Why are policymakers averse to cryptocurrency?

Rarely do we find a situation when policymakers are averse to allow any new asset class in their domain. Policymakers usually treat an asset class as a new investment option.

However, when it comes to cryptocurrency, policymakers seem to be singing a different tune.  Irrespective of the fact that cryptocurrencies, over the years, have seen a lot of traction as an investment class, policymakers continue to remain averse to it.

In the past couple of years, when global equity markets seemed to be on steroids due to injection of unending stimulus-driven liquidity, the cryptocurrency market outshone them all. However, there are many problems with cryptocurrency as an investment – which may hamper its growth as a globally preferred medium of exchange.

What are the biggest disadvantages of cryptocurrency?

To understand why policymakers are not very keen on cryptocurrencies, we have to look at its disadvantages first.

In a major concern – the scale to which cryptocurrency can reach, despite all its efforts in mining, seems to be low. Even as the cryptocurrency craze has shot up over the years, yet it is dwarfed by transactions on other traditional payment gateways.

In yet another operational disadvantage, cryptocurrency needs faster internet than the point of sale (PoS) systems. This is why card payments happen at a faster pace than the cryptocurrency payments. So, there is a need to ramp up the infrastructure before cryptocurrency sees an increase in the adaptability.

Well, while these operational disadvantages might not seem to harmful, there is a bunch of dangerous issues associated with crypto as well. In their founding years, cryptocurrencies – like Bitcoin – were used a lot for illegal international transactions on the dark web. The illegal transactions, which still take place using cryptocurrencies, include drug trafficking. Anti-social elements are able to pull this off using one of the biggest advantages of cryptocurrency – anonymity. As data is kept in a decentralised way ensuring user anonymity, it becomes easier for such elements to operate in this space, in a bid to escape the enforcement agencies.

Also, cryptocurrencies, being digital technologies, are prone to cybersecurity breaches and may fall into the hands of hackers. There have been incidents of multiple initial coin offerings (ICOs) getting breached and ultimately costing investors hundreds of millions of dollars this summer alone. Thwarting this threat will require a continuous upkeep of security infrastructure.

But the biggest drawback of any cryptocurrency seems to be the lack of inherent value. Remember that cryptocurrencies are not backed by any assets. As a shareholder in a company, in the case of liquidation, you get rights to claim a part of proceeds from the sale of assets of the company. This, in a way means that you, in part, own the company and its assets. But that is not the case with cryptocurrencies. There is no underlying asset in case of cryptocurrency. It is purely based on bloated trust and bullishness of the people. Since, there is no underlying asset in this case, whose fundamentals would, in part, determine the market value of the asset, cryptocurrency has become one of the most volatile asset classes in the world. This is probably the reason why billionaire Warren Buffett called it a bubble some time back.

But why exactly are policymarkers averse to it?

Since there has been precedence of cryptocurrency being used for illegal activities, policymakers find themselves to be uncomfortable with more and more formalisation of the transactions globally. Also, cryptocurrency has grave security concerns. It is highly volatile and does not have any underlying assets. Hence, policymakers are also aware of the potential lack of consumer and investor protection – which is paramount for any ruling dispensation in any country.