Governments Induce Cryptocurrency Volatility
The Intelligent Insurer #24 — As governments pursue digital currency projects, some have begun taking aggressive stances against cryptocurrencies, causing market volatility — INFI on Polygon Testnet
Nations are scrambling to adopt decentralized technology. Major nation states like China are aggressively rolling out digital currency test programs and are quickly moving towards nationwide implementation. Vietnam is the latest country to join the ranks.
The Central Bank of Vietnam has been instructed to pilot a blockchain-based cryptocurrency project. Pham Minh Chinh, the Vietnamese Prime Minister, was the impetus behind the Central Bank initiative. Chinh foresees the project being an integral part of the government’s development strategy and aims for the digital currency project to be rolled out over the next two years.
In the latest Intelligent Insurer, we highlight the recent efforts made by various nations regarding the implementation and regulation of blockchain and cryptocurrency technologies. We also highlight how such development has led some governments to take aggressive stances against cryptocurrencies, causing volatility and impacting holders.
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Breakthrough for El Salvador as Bitcoin becomes legal tender
In June 2021, El Salvador became the first nation state to adopt Bitcoin as legal tender. Nayib Bukele, the country’s President, initiated and advocated for this development. Upon approval, the development received widespread coverage in both cryptocurrency and mainstream media alike.
However, the development also raised eyebrows. The development meant that the El Salvador economy will accept both the US Dollar and Bitcoin as legal tenders. The main concern with this development was that it may affect the nation’s program with the International Monetary Fund (IMF). Also, a request that The World Bank help with the implementation of Bitcoin as legal tender in El Salvador was met with rejection. The reasons cited for this rejection revolve around issues of transparency and the environmental concerns associated with Bitcoin mining.
Nonetheless, the new legislation stands. El Salvador has begun accepting Bitcoin as legal tender and the country’s government has secured favor with Bitcoin enthusiasts as a result. Moreover, Bukele has also instructed a state-owned energy company to implement a geothermal-powered Bitcoin mining operation.
A less friendly approach towards generic cryptocurrencies
Not every country has treated cryptocurrencies with such a welcoming attitude. The stance of governments widely varies and some are treating the technology with increasing hostility as they begin rolling out their own digital currency programs.
China has been one of the most progressive when it comes to rolling out a domestic digital currency. Their digital currency program, known as DCEP, has already been tested in several regions and has recently been implemented with the Beijing subway. Unsurprisingly, the advancement of their DCEP program has aligned with a clampdown on cryptocurrency-related activity. China likely sees cryptocurrencies as a threat to their domestic capital controls and digital currency initiative. The Chinese government has repeated similar behaviour previously, domestically banning platforms like Facebook and Twitter as they rolled out domestic alternatives.
Some US politicians have also called for aggressive stances against cryptocurrency technology. Brad Sherman, a US congressman, called for a complete shutdown of cryptocurrencies. He cited the volatile nature of the technology and the possibility of KYC circumvention as some of the reasons for a ban.
What impact are governments having?
In bullish market conditions, little can impact the upward trend of cryptocurrencies. Such was the case when Bitcoin was continuing to reach new heights up until May of this year. However, with a reversal in conditions, the opposite now stands true. Bullish developments such as the El Salvador news are barely registered while negative developments have a big impact on the market.
The recent Chinese developments have had a monumental impact on market conditions. They played a huge role in shaping the negative sentiment which resulted in Bitcoin recording an over 50% high-to-low drawdown. Bitcoin remains in a state of consolidation and further aggressive stances from governments could spur further downside movements.
Such volatility can cause issues with both exchanges and cryptocurrency projects. Exchanges become more susceptible to security lapses while falling cryptocurrency projects become more desperate and a few malicious actors may seek to exploit their users through rug pulls.
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