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Opinion

Don’t Let China Co-Opt Bitcoin

It’s no secret that governments and established banks don’t really like cryptocurrencies. cryptocurrencies like bitcoin, Ether and Litecoin disrupt a centuries-old model that places currency under the control of government and established banks. This is true even for liberal, democratic governments. The United States has the Federal Reserve; Europe, the European Central Bank.

No government or central bank regulates the supply of a cryptocurrency. Instead, the “bank” is a massive network of users. Transactions are peer to peer and are authenticated and validated through a virtual public ledger accessible from any network node. Consumers who use bitcoin and XRP avoid all those annoying $2.95 transaction fees. More significantly, through new software products that use them as tokens, cryptocurrencies have the potential to bring inexpensive banking and financial services to populations who would never be able to access a brick-and-mortar bank.

This makes it imperative that the United States take the lead in defining a consistent legal and regulatory framework for cryptocurrency. To reach its fullest potential as a tool for economic empowerment, cryptocurrency will need the traditional economic freedom of the United States, where the government incentivizes entrepreneurs to take risks while simultaneously offering clear regulatory guidance.

That could all be undone if too much control is concentrated in one place. The Chinese government is making a concerted effort to corner the market on bitcoin and other virtual currencies. The government has been pouring resources into cryptocurrency mining and using cheap electricity to build a mining monopoly. Chinese pools are now responsible for 74 percent of bitcoin mining, as well as larger shares of other cryptocurrencies. According to a recent NextWeb report, Chinese companies hold more blockchain related patents than the No. 3-14 holders combined — more any other country in the world.

Some cryptocurrencies, such as bitcoin and ether, are mined by nodes, or computers, in their respective blockchains. Simply put, bitcoin mining involves applying computer power to solve a series of algorithmic math problems. When a bitcoin mining party solves a problem, they are rewarded with bitcoin. It was designed so that over time, these math problems become more difficult. This in turn requires for greater computer power, more investment and the formation of mining pools — teams that combine their machine intelligence to mine.

Ironically, the original intention for bitcoin was a decentralized network where a greater number of miners would lead to increased security and trust in the system. What the founders did not anticipate is one country gaining an overwhelming share of the mining process, which China has done.

Cryptocurrency analysts are worried that China already has enough mining power to manipulate or alter cryptocurrency blockchains, undermining the validity of bitcoin and currencies like it. Called a “51 percent attack,” this level of control could damage a currency enough to kill it.

That’s why the U.S. government needs to make its peace with cryptocurrency and embrace the innovative opportunities for the next generation of financial technology.  We cannot be like China, picking winners and losers; we must provide an even playing field. That starts with a broad policy that offers regulatory certainty, recognizes its legitimacy, permits its growth, removes obstacles to the entry of new players and protects consumers and businesses from fraud.

For example, the Securities and Exchange Commission can clarify the difference between digital coins, security tokens and utility tokens. All three are virtual currencies and use blockchain for validation, but each has a different function.

Coins are a basic method of payment, like cash. Utility tokens can be purchased with coins, but represent an asset that can be applied in a particular way. A paper analogy is a ballgame ticket. It has value because it admits you to the stadium, but you can’t use it to buy a hot dog and a beer.

Security tokens represent digital shares in actual enterprises, and therefore are akin to conventional stocks. Although the SEC seeks regulatory oversight of all types of cryptocurrency, only security tokens truly fall within its jurisdiction. Coins and utility tokens do not.

Utility tokens, in specific, have the greatest potential for scalability and are already used by American businesses. Their end goal of providing a service, rather than generating profit off speculative trading, has led real American businesses to develop entire business plans around these tokens, generating jobs and improving services for global citizens. Thus, an SEC confirmation that they are not securities would provide regulatory clarity and foster the adequate environment for the development of American businesses using these coins.

While we can hope China’s interest in cryptocurrency signals its desire to strengthen ties with the global economic community, we must be on guard against China’s usurping it for a trade weapon. China has a history of currency manipulation and President Xi Jinping has taken a firmer hand in central economic planning. If we are not careful, thousands of transactions and businesses will be subject to the whims of the Chinese government, undermining investment, growth and opportunity in the entirety of the blockchain.

Judicious changes in current U.S. laws and regulations can assure U.S. retains leadership in cryptocurrency development. Not only will that fuel U.S. jobs and growth, it will assure future businesses can evolve transparently within the rule of law, not under the cloak of dictatorial fiat.

 

Steven Titch is a technology policy analyst based in Texas. He is a policy adviser with the Heartland Institute.

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