Lessons of History: Legal Bans, Restrictions and Exchange Controls Failed to Curb People’s Using Alternative Value Exchange Methods

Crypto industry has grown to the extent that it can’t be ignored by the world’s major governments. Since all governments need to govern, it’s no wonder why the crypto drowned in all sorts of regulatory bills demanding a wide range of restrictions from mandatory ID disclosures to outright bans.

Speaking about the latter, various partial or complete currency bans, as well as establishing artificial exchange rates, can be traced back to the Medieval age, and it’s very interesting to find out where they failed or succeeded in each particular case.

Why do I make parallels between conventional and crypto currency bans? In both cases governments are concerned that by using alternative means of exchange people avoid paying back taxes. We must admit, that although that represented a legitimate reason for governments to worry, the main reason to avoid using the implied legal tender was not a desire of dodging from levies, but the fact that their native currencies happened to lose their exchange power.

Investopedia says that exchange controls are government-imposed limitations on the purchase and/or sale of currencies. These controls allow countries to better stabilize their economies by limiting in-flows and out-flows of currency, which can create exchange rate volatility.

Many western European countries implemented exchange controls in the years immediately following World War II. The measures were gradually phased out, as the post-war economies steadily strengthened. The United Kingdom, for example, removed the last of its restrictions only in October 1979, not long after the memorable Nixon Shock’s aftermath subsided.

The US dollar has traditionally been the most desirable black market currency in many regions and countries. When its link to gold was lifted in 1971, as well as during the broader inflation of the 1970s, it lost some of its allure and other currencies such as the West German Mark and Swiss Franc, and gold – all gained in popularity. The dollar’s appeal was also dented by the 1970 introduction of mandatory reporting by banks of all monetary transfers in and out of the US.

In Soviet Union what stood it out from other economies was the stringency of their currency restrictions. USSR’s monetary system was designed to be hermetically sealed from the capitalist world and “crimes against the national currency” were punishable by severe penalties including death. The high black market exchange rate premia reflected the risks and ample difficulty of obtaining hard currency by ordinary people. To put it mildly, that activity was something akin to smuggling drugs in some of today’s most conservative Asian countries.

In the Soviet Union, despite the severe statutory punishments for currency crimes, black market transactions were relatively commonplace. By the late 1980s, services such as car repairs, luxury dentals and plumbing, which would ordinarily take months, could be instantly arranged in exchange for a payment in US dollars, Swiss Francs or West German Marks. Some experts say that in urban areas, up to 45% of total apartment repairs and 40% of car repairs involved the black market payments; whereas 80% of all services in rural areas involved hard currency payments. This is what countries mulling various currency bans today must be prepared for.

There was official recognition of the black market as early as 1967. From that year, Foreign Exchange certificates were issued to the Soviet elite not at the official rate of 0.9 roubles per dollar, but at the black market rate of 4.6 roubles per dollar. The certificates were exchangeable for western luxuries in special stores like Moscow’s GUM store. A black market developed in the certificates themselves, which traded as high as 6-10 times their nominal value.

In Colombia, it had long been illegal to maintain FX accounts. During the 1970s, however, Colombia’s central bank opened a dedicated facility – the “sinister window” – where unlimited amounts of US dollars could be exchanged at prevailing black market rates. It allowed cocaine traffickers to launder their monies while simultaneously offering various government officials a slice of their profits.

Ghana’s exchange restrictions during the 1970s and early 1980s caused its black market premium to climb above 4000%. This resulted in export underinvoicing and smuggling on a massive scale.

In China, until the 1990s, gold dealing and ownership was strictly prohibited and reportedly punishable by years of hard labor. Nevertheless, there was an active black market in gold throughout the country: Swiss gold made its way to the mainland via Hong Jong, Macao, Bangkok and Vientiane. Gold was also smuggled in by means of placing US double eagles coins in the coffins of Chinese Americans for burial in the homeland. Following the Communist Party Reform, gold became a more important black market than even those in Hong Kong and US dollars. The black market premium for gold surged in times of famine and social unrests, such as during the Collectivisation and the Great Leap Forward, yet settled down during the more quiet 1970s and 1980s.

In June 2021, the Bank for International Settlements (BIS) released its “Central Bank Digital Currencies: An Opportunity for Monetary System” report dubbed the “BIS Report” shedding light on the ongoing challenges of the cryptocurrency market. According to CBC, the BIS Report defines that central banks “will begin to issue their own digital coins” and they may even take action to discourage the use of cryptocurrencies. CBC pointed to the BIS Report’s conclusion which stated that “innovations such as cryptocurrencies, stablecoins and the walled garden ecosystems of big techs all tend to work against the public good elements that underpins the payment system”. Doesn’t this wording sound somewhat familiar?

According to IFC, Kazakhstan has signed a new taxation law to tax cryptocurrency mining effective January 1, 2022. IFC explains, while the new law is “expected to generate billions in the national currency”, businesses are speaking out against the taxation of cryptocurrency mining. According to IFC, many businesses are opposed to the new taxation law and are concerned about its impact on the future of the crypto mining industry in Kazakhtan at the time of its rising international prominence.

Cryptocurrency mining activities are also subject to taxation under regular Canadian tax law rules. However, determining whether a cryptocurrency mining activity constitute a business or a hobby for Canadian income tax purposes, and the method of reporting profits, is complex tax law must be considered.

The IFC reports sheds light on the fact that governmental authorities across the world are focusing their attention on “the regulation of the cryptocurrency market” as in the example above whereby China is banning the cryptocurrency market and has ordered its banks to cease facilitating cryptocurrency transactions. In addition, IFC reports, while South Korea precisely designed a comprehensive set of rules for exchanges within the crypto market, Canada issued notices to “several exchanges [Poloniex and KuCoin] for failing to comply with regulations within time”. However, according to Coindesk, with Canada “implementing stricter regulations out of concern for bitcoin’s energy impact, miners are getting ready to leave the country for other sources of power”. In addition, Bitmex and Binance are among the cryptocurrency exchanges that departed both Canada and the US because of their updated securities regulations. Yet while it is uncertain whether stricter restrictions and the regulation of the cryptocurrency market and the cryptocurrency mining industry will be enforced per se, governmental authorities are becoming increasingly eager to maintain even stricter patronage over their domestic currency remittances.

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Many world’s outright prohibitions of cryptocurrencies mainly happened around 2017 and 2018, coinciding with Bitcoin’s previous bull run. As central banks and governments noticed the surge of common interest in cryptocurrencies, ignoring this growing market was no longer an option for them. Although there is no direct evidence that those actions contributed to the followed profound rise in the crypto assets, one thing remains obvious: they weren’t able to undermine their rising popularity.