Up until a couple of years ago, mentioning bitcoin to someone (if they had heard of it) almost invariably provoked a response along the lines of “oh, that internet money for buying guns and drugs?”
The pseudonymous nature of the decentralised payment system made the cryptocurrency a hotbed of criminal activity.
For many years, it was the medium of exchange on The Silk Road (the Amazon of the dark web and purveyor of all manner of illicit goods) and its many imitators. Bitcoin’s reputation as a facilitator of criminal activity did not begin with The Silk Road, nor end when the various incarnations of the website were shut down.
Bitcoin is no longer as private as it was reputed to be. For at least three years now, the FBI has been able to see every transaction on the bitcoin blockchain. While holding your bitcoin pseudonymously provides a degree of protection, you become easy to catch when you cash out into fiat.
Those looking for true anonymity turn to Monero and Zcash for the latest in cryptographically stealthy decentralised value transfer.
But with bitcoin a household name and Senate hearings with the SEC and CFTC discussing the regulation of the sector, many assumed that, in the spotlight, the criminal element of the market would gradually recede. There would, after all, be plenty of legal money to be made, as institutional investment, corporate capital raising and the disruption of establishment payment systems took over from darkweb purchases as the driver for the crypto market.
Instead, the possibilities of subterfuge afforded by decentralised systems have begun to catch the attention of the very largest players with reason to avoid more legitimate, traditional financial channels policed by US regulators and central banks.
On Tuesday, Venezuela will begin the first sale of a state-run cryptocurrency. Petro is to be backed by the country’s oil reserves in a move which is regarded by the Venezuelan congress as “illegal” and “a forward sale of the country’s oil reserves” and “tailor-made for corruption”.
The first 38.4% of the 100m tokens go on sale to institutional buyers on Tuesday at a discount to the further 44% set to go on sale in a month to the general public. There are several tiers to the discounts, meaning that only 24% of the tokens will be sold at full price. The remaining 17.6% will be retained by the Venezuelan government.
'Petro' will be accepted by the Venezuelan government as a means of paying taxes and other public sector fees — the same power of state violence which backs fiat currency, but without the international approval.
President Nicolas Maduro’s regime has been teetering on the edge of a huge default event for years and has resorted to a variety of obscure and questionably legal tactics to raise the cash required to service its mountain of debt.
This latest scheme is designed to raise around $6bn (Maduro’s estimate based on an oil price per barrel of $60).
Venezuela is as strapped for cash as any nation in the world, but this goes beyond a desperate effort to attract foreign money: this is a groundbreaking attempt to circumvent trade embargoes and it is giving other countries ideas.
Russia is working on a “cryptoruble”. Sergei Glazev, an economic adviser to Russian president Vladimir Putin, was quoted saying that “[with such an instrument] we can settle accounts with our counterparties all over the world with no regard for sanctions.”
Many involved in cryptocurrency are applauding the concerted crackdown on bad actors from regulators around the world, and rightly so. The regulators are, on the whole, doing an impressive and important job in enforcing old rules in new ways, and creating new ones to suit the needs of a new and rapidly evolving asset class.
However, we must not lose sight of what blockchain technology enables: peer to peer value transfer with no oversight or supervision.
This has huge potential benefits related to privacy and independence from institutions, but we must open our eyes to the downsides.
The ability to ignore sanctions is one consequence. Capital flight and tax evasion are others. These problems require international collaboration to address. Despite national regulators’ best efforts, we are no closer to curtailing these possibilities.