Explaining variation in national cryptocurrency regulation: implications for the global political economy

Abstract

While still in their nascent stages, cryptocurrencies have the potential to reshape the international political economy by hastening the end of US dollar hegemony and reducing the US’s coercive financial power. Recently, governments have adopted various regulatory approaches to these new technologies. Most commonly, countries have implemented an array of partial and absolute bans. What explains governments’ responses to the new and potentially disruptive technology? We argue that governments’ decisions to ban cryptocurrencies stem from their desire to maintain monetary control. While cryptoization threatens all governments’ monetary policy autonomy, governments who choose to fix their exchange rates and restrict cross-border movement of capital are most motivated to ban crypto because digital currencies can be used to evade exchange and capital controls. A country’s regime type also affects its ability to enact bans; democracies will be less likely to enact a ban than autocracies. Our results suggest that cryptocurrency threatens the international political and economic status quo less than many speculate because regimes most likely to be at odds with US monetary and financial dominance face a strong incentive to ban the technologies in their own countries.

Keywords:

• Cryptocurrency
• hegemony
• exchange rate regimes
• dollar dominance
• democracy
• authoritarianism

Acknowledgments

We would like to thank the participants and discussants of the RIPE Pre-Conference Workshop (ISA 2023) and Jennifer Tobin for their valuable comments on the early drafts of this paper. We would also like to express our gratitude to the anonymous reviewers for their valuable feedback and contributions to the refinement of this paper.

Disclosure statement

The authors declare no conflict of interest.

Data availability statement

Data supporting this manuscript can be found at: https://bah.mufaculty.umsystem.edu/research

Notes

1 While the collapse of the cryptocurrency exchange FTX in 2022 burst the most recent cryptocurrency bubble, reducing the market by at least 25% by most estimates, the technology persists.

2 America gains tremendous influence from the size and relationships of its largest banks and financial institutions. The size of its financial markets and the scale of international intermediation conducted by US banks give the US tremendous control over the flow of money around the world. This control makes US financial sanctions particularly powerful. Furthermore, the pervasive use of the US dollar allows the US government to borrow at will and fund its abnormal levels of security-related spending.

3 The executive order also instructs the federal government to research and develop a central bank digital currency (CBDC), a step that more than a dozen other governments have already taken. The New York Federal Reserve bank announced in December of 2022 that it had developed a prototype e-currency using blockchain technology (New York Innovation Center, 2022).

4 In the case of Bitcoin, the most popular cryptocurrency, the maximum supply of currency is fixed by the algorithm, and the currency is gradually introduced into circulation via a process called ‘mining.’ Miners solve a cryptographic puzzle (using software) that lets them add a ‘block’ of transactions to the ledger.

5 For more information on mining, please refer to section I of our appendix.

6 This argument might depend on how governments ultimately decided to classify crypto – whether as a currency, commodity, or security. The US, UK, and Europe have not yet definitively classified crypto.

7 This Executive Order was challenge in the Supreme Court multiple times - Norman v. Baltimore & Ohio R. Co; United States v. Bankers Trust Co.; Nortz v. United States; Perry v. United States.

8 The role of remittances in the Salvadoran economy is one reason the government decided to grant Bitcoin legal tender status in 2021. International remittances constitute nearly 25% of the El Salvadorian national income (World Bank, 2022), one of the highest in the world.

Additional information

Notes on contributors

Heather-Leigh Ba

Heather-Leigh Ba is an Assistant Professor in the Truman School of Government and Public Affairs at the University of Missouri.

Ömer Faruk Şen

Ömer Faruk Şen is a PhD candidate at the University of Missouri.