In the ever-evolving world of cryptocurrencies, the clash between government regulation and foundational principles is a story to tell. As we navigate this digital frontier, we have witnessed the transformation of the financial landscape, with banks at the forefront. This complex issue is fraught with opinions, and it's worth exploring government influence on asset valuation, the shifting sands of cryptocurrency sustainability, and what they reveal about the clash of ideals in the history of American banking.
The history of banking and American principles
To truly grasp the significance of the impact cryptocurrencies have had on the financial landscape, it's essential to delve into the historical context of American banking and currency.
The U.S. was built on principles of individualism and capitalism. The laissez-faire approach to economics, championed by objectivist thinkers, was the backbone of the nation's financial system. But in the early days of the U.S., a diverse array of currencies were in circulation, issued by state-chartered banks, leading to a chaotic financial environment. However, in 1792, the Coinage Act established the U.S. Mint and introduced the first national coinage system based on the decimal system, which remains in use today. This was a pivotal moment in American monetary history, as it laid the foundation for a unified and regulated national currency.
In the 19th century, the U.S. adopted the gold standard, wherein the value of the dollar was directly tied to a fixed quantity of gold. This system instilled confidence in the currency and fostered economic stability, as each dollar could be exchanged for a specific amount of gold. This era witnessed a relatively stable valuation of the U.S. dollar, reflecting a belief in the intrinsic value of tangible assets.
However, the constraints of the gold standard became apparent during times of economic hardship, such as the Great Depression. To combat deflationary pressures, President Franklin D. Roosevelt abandoned the gold standard in 1933, allowing the government to print more money and stimulate economic recovery. This marked a significant departure from the rigid principles of asset backing and initiated an era of flexible, fiat currency.
In the evolution of American currency, from its adoption to the gold standard era, we witness a fascinating interplay of values and economic principles. These historical transitions in American currency underscore how valuation has evolved over time — from a tangible and gold-backed standard to a more flexible, government-backed fiat currency system. It's against this backdrop that we examine the disruptive force of cryptocurrencies and their impact on traditional notions of valuation and financial control.
Enter the incumbent
Cryptocurrencies were born out of the desire for financial freedom and autonomy. They offer an escape from centralized control, but regulators are increasingly asserting their presence. Government influence in the crypto market raises concerns, primarily because it contradicts the founding principles of minimal government intervention.
Under the lens of historical context and regulatory efforts, it's readily apparent that cryptocurrency spawned an industry that created a monetary system that circumvents today’s financial institutions. It challenges the status quo in ways reminiscent of early American entrepreneurship. Cryptocurrency mining continues the virtualization and intangibility of what was once a material process — producing real dollars and cents. To this end, I actually prefer to discard the imagery of referring to community members as crypto “miners” and, instead, suggest we refer to them as crypto “asset producers.”
One of the most intriguing aspects of cryptocurrencies is their inherent volatility. Banks understand that asset valuation changes constantly, even with more traditional assets. They sit at odds with government institutions that strive to maintain a relatively stable valuation of American currency, but, with cryptocurrencies, their reach into the paradigm shifts dramatically. Crypto assets challenge the conventional wisdom banks have operated under for centuries, where currency valuation is regulated and controlled by the Federal Reserve through measures, like money printing and interest rate adjustments.
The unfortunate reality is that as cryptocurrency value goes up, the interest, aka demand, to produce it also increases, which drives greater energy consumption.
In order for cryptocurrency to be mined, it requires specialized high-performance hardware to accurately solve computer algorithms in the shortest time possible. This hardware produces a significant amount of heat, which naturally has to be cooled in the same ways we’ve all come to know and appreciate in the traditional data center world. There is increasing demand for them to be equipped with the technology to handle such a vast amount of heat, and specialized data centers are able to achieve this, thanks to immersion cooling, a liquid-cooling technique developed for this particular purpose and others like it. Initiatives such as these are welcome. Embraced in principle, they remain voluntary in nature, and governments are unable to externally enforce changes in the consensus method.
And, as the world grapples with environmental issues, cryptocurrencies have faced scrutiny for the energy consumption involved in the mining process. Critics argue this threatens the planet's sustainability. However, the crypto community is also actively seeking solutions to mitigate these environmental impacts, and, in the spirit of objectivism and capitalism, many in the crypto world are advocates of the freedom to produce assets without excessive oversight, believing that the dynamism of this emerging market should not be stifled by regulation but encouraged to flourish.
While decentralized as a currency, it’s not impossible for regulators to put a halt to the currency creation in other ways, because many aspects of the ecosystem surrounding it are not outside of regulatory pressure or control. Large-scale miners can easily be targeted with higher electricity rates, moratoria, or, in the most extreme case, confiscation of the equipment used.
Let's think about this though
While cryptocurrency uses a lot of power, the data center world understands that so do regular fiat money systems of banking. While we can all agree that crypto uses a massive amount of power, it seems there are two different ways of thinking about how big the impact on the environment really is. As we know, estimating carbon emissions is more difficult, as you need to know the exact energy mix, and this is why its environmental damage varies greatly depending on the source.
Some mining companies claim to be environmentally friendly because they use renewable electricity generated by wind, hydro, solar, or nuclear. However, because of mining’s rapid increase, the industry also faces criticism that these renewable energy resources are being monopolized by miners instead of used to support the greater good of societal infrastructure — schools, manufacturing, transportation, etc. I also like to think about this in financial terms, proposing that we offset the largest energy offenders with the best power sources, sort of like paying off your highest interest credit cards first.
Whichever way you look at it, though, there's a lot to consider on behalf of all stakeholders.
- First and foremost, public authorities face the task of evaluating whether the substantial carbon footprint of crypto assets undermines their ambitions and commitments to achieving sustainable transitions to net zero greenhouse gas emissions. However, it is crucial for these authorities not to stifle innovation, recognizing it as a catalyst for economic growth. Instead, the onus lies on investors to evaluate whether engaging or investing in certain crypto assets is in line with their ESG objectives.
- Financial institutions will have to integrate climate-related financial risks associated with crypto assets into their ESG strategy. Regulatory bodies overseeing these institutions should scrutinize the extent to which significant climate-related financial risks are factored into the banks' risk management frameworks. Prudential standard-setters may opt for a comprehensive approach, including defining requirements like risk weightings or even more stringent measures such as imposing capital deductions for new exposures to crypto assets with substantial carbon footprints.
Regulatory bans can be seen as a failure to understand the role of cryptocurrencies in society, much like our government's skepticism (ahem, ignorance) toward Facebook. Governments tend to resist what they cannot control, especially when it concerns currency. Negative portrayals and ideologies surrounding these assets, which are no worse than the celebrated entrance of AI compute, are rooted in the desire to maintain control.
I'll leave you with an Ayn Rand quote.
"If you ask me to name the proudest distinction of Americans, I would choose — because it contains all the others — the fact that they were the people who created the phrase 'to make money.' No other language or nation had ever used these words before; men had always thought of wealth as a static quantity — to be seized, begged, inherited, shared, looted, or obtained as a favor. Americans were the first to understand that wealth has to be created."
I would argue that since the dawn of our country, no industry has embodied this sentiment in quite the same way as crypto asset producers.
The crypto market's negative side, influenced by government regulation and valuation challenges, presents a fascinating paradox in the context of American ideals. While regulatory concerns are valid, it's crucial to strike a balance that allows for innovation while ensuring the sustainability of the environment. As we continue this journey, the battle for crypto freedom remains an ongoing struggle, emblematic of the clash between government intervention and the principles of individualism and capitalism.