In recent years, cryptocurrencies have gained popularity with their decentralized and secure nature, as well as their potential as a novel method of payment that operates outside of traditional financial systems. Additionally, the rise of blockchain technology, which underlies cryptocurrencies, has also increased their visibility and attracted investors and businesses alike. Recently, particularly with the growth of Bitcoin, cryptocurrency has gained widespread recognition, and many people have become interested in investing in these digital assets.
However, not everyone loves cryptocurrencies. Charlie Munger (Trades, Portfolio), the Vice Chairman of Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial), has been critical of cryptocurrencies due to their high volatility and potential for fraud. The decentralized and unregulated nature of cryptocurrencies leaves them vulnerable to manipulation and price swings, which can result in significant losses for investors. Additionally, the lack of government oversight and protection for investors makes it easier for fraudsters to engage in fraudulent activities, and the anonymity of transactions makes it a popular method for money laundering and illegal activities as well. These risks are why Munger has stated his skepticism toward cryptocurrency.
Last November, Munger said in an interview with CNBC:
"The country did not need a currency that’s good for kidnappers and so on. There are people who think they’ve got to be on every deal that’s hot. They don’t care whether it’s child prostitution or Bitcoin. If it’s hot, they want to be in on it. I think that it’s totally crazy."
Although most countries do not criminalize the use of Bitcoin or other cryptocurrencies, their usage as a form of payment or commodity varies with different regulations. However, some nations have imposed restrictions on the utilization of Bitcoin. Algeria, Bangladesh and China, for example, have completely banned the use of cryptocurrencies and enforced severe consequences for anyone engaging in cryptocurrency transactions.
Munger believes the U.S. should adopt the same stance as China, which banned cryptocurrency trading and mining in 2021. He compares cryptocurrencies to gambling contracts and calls for a ban in the United States. Voicing his thoughts in an opinion piece for the Wall Street Journal in February 2023, Munger wrote:
"A cryptocurrency is not a currency, not a commodity, and not a security. Instead, it’s a gambling contract with a nearly 100% edge for the house, entered into in a country where gambling contracts are traditionally regulated only by states that compete in laxity."
He also referred to the British Parliament's passing of the Bubble Act in 1720, which prohibited public trading of new stocks following the "South Sea Bubble" which caused a significant economic crisis. The crisis was caused by a speculative mania in which people invested in the South Sea Company, a British joint-stock company formed to trade with South America. The value of the company's shares increased rapidly as people speculated on the company's potential profits, but the bubble eventually burst, causing widespread losses and a major economic crisis. The South Sea Bubble is often considered one of the first recorded financial bubbles in modern history and tells a cautionary tale about the dangers of speculative investing.
Cryptocurrencies are often seen as speculative investments, which has led some people to compare cryptocurrency trading to gambling. Additionally, some crypto-related transactions, such as initial coin offerings, have been criticized for having characteristics similar to speculative bubbles and Ponzi schemes. Taking these characteristics into consideration, Charlie Munger (Trades, Portfolio) believes society would be served well if cryptocurrencies were to be banned at a federal level.
Will the U.S. ban crypto?
It is important to note that not all cryptocurrencies are the same and that some have been used for legitimate transactions and investment purposes. Further, given the growing usage of these digital assets, banning cryptocurrency in the United States would be a difficult and complex task due to the decentralized nature of digital currencies. Cryptocurrencies operate on a distributed ledger system called blockchain, which allows for secure, peer-to-peer transactions without the need for intermediaries such as banks. This decentralization makes it challenging for governments to control and regulate the use of cryptocurrencies.
Additionally, cryptocurrencies have gained widespread adoption and usage, with millions of people and businesses around the world holding and using them. A noteworthy example is BlackRock Inc. (BLK, Financial), the world's largest wealth management firm, which entered into a strategic partnership with Coinbase Global (COIN, Financial) in 2022 to offer its institutional clients access to cryptocurrency trading, custodian services, brokerage and reporting services. Banning cryptocurrencies would not only impact these individuals and organizations, but it could also disrupt the financial system as a whole. Implementing and enforcing such a ban would also pose a challenge for the government as the world is steadily moving towards a digitalized future in which cryptocurrencies will play a massive role.
Moreover, cryptocurrencies have been increasingly seen as an alternative investment option, with many individuals and institutions investing in them for the purpose of diversification and hedging against traditional financial markets. Banning cryptocurrency could negatively impact the growth of the industry and limit innovation in the financial sector.
Nevertheless, the government is ramping up its efforts to regulate the cryptocurrency market. Officials are warning that it would be a major misstep to allow cryptocurrencies to become too closely intertwined with the broader financial system, particularly during a time of global financial uncertainty. This concern is not unfounded, as the recent collapse of cryptocurrency exchange FTX has brought big names like Goldman Sachs Group Inc (GS, Financial), JPMorgan Chase & Co (JPM, Financial) and Wells Fargo & Co (WFC, Financial) into the spotlight. The government's efforts to regulate the cryptocurrency market aim to prevent similar incidents and protect the stability of the financial system. The decision to ramp up regulatory efforts also comes after Fidelity (FNF, Financial) faced criticism for its 401k plan that allows for Bitcoin allocations.
In January, the Federal Reserve denied cryptocurrency bank Custodia Bank Inc.’s application to become a member of the Federal Reserve System and issued a policy statement discouraging banks from holding cryptocurrency assets or issuing stablecoins due to concerns over "safety and soundness" risks. Earlier, banks like Signature Bank (SBNY, Financial) and Metropolitan Bank Holding Corp. (MCB, Financial) reduced their involvement with crypto-related clients. Metropolitan Bank announced earlier this year that its cryptocurrency business will be discontinued.
Takeaway
Charlie Munger (Trades, Portfolio) dislikes Bitcoin and unregulated digital tokens for many reasons that he has been very vocal about, but I believe enforcing a cryptocurrency ban would be challenging. Bitcoin has become integrated into the U.S. financial system and is treated as a commodity. Further, such a ban could hinder innovation and could result in resistance from its users, and create social and political tensions. The U.S. does not seem to be considering a full ban on cryptocurrencies yet, instead opting for strict regulations to keep mainstream financial institutions separate from the cryptocurrency market.
