Cryptocurrency may be one of the biggest threats to governments, security and the entire financial system that we’ve ever seen.
It can help fund terrorism and its anonymity makes it almost impossible to track. Most importantly, it is poised to revolutionize global finance and banking.
But our new Enemy No. 1 can’t be fought; it can perhaps be controlled. Banks have figured that out and are bringing crypto currency into the fold.
The superpowers—U.S., China and Russia--will have to face the new reality. They love to hate it and hate to love it. Regardless, if they don’t embrace it, they won’t be able to control it. An enemy you don’t control is a much bigger threat.
So, welcome to the new balance of power, funded by cryptocurrency.
“This will ‘uberize’ banking to the extent that the major banks are spending billions to get into this Blockchain, says Frank Holmes, legendary gold investor, CEO of US Global Investors and Chairman of HIVE Blockchain Technologies (TSX:HIVE.V), the first public company where investors can participate in the build-up and infrastructure of crypto-mining.
“Bitcoin is the catalyst for crypto-mining the way emails were for the Internet. When we first heard about the Internet it was for the ‘dark world’, but with email, it exploded and became mainstream. Ethereum takes crypto-mining further with smart contracts,” Holmes told Oilprice.com
The Period of Uncertainty is Over
Russia is embracing it, with an eye to dominating it. China has banned it. The U.S. is struggling to figure out how to regulate it. But nothing can hold it back.
And now, many believe the uncertainty is over.
China tried to ban it in September, making it illegal for residents to trade in cryptocurrencies or start-ups to raise funds through ICOs, completely shutting down local cryptocurrency exchanges.
Bitcoin’s price plunged 40 percent. Then it recovered almost immediately.
This was a reminder that cryptocurrency is an autonomous system that can’t be knocked out.
"The ethos behind blockchain has been tested," Ken Sangha, COO of Open Money and the Open Project in San Francisco, told Forbes. "A central, organized and powerful authority -- China -- said 'no' and we all have been tested worldwide because of it. But the system flexed its muscles. It's doing what it was supposed to do."
And its muscles are the envy of tangible currencies everywhere. Bitcoin hit a record $6,000 per coin on 21 October. Naysayers came out of the woodwork to say it couldn’t possibly last, and definitely couldn’t go any higher. Wrong again. By the last week of November it was approaching $10,000 a coin.
Threats and Opportunities
The potential security threats are clear and present, but let’s put things like new avenues of terrorism funding into perspective.
At this point, terrorist groups are certainly eyeing their options with cryptocurrency, and testing the waters. In January, we saw what appears to be the first case, with the Indonesian government claiming that members of the Islamic State were transferring Bitcoin to each other.
Terrorists could create a virtual currency that is even more powerful and untraceable—one that can completely bypass the global banking system. It hasn’t happened yet, but the potential is there.
While terrorist groups may be mildly courting cryptocurrency, it’s not widespread. Speaking to Newsweek, the Rand Corp’s Joshua Baron, a cryptographer and mathematician, says he doesn’t really see Bitcoin as the “go-to currency for terrorists”—yet. “It does not offer enough anonymity.”
While terrorism is a threat to the security of all states, another threat to the U.S. is an opportunity for Russia: sanctions busting.
The rise of digital currency means that Russian officials sanctioned by the U.S. and the European Union have a way to send and receive money.
While the U.S. Treasury’s Terrorism and Financial Intelligence unit puts sanctioned individuals on a blacklist that keeps them from doing any business in U.S. dollars, cryptocurrency, which isn’t backed or controlled by any state, makes it possible to bypass the blacklist.
But even this pales in comparison to the bigger story here: Bitcoin and its fellow cryptocurrencies are challenging the foundations of the global banking system.
Disruption of the global banking system at this point is “inevitable”, Bala Venkataraman, global chief technology officer of banking and capital markets for Computer Sciences Corp, whose sister company runs the IT backbone of the National Security Agency (NSA), told Newsweek.
“Cryptocurrencies could become the new driver of international business and financial transactions, and that would be transformative, if not revolutionary,” says Dr. Makarenko, whose consulting firm advises Fortune 500 companies.
But here’s the problem:
“If we don’t truly understand how they are operating, who is controlling them and how to avoid it being used for illicit purposes, it may inadvertently turn out to be one of the most innovative turning points in the underworld, whether it’s organized crime, terrorism financing or corruption.”
The Crypto ‘Embrace’ is All About Control
Just last year, Russia was toying around with throwing Bitcoin owners in prison, characterizing cryptocurrency as an infectious pyramid scheme.
Now, Vladimir Putin’s Russia is ready to embrace cryptocurrency - if only to control it.
The real push started in July, when a Putin aide unveiled his cryptocurrency mine: an industrial-scale server farm called Russian Miner Coin. In September, the company held an initial coin offering (ICO), raising over $43 million in Bitcoin and Ethereum.
Then came the regulatory push. After all, Russia has lost an estimated $310 million this year alone due to lack of ICO regulation.
In late October, Putin issued five presidential orders for controlling cryptocurrency. This means everything from taxing coin miners and regulating initial coin offerings (ICOs) to creating legislation for new blockchain tech and setting up a single payment space, presumably with the Central Bank.
Still, the Russian government is not entirely unified on the issue. The Central Bank thinks blockchain is cool, but isn’t keen on cryptocurrency itself. They’d like to have something like a crypto-ruble that could track transactions from cryptocurrencies into rubles.
It’s far more than a fad. Cryptocurrencies are becoming increasingly visible across Russia. Mining is becoming so pervasive, in fact, that computer stores are having a hard time keeping graphic and video cards in supply.
The Russian Finance Minister, Anton Siluanov, has even gone as far as to say that cryptocurrency will soon be treated like regular financial securities.
There’s no point in prohibiting this reality, says Siluanov.
The U.S. might be of the same mind—broadly speaking, but it’s moving at a slower pace in the race to control the world’s new currency.
And it’s its own worst enemy in this scenario, says Dr. Tamara Makarenko, managing director of West Sands Advisory, a UK-based global consulting firm.
But Russia, for one, is much more motivated. Cryptocurrency is a great way to skirt sanctions.
“The U.S. is rightfully concerned about cryptocurrencies, but like anything that may have a negative impact on national security, there are way too many stakeholders that need to be brought to the table to discuss, so the U.S. is not capable of acting quickly,” Dr. Makarenko told Oilprice.com.
“The right conversations are taking place, but at the end of the day, it is in the U.S. interest to secure the value of the global position of the dollar.”
So, while China is banning cryptocurrency and the U.S. is still trying to figure things out, Russia seeks to dominate.
But just like China’s ban will be largely ineffective, so too will Russia’s move to dominate. Cryptocurrency is stateless, and that is its real power. It can be regulated, but not enslaved.
Resilience Proven, Investors Flock to the Future
Right now, about 85 percent of the world’s bitcoin trading volume comes from China. Countries with heavily subsidized energy are obvious ether mining haunts, but now the colder countries have something to offer that has nothing to do with the government, and doesn’t involve any legal gray areas that will come under scrutiny.
With even Putin’s IT advisor getting into the great game, hoping to challenge China’s hegemony in Bitcoin mining, the race is on in full force. They’re hoping to capture 30 percent of the global cryptocurrency mining share in the future.
Japanese billionaire Masatoshi Kumagai, co-founder of giant GMO Internet, announced plans recently to invest over $90 million in a new Bitcoin mining business that will operate as a fund, partially by soliciting capital from investors and repaying them in cryptocurrency.
In North America, billionaire backing is going into HIVE (TSVX:HIVE.V), via Lionsgate Entertainment and Goldcorp (NYSE:GG) superstar Frank Giustra, a legendary mining figure known for being in the right place at the right time—and always in front of a trend.
The new Great Game is virtual reality, and while governments are busy trying to figure out how they can control it, investors are busy sinking billions into what is fast becoming a story of industrial-scale cryptocurrency mining.
Now that everyone’s seen how resilient Bitcoin is, not only are things moving to the industrial phase, but everyone’s weighing the best venues for mining. Because even though this is virtual reality, location still matters.
That’s why HIVE has set up in Iceland, where Mother Nature’s natural cooling is friendly to these massive computing facilities, and where the massive energy required to mine cryptocurrency—in this case Ether--on an industrial scale is cheaper thanks to plentiful hydroelectric and geothermal sources. First, HIVE put $9 million into Hong Kong-based Genesis Mining Ltd., which just built the biggest ether-mining facility in the world—Enigma. Genesis acquired 30% of HIVE in the deal. A second deal in mid-October saw HIVE close a $30-million bought deal financing, completing a $7-million investment by Genesis Mining, acquiring a second data center in Iceland.
And now HIVE is setting up in another ‘cold country’—Sweden—with Genesis.
From China and Russia to North America, virtual is the reality. It’s no longer a question of whether cryptocurrency will survive. It’s a question of what it will disrupt on its way to the top of the global finance chain.