control and the rise of big data companies, there are more people unwilling to have their actions tracked.
Limiting or directly controlling Bitcoin does not affect peer-to-peer transfers, thus normal rules would not work. Russia proved that normal rules or bans result in fueling the use of less known digital currencies.
Read Also: How to Mine Bitcoin?
Would Control Make or Break the Network?
That being said, will the network work better if it is controlled? The easy answer is yes. It cannot be denied that the network has an ugly hidden side that has stopped wider public use. Or at the very least slowed it down. Digital currencies fuel criminal activity. This is why the network has such a bad image.
For example, Silk Road was a dark web market. It was closed in 2014 due to illegal activities like using Bitcoin to buy drugs. The truth remains that, Silk Road was simply the most well known of such markets that exist.
Some benefits that could result from introducing control
- A drop in coin scams
A major factor that reduces investor trust is coin scams and forged Initial Coin Offerings (ICOs). An ICO offers coins for the first time publicly mainly on an exchange. After receiving investments the creators then run away without a trace.
Due to the lack of rules and the encrypted nature of the network, it is very hard to find this money. Usually, it is also hard to arrest wrongdoers.
Thus, bringing control would help boost trust by making sure that new coins meet certain rules to be allowed for public sale.
2. Lack of safety
The lack of rules means that there is no safety against the loss of money or the value of money. Once made, a transfer cannot be undone. As a result, normal fund managers are not willing to invest in digital currencies. Even though Bitcoin, for example, has a higher investment return and a long-term deflationary nature.
This should mean that holding digital currency companies guilty for financial loss and/or for fake activities, will help to attract big investors. Rules would also enable better watch of exchanges. Thus stopping them from risky fractional banking activities without first telling their investors.
More investors mean more money will be in the market making it work better. In the end, this will serve to reduce the differences that exist among exchanges. Reducing price unrest and making the market more stable.
3. Making the image better
Most people still see digital currencies as bad money used to fuel criminal activities. This bad image stops the wider use of digital money. Doubters continue to wait for the fall or ban of digital money. These fears remain even as Bitcoin prices continue to rise and it is getting clear that it is a good investment.
Elon Musk, for example, is now the richest man in the world thanks, partly, to his Bitcoin investments. Thus, rules would help to improve the currency’s image. So that it can be used instead of physical money.
On the other hand, rules would also have some bad effects on the market. For instance, The market usually responds badly each time the issue of control comes up. People desire easier, faster, more flexible financial freedom with more privacy. This makes digital currencies so popular and the idea of losing these benefits upsets some investors.
Read Also: Is It Safe to Use Bitcoin?
Other cons include:
- Loss of unique selling point
It is important to remember that digital money exists partly to avoid government control. Not everyone who uses digital money has something to hide. But, most users desire to protect their private information from unwanted attention.
- Loss of privacy
- Increased transfer costs that would result from more checking and recording
- Collecting transfer data in one place would leave users exposed to hacking, thus raising security risk.
Losing these traits would result in the loss of the benefits that make digital money worth the higher risk. In the end, greatly reducing the strong pull to buy or own them.
2. Rise in black market activity
Despite the growing use of artificial intelligence by police agents like Interpol to fight cybercrime. There is still a high volume of illegal use of digital money. As stated before, control stands to stop legal digital money users but is not likely to affect illegal ones. Control targets exchanges and crypto companies, but cannot be enforced over individuals.
Holders of DIY wallets don’t need to be hosted by a crypto company or to be listed on an exchange. As a result, peer-to-peer transfers will remain unrecorded and beyond control. Some of the most common criminal activities linked with digital money included:
- Terrorist funding
- Weapons funding
- Sanctions evasion
- Money laundering
- Forged and scam ICOs
- Drug trafficking
- Sex and human trafficking
- Ransomware attacks
For these reasons, it is clear that the issue of rules is not simple. Above all, we must consider all the pros and cons to enable growth and wider digital money use. But, who would be in charge of coming up with the rules and how would they do it?
Read More: The Pros & Cons Of Bitcoin
Putting up rules
Digital currencies are a good example of the power of globalization. As such the divided nature of the market makes it hard to control in the same way as normal money. Different governments have taken different views about digital currencies.
These views go from outright banning, strict control, full support, and or partial support. Some countries chose light rules that resulted in the rise of “Blockchain Islands” like Malta, Cyprus, and Gibraltar.
These countries have benefited from the resulting good economic boost. Some freedom leads to a rise in funding for innovation, investment, and job creation. On the other hand, as shown by the fall of multiple startups when Canada initially introduced tighter crypto rules.
Canada has a history of strict financial control and reporting rules. This enabled the country to remain relatively financially stable during the 2008 economic fall. However, recently CBlocks, a digital currency startup in America, chose to move to Canada.
This was because the USA was having some trouble classifying the startup. Maybe this is further proof that some control might be better than no control at all. Perhaps this is also one reason why the US government is moving towards controlling digital currencies with the proposed Cryptocurrency Enforcement Framework.
Different world governments held these different views about digital money at the end of 2020, as shown below:
|Status||Control||Partial control||No control||Banned|
|Numbers of countries||18||5||97||12|
The need to stop crime backed by digital currencies is real and urgent. Interpol has made progress in spotting illegal crypto transfers, but the lack of global rules makes the effort hard. Because the different rules given through different government policies make it easy for such criminal activities to continue to grow.
In conclusion, to enable digital currencies to reach their potential all governments must work together. A free global body similar to the International Accounting Standards Board should be formed. This body would lead the global creation of rules for the crypto network.
Possible results of control
Change is clearly coming, despite the resistance towards it. This change will promote growth while protecting all players. No matter your position on the issue of control, there are steps you can take to prepare yourself.
- Go private
You can remove your wallet from exchanges and strictly deal with peer-to-peer transactions. You have to research and make sure that you only deal with partners you trust. This is because transfers are fixed and cannot be undone.
2. Do your homework
Don’t believe the hype, because it always pays to do your research. So, learn what the proposed law and rules will mean to you as a crypto holder. Above all, remember that what might benefit cryptocurrency companies might not benefit you as a person and vice versa. In the end, it always pays to make your own informed decisions.
3. Stay up to date
Pay attention to industry news and updates to quickly take note of new market trends and protect your position.