The bitcoin community is inclined to view regulation as terribly negative. In the financial world, however, we know that not all government intervention is negative. Government can be a blessing or a curse. It all depends. That is, the thing can go in two directions. Denying a patent can be fatal for a pharmaceutical company. However, approving a contract with NASA can save a technology maker.
In some countries like China, regulation has not favored Bitcoin. But in other countries like Malta and Switzerland this is the case. I mean, the intent of a regulation is not always to destroy. In many cases, investors should be protected. Of course, in a world of absolute distrust of all authorities, such statements could seem extremely naive. The norm is to think that every regulator is a bad guy.
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Christine Lagarde, the director of the European Central Bank, made an international call to regulate Bitcoin because it is a “highly speculative” asset. Many interpreted these statements as a system attack on Bitcoin. But, What does it mean to be a “highly speculative” asset? You could say that it is a very volatile and risky asset in a fragmented, rigged market, with little reliable information and a lack of controls. You could say that the art world is a highly speculative market.
In this context, the use of the word “speculative” could be misleading. The person who buys a home and expects it to appreciate in value over time is technically a speculator. In general, however, much more neutral terms are used. “Speculator” is usually a derogatory label. The term “investor” is much more noble. The term “trader” is less derogatory than “speculator”. Lagarde clearly used the term “highly speculative” in its derogatory sense. In the same sense that the same phrase could be used to refer to the world of art. These “highly speculative” markets are prone to deception, fraud and crimes such as money laundering.
We could talk a lot about the negative aspects of regulation and we could talk about free market miracles. Totalitarianism versus anarchy. Ruin against paradise. In these debates, each side tends to go to extremes. However, in the real world there are bad regulations. But there are also appropriate regulations. These proper rules set the rules of the game, ensure legitimacy and create trust. Let’s think for a moment about an organization that wants to invest in Bitcoin. One could speak of a university, a foundation, a union or a mayor’s office. Let’s say the proposal reaches the board. On the one hand, we have an unregulated and “highly speculative” market. On the other hand, we have one that is regulated and follows all good practices. The second market will certainly have more good prospects than the first.
I am not promoting any particular path here. But I just add up the numbers and do the math to get to my conclusions. The arrival of institutional capital in this area increases the need for regulation. We have to remember that when we talk about institutional capital we are actually talking about someone else’s money that is managed by a third party. Investors need certain guarantees in this regard. Anarchist rhetoric is of little use here, because the same actors ask for certain norms. If there is an irregularity, investors expect the authorities to take action. In other words, it is not libertarian utopia. Like it or not, this world is invading the Bitcoin market. And in this world, regulation is a necessary evil.
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Suppose a global regulation of Bitcoin is passed due to various pressures. What does that mean? Its end? Or its legitimacy? I would say that such a move would mark the maturity of Bitcoin as a legitimate asset. Despite the trauma of the transition and loss of some users, clear rules of the game will make Bitcoin more attractive in the world of big business. This would certainly mean having a bigger, liquid, stable, and boring asset. That said, at some point we will get a less speculative asset, but one that is much more reliable. We wouldn’t see today’s returns. Because today’s returns are typical of highly speculative assets. But Bitcoin would be approaching a much safer asset.
Now the question in the headline. What if central banks start buying bitcoin? If central banks start buying bitcoin, it would likely mean that bitcoin would completely change its behavior. It would no longer mimic the behavior of high-risk assets, but rather resemble gold.
Central banks usually buy goods or other currencies to offset their own currency. For example, they buy gold to generate liquidity. Or they sell gold to withdraw liquidity. That explains the dynamics of the gold market. The price of gold rises when governments start buying gold to correct their imbalances. Here is a key difference between bitcoin and gold. Central banks buy gold, but they don’t buy bitcoin. Bitcoin’s price is rising in a completely different context. Bitcoin is rising due to speculation in bullish times, when investors tolerate high risks due to the loose monetary policies of central banks. In this sense, Bitcoin is the opposite of gold.
That is, in a hypothetical future where central banks buy bitcoin as an asset for their reserves, we will have bitcoin there as a safe haven. Bitcoin is currently not a safe haven, despite repeated official propaganda. But when we end the romance, it will be clear. Bitcoin is a relatively new and very volatile asset. How can it be a “safe haven” that is so unstable? If it were indeed a safe haven, it wouldn’t be as profitable. The high profitability is closely related to the risk. As clear as water.
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Here we are talking first of all about the major central banks. And we assume that these banks will not buy Bitcoin at this point, but at a later point in time. However, some central banks could start buying now. Which? Dictatorships that want to evade sanctions. Ironically, this would speed up the regulatory process.
Of course, we will certainly always have a regulated bitcoin and a secret bitcoin. The same thing happens with the dollar and with gold. Regulation doesn’t always prevent criminal activity. But regulation gives legitimacy to good actors. What we need to look for is adequate regulation. Because, let’s be honest, non-regulation is not an option. Regulation is coming. Like it or not. It is best to campaign for sensible regulation.