How Governments Influence the Value of Bitcoin

28 Aug 2020

Governments are one of the key price influencers of bitcoin. The actions taken by nation-states can have significant influence on adoption and therefore price. Are we on the cusp of a breakout moment as certain governments warm up to cryptocurrencies?

Bitcoin’s bull run seems unstoppable at this point. It recently smashed the $11 thousand barrier. Investment bulls are hopeful that BTC will push through the $12 thousand barrier over the next few months. But the bulls have been wrong before.

There’s been a global surge of interest in bitcoin since the coronavirus pandemic spread.

  • Peer-to-peer trading volume in some countries reached historic highs and industry reports indicate “Kraken and Coinbase have commenced hiring sprees.”
  • Millions of new brokerage accounts have been opened with a portion of those trading in digital assets.
  • Fidelity Investments released new research showing an increasing number of institutional investors believe digital assets should be included in client portfolios.
  • Last month the US Treasury Department announced that nationally chartered banks are allowed to custody crypto assets.

One of the most important drivers of the price of BTC is adoption and it is largely governments that drive this. To understand how bitcoin could break the $12,000 barrier, it's important to understand the latest geopolitical rumblings in the crypto world.

Is Crypto Coming in From the Cold?

Last June, members of the G20 published a request for a multilateral regulatory framework to help regulate the crypto ecosystem. This request is more complicated than it may seem. There is little agreement on what exactly constitutes a cryptocurrency.

Bitcoin is incredibly versatile and has been used as everything from a store of value to a currency to a loan instrument. This makes it difficult to define and therefore to regulate.

Some, such as a French commerce court, view bitcoin as a currency — particularly when applied as a loan. The German Finance Ministry, in contrast, has come to the conclusion that bitcoin and other cryptocurrencies are instead financial instruments. To make matters even more confusing the Australian government has decided that bitcoin can be used as a security.

As long as these disagreements exist, they will remain barriers to adoption. That true regardless of whether it is banks refusing to use crypto or governments themselves blocking it.

The United States: Bringing the Banks Onboard

Banks hate uncertainty and until recently have often acted aggressively against individuals trading in cryptocurrency. UK banks have even gone so far as to close accounts of crypto owners.

A landmark opinion by the United States Office of the Comptroller of the Currency (OCC) looks set to change that. The ruling enables National Banks and Federal Savings Associations "of all sizes" to provide "cryptocurrency custody services to their customers."

This ruling could encourage US banking giants to begin offering cryptocurrencies to retail investors. If bitcoin was, in essence, endorsed by a major US bank, it would help to remove a lot of the skepticism surrounding the cryptocurrency. It would also likely provide a boost to the price of bitcoin as more people started trading it.

Russia: Kicking the Can Down the Road?

Russia made headlines in June when the Duma (their parliament) finally approved the draft legislation "On Digital Assets." The legislation was a mixed bag. The positive news was that it fell well short of the central bank's favored solution of a ban. It also defined cryptocurrency as a digital asset. The negative side of it is that it completely removed the possibility of using bitcoin as a currency — making it illegal to use BTC for day-to-day transactions.

The Duma opted to split the bill into two parts. This essentially means that the real arguments, such as whether banks can use crypto, have been pushed down the road. While the more positive attitude to BTC is definitely good there is a long road ahead in Russia.

Mexico: Red Tape Creates a Booming Bitcoin Market

It’s not always crypto regulations that drive the growth of cryptocurrencies. Sometimes it's just red tape.

Mexico, in an effort to combat tax evasion and money laundering, implemented new fintech laws in 2019. These laws required tech firms that hold deposits for users to register as a financial institution within the country.

The problem? A single application can cost upwards of $35,000 and all businesses, even startups, have to have a minimum annual profit of $100,000. Even the likes of Paypal were forced to cease holding deposits on customer accounts.

The side effect of this regulation was that it made it difficult, slow, and costly to receive money from abroad. This led to the explosion of Bitso, Mexico’s leading crypto exchange. Between 2019 and May 2020 the company grew by 342%.

It now has over 1 million users on the platform. This growth has been largely driven by new fintech laws in the country making it difficult and expensive for Mexicans to send and receive money.

The Actions of Governments Have a Powerful Effect on Bitcoin Adoption

Whether intentionally or not, governments can cause significant shifts in the adoption of bitcoin, even when not specifically regulating cryptocurrencies. There are two key drivers of bitcoin adoption. The first is friction in existing financial institutions, as in Mexico. The second is access.

If governments continue to make Bitcoin easier to access, as America has done, it is likely that bitcoin adoption will surge, helping to drive a more sustainable bull run than we have seen in the past.

 Featured image via Unsplash.


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