A bitcoin sign with a graphic in the background.
STR | NurPhoto via Getty Images
I have stated in previous comments that sovereign nations have the power to regulate and eliminate any competitor to their own currencies. One country took this step on Friday.
China’s central bank has just made all cryptocurrency-related activities illegal. Bitcoin’s value has fallen over 5% while other digital coins are also trading lower that day.
What China did could be repeated in other countries.
Regulators in the US have already expressed remarkable disdain for replacing the US dollar, the world’s reserve currency, with cryptocurrencies other than a central bank digital currency.
In other words, the only way to replace the dollar is to make a digital version of it with the support of the Federal Reserve, the US Treasury Department, and Congress.
The chairman of the Securities and Exchange Commission, Gary Gensler, who himself taught a class on cryptocurrencies at MIT, has suggested that decentralized finance and the world that Bitcoin and other cryptos live in have no legitimate place in the world without proper oversight and additional regulations Have US financial system.
This could be a precursor for the US to take steps that effectively make Bitcoin and other cryptos, but not the underlying transformative blockchain technology, illegal or unusable.
So-called “stablecoins”, which are secured by interest-bearing securities on a dollar-dollar basis, can also be at risk, as they are dependent on the US dollar itself to support their value and invest in risky securities in order to achieve a positive effect Yield.
That shot across the bow in China may just be the first in a series of similar moves around the world.
Crypto bulls have long argued that DeFi and alternate currencies are out of the reach of sovereign nations, but as we saw today, this is far from the truth.
As outright bans and stricter regulations diminish the value of cryptocurrencies, they also send out a message that the fundamental commandment on which crypto is based is flawed at best.
In a recent presentation at a Washington Post event, Gensler referred to the time in the United States when individual state-chartered banks issued their own scrips or currencies.
He described these days as the era of “wildcat banking”. Banknotes had no intrinsic value other than how individual banknotes were rated against each other based on perceived security and solidity.
That experience didn’t end well, ultimately forcing the US to centralize its financial system, creating a single currency, the US dollar, and ultimately creating the Federal Reserve.
Countries do not and will not let their institutions or their currencies fall by the wayside because an independent group of currency creators decides to do so.
The US Constitution gives Congress the power to print and mint money. Obviously, this power has been challenged several times in our history.
But nations tend to be centralized and controlled, especially when it comes to money.
China may be the first to ban Bitcoin and other currencies, but I’m sure it won’t be the last.
While there are huge differences between the US and China when it comes to revolutionary technological advances, challenging the existing order is not one of those differences.
If it can happen there, it can happen here.
Bitcoin buyers, take note.
—Ron Insana is CNBC employee and Senior Advisor at Schroders.