Congratulations to our Fall 2021 Undergraduate Essay Contest runner up, Akshar Katariya!


Digital assets such as Bitcoin give gold, fiat, and central bankers a run for their worth. Experts predict that the market capitalization of Bitcoin will surpass that of gold by the end of 2030.1 But, as the case is with many innovations, it has its shortcomings. This essay will discuss the possible flaws of digital assets and whether the US government should intervene. 

In March 2021, Tesla allowed customers to buy its cars using bitcoin, the most valued and traded digital asset, a policy that was not only short-lived but also an unintentional irony to Tesla’s pledge of zero emissions. Bitcoin mining consumes 0.55 % of global energy production.2 This huge proportion of energy being devoted to a digital asset begs the question: Does Bitcoin do more good than harm? This question gets more relevant by the day as countries pledge Billions of dollars investing in renewable energy post the COP26 summit. 

An Australian study found that 44 % of all transactions are associated with illegal activity. The volume of this illicit trade is comparable to that of the US market for illegal drugs.3 These unlawful activities interfere with the current monetary systems as people find novel ways to send money offshore for tax avoidance and money laundering. Digital asset transactions are anonymous. This promotes the fundamental right to privacy. But, this anonymity, or lack of surveillance, paved the way for making digital assets a haven for illicit activities. 

However, the need for cryptocurrency is understandable. The underlying technology in most digital assets is based on the blockchain framework, which promotes the decentralization of power. This shared database of transactions ensures no third-party involvement. Assurance of such sophistication is not found in fiat currencies. 

Moreover, people have begun to question the validity and are frustrated by the extent of loose monetary policies. This has deepened since the pandemic as countries’ policy response was to give out stimulus packages that were financed by printing currency. This has led to the onset of inflation. USA and India, whose citizens hold most of the cryptocurrencies in circulation, are seeing inflationary tendencies. In a situation where the value of your currency depreciates by the day, citizens will be prompted to invest in a currency whose intrinsic value is not a function of politics. 

Digital assets are promising, but right now, they are causing negative externalities. Research in public economics tells us that government intervention is necessary to reduce the extent of this externality or to eliminate it. Climate change is the gravest danger to humanity. Countries are stepping up, switching to cleaner fuels, and, to the world’s surprise, changing policies at the cost of their vote bank. In this context, sustaining a wasteful digital asset is not a clever choice. Governments must intervene in the establishment of digital assets. Norms must be set which put a cap on energy, land, and water consumption. Entities must be fined appropriately for any violations. Lawmakers should understand the urgency of such policies instead of abstaining from recognizing the presence of digital assets. Only when they formally recognize it will they be able to place policies to regulate the establishment of such assets. 

Owing to the bulk of illicit transactions using digital assets puts people at risk of fraud, risks a country’s national security. This gives governments cause to regulate and monitor the digital asset trade. However, governments must proceed with caution as doing so would also compromise the privacy and autonomy of people— the very principles of blockchain technology. Proponents of digital assets believe that regulation is harmful and don’t consider that regulation also leads to increased openness and fairness. These attributes are essential for new entrants into the market, given that digital assets are relatively new to people and governments.

Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty,  or the University of California, Berkeley in general.

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