What if governments banned cryptocurrencies?

Potential Threat

Government Action: Following Pavel Durov’s arrest for failing to prevent crime on Telegram, cryptocurrencies could be the next target.
Political Claims: Politicians claim that cryptocurrencies facilitate criminal activities such as terrorist financing and money laundering.

Potential Government Strategies

51% Attack on Bitcoin:
Mining Pools: Two mining pools control more than 50% of Bitcoin’s mining power.
Consolidation: Mining pools consolidate computing power, share costs, and increase reward opportunities.
Chainalysis Report: Lazarus and scammers use mining pools to mix illegal funds with legitimate mining rewards to launder money.

Practical Challenges

Impossibility of 51% Attack:
Computing Power: Significant computing power and coordination are required.
Expert Opinion: Andreas Antonopoulos, author of Mastering Bitcoin, explains why nation states can no longer effectively use Bitcoin.

Regulatory Surges

Privacy Coins Under Attack:
Arrests: Tornado Cash founder and Samourai Wallet CEO/CTO arrested for money laundering.
Bans: Countries like Japan, South Korea, and the UAE have banned privacy coins like XMR and ZEC. The EU is considering a similar ban.
Consequences: Delisting from centralized exchanges (CEX), reduced liquidity, lower adoption rates, difficulty cashing out to fiat currencies.

Case Study: China

Comprehensive Ban:
2021 Ban: China declared all cryptocurrency transactions illegal, banning trading, mining, and related financial services.
Impact:
Declining Hash Rate: A nearly 50% drop in Bitcoin network computing power.
Recovery: Computing power recovered quickly as mining operations moved to other countries.
User Adaptation: Users in China used small rural commercial banks to purchase cryptocurrencies through gray market traders, setting a limit of $7,000 per transaction to evade scrutiny.

Current Situation in China

Over-the-Counter Trading: Chinese individuals use OTC trading on platforms like OKX and Binance and open accounts in Hong Kong.
Impediment to Development: The ban continues to impede the development of cryptocurrencies in China, despite its large population.
Change of Attitude: Recently, China’s stance on cryptocurrencies seems to be shifting towards a more open approach, which is a positive sign.

Threat of Self-Hosted Wallet Ban

A Big Blow: A self-hosted wallet ban would be a major setback.
Centralized Crypto Exchanges Interact: Centralized exchanges (CEXs) may only interact with regulated custodial wallets, limiting the use of self-hosted wallets.
Loss of Financial Sovereignty: Users will rely on third parties who can freeze accounts.
Global Cooperation Needed: An effective ban requires global cooperation; otherwise, users will move to regions where such bans do not exist.
EU Concerns: Despite concerns, the EU did not ban self-hosted wallets this year.

Another Effective Ban

Worst case scenario: US cryptocurrency ban

Full ban: The US could ban cryptocurrency holdings entirely.
Convert to USD: Citizens could be forced to convert cryptocurrency to USD, with penalties for non-compliance.
Bank restrictions: Banks would ban cryptocurrency transactions and report suspicious activity.
Global surveillance: Increased international surveillance and cooperation could lead to a ban.
Introduction to Central Bank Digital Currency: The US could introduce a central bank digital currency (CBDC) as an alternative.

Historical context: The 1933 Gold Ban

Gold Ban: In 1933, the US banned private ownership of gold.
Limited compliance: Only 20% to 25% of privately held gold was surrendered.
Value impact: The US dollar fell more than 40% against gold, and the price of gold rose from $21 to nearly $35 per ounce.
Increased wealth: Those who held gold saw a significant increase in wealth.

Potential outcomes of a cryptocurrency ban

Economic control: The ban could be driven by critical economic control issues.
Market impact: Such bans could cause prices to crash and send the market underground.
Bitcoin resilience: Despite the ban, Bitcoin will continue to produce blocks and exist as a government-free haven.