SUERF: The encrypted threat: Bitcoin’s social cost and regulatory responses

10 January 2022

While Bitcoin raised the attention for the potential of distributed ledger technology (DLT), it fails to deliver on its promises but comes at high costs. It is unfitted and inefficient as a means of payment but used extensively for illicit activities. It is unsuitable as an investment asset and neither empowers, nor relieves the sovereign individual from the state.

While so far authorities seemed to have insufficiently addressed the negative effects of Bitcoin for society, this is eventually changing. Illicit usage will be further hindered, and compliance costs added to the Bitcoin ecosystem. Likewise, growing concerns on Bitcoin’s climate footprint have now led to calls of some authorities to address or even ban essential elements of Bitcoin’s technology. Nevertheless, Bitcoin has reached new valuation records in November 2021, maybe also because of perceived or actual supportive legislative measures facilitating investment inflows into Bitcoin. As it is difficult to find arguments supporting the sustainability of Bitcoin, and as the social fall-out of its collapse would be significant, authorities should (1) strengthen global implementation of AML/CFT standards and broaden  measures to stop Bitcoin being a vehicle for illicit purposes; (2) avoid measures that invite additional investment flows into Bitcoin.

 
1.Introduction

In November 2021, the market capitalisation of crypto assets exceeded for the first time USD 3 Trillion, of which around USD 1.3 trillion were contributed by Bitcoin (see Figure 1). This article restates the reasons why the observed Bitcoin valuation is unlikely to be sustainable. Moreover, it emphasises that, even if financial stability risks of a Bitcoin collapse might be contained, the Bitcoin life cycle will likely have implied painful losses for many retail Bitcoin investors and a significant enrichment for early investors who liquidate their position in time. Beyond the negative effects of a perceived unjustified redistribution of wealth, Bitcoin will have represented a significant negative-sum game as it will have come with large costs in the form of hardware investments and energy consumption. The article therefore concludes that public authorities should not contribute to scale up the eventual damage of Bitcoin to society. Instead they should, first, treat the Bitcoin network as rigorously as the conventional financial industry in terms of prevention of illicit payments, money laundering and terrorist financing, second, address the negative externalities of Bitcoin’s energy consumption, and third, deny  recognition of Bitcoin as an investment and not allow it to become incrementally part of the regular financial system without strictest safeguards. In the rest of this introduction (section 1), we will briefly recall the origins and the principles of the functioning of the Bitcoin network. Section 2 turns to the vulnerability and inefficiency of the Bitcoin technology.  Section 3 explains why Bitcoin is not a suitable means of payment, and section 4 why it is neither an investment asset. Based on sections 2-4, section 5 concludes that Bitcoin is unlikely to be sustainable. Section 6 argues that contrary to one common narrative, Bitcoin does not help the sovereign individual to regain its liberty, and section 7 recalls the misuse of Bitcoin for criminal activities. Section 8 explains how all these issues can be mapped into private and social costs of Bitcoin and concludes that the net welfare effects of Bitcoin over its life cycle will have been significantly negative. Section 9 turns to recent measures by regulators and public authorities, noting that the latter are becoming tougher on Bitcoin’s use for illicit payments and its other shortcomings, while some ambiguous regulatory measures facilitate Bitcoin’s recognition as an investment asset.      
 
Figure 1: Market capitalisation of selected crypto-assets  
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