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America's Crypto Conundrum

Mining cryptocurrency in Gondo, Switzerland.

The enormous potential for upside as well as downside has driven the policy debate around digital currencies to extremes.

Credit: Valentin Flauraud/Redux

This is the year that digital currencies went mainstream. In the span of just three months last spring, China tested its first-ever digital currency in some of its largest cities, hackers breached a major U.S. oil pipeline and successfully demanded a ransom of more than $4 million in Bitcoin, cryptocurrencies surged to a record combined market capitalization of over $2 trillion, and Jerome Powell, the chair of the U.S. Federal Reserve, warned that cryptocurrencies are "highly volatile" and "may carry potential risks to . . . users and to the broader financial system." 

What for years many in Washington had dismissed as a pet project of techies and West Coast libertarians suddenly became one of the most important, if least understood, policy issues on the agenda of the Biden administration. Digital currencies are driving tremendous innovation that has the potential to make whole economic sectors more efficient. But they also pose various national security and financial threats and could even diminish U.S. influence abroad. 

One reason that digital currencies are so potentially transformative is that their software design often reflects a particular policy view—that government should have less control over money. Early adopters routinely imbued their use of digital currencies with political and philosophical meaning. And even if many people buying Bitcoin today are just looking to make a profit, the values embedded in the code still come with every purchase. Reduced government control of money has potential benefits, such as lowering the cost of payments. But it can also undermine the ability of authorities to respond to economic crises or fight cybercrime and financial crime, among other basic services that citizens across the political spectrum expect.

From Foreign Affairs
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