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Premise

(-clears throat-)

I'm imagining a world where financial systems are considerably centralized and the wealthy top few percent hold much sway, so to speak. In this world, it's not inconceivable for money to influence politics or for the special governmental / financial relationships to exhibit rent-seeking behavior.

This kind of institution frustrated some groups of people and some experimenting was carried out. A crypto-currency was developed (at least in part) to decentralize the finance system by taking the central banks out of the equation and allowing users to interact with each other comparatively freely. A limit of the number of the crypto-currency was set, to create scarcity and not allow for rent-seeking behavior or infinite money printing. While this crypto-currency had a modest adoption rate in terms of its user base, it's net-worth has already eclipsed some of the major investment-banks and other inner sanctum constituents of the financial elite. However the value of this crypto-currency is very volatile, ranging wildly, sometimes even from month to month. Still, some think this crypto-currency represents the future of finance, and to an extent the world as a whole. As this world has followed a trajectory of increasing decentralization with the advents of newer technologies. In the past this world had kings and emperors and religious elite, now democratic institutions are gaining momentum (or that's the rumor anyway).

The problem is, the powers that be in the existing financial system would surely not relinquish their grip on the financial system lightly. Maybe they leverage their political clout to ban it outright, or they launch a smear campaign to legitimize it. Or perhaps they could acquire enough stake in it so that they could embrace it. Whatever the existing financial elite do, it would have to benefit them both economically and strategically/politically. The financial system elite are mindful of how fine a line must be walked to avoid creating a "martyr" out of the currency. That is to say, can it be banned outright or would that create its own set of problems (over regulation, control state, suspicion, ect)? That is the crux of it.

To narrow the scope a bit, let's say diplomacy has failed and the two financial systems are at odds with each other. Even if the existing finance elite hold a large stake of the crypto-currency, the intrinsic scarcity of the crypto-currency will make it too challenging for the financial system elite to conduct rent-seeking that they look rather fondly on.

Question

What is the best (for the finance system) strategy for the financial system decision makers to defeat the afore-described crypto-currency?

Clarifications

  • Setting: Near future
  • Success metric: stop the rising adoption of the crypto-currency and keep the it on the fringe or completely non-existant
  • Acquiring the crypto-currency is allowed (e.g. acquire and freeze), but it may not be used
  • Must imagine you are on the panel of the finance system (what's best for the finance system, might not be best for mankind as a whole, ect)
  • Timeframe: The faster the better
  • Ethics: little to no concern (don't pull any punches)
  • Doomsday scenarios: Ideally, the world would be left in-tact, nuclear war would be avoided and so forth, but if it really, really, truly calls for a doomsday solution, so be it, just explain why
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    $\begingroup$ Nice try, Mr. Big Bank. $\endgroup$ – Azuaron Dec 12 '17 at 14:43
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    $\begingroup$ You do realize that if crypto-currencies become widespread enough to account for a non-negligible part of financial transactions the banks and settlement networks will use their infinite resources to become the best and safest crypto-currency transaction service providers. If you look around you will notice that large IT companies are promoting blockchain technology services aimed directly at the incumbent providers of financial services. If Mr. Random User has a choice between doing his transactions on an anonymous unguaranteed network and a state-guaranteed network guess what he'll choose. $\endgroup$ – AlexP Dec 12 '17 at 14:56
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    $\begingroup$ The purpose of any business, bank, exchange, whatever, is to make money. If banks can make money from processing crypto-currency transactions then they will process crypto-currency transactions. If crypto-currencies ever raise above a minuscule part of the financial transactions then all the countries in the world will require that crypto-currency transaction providers have the same security and obey the same laws as any financial services provider -- anti-corruption, anti-money laundering, fraud prevention and so on. And guess who already has all the licenses and processes in place. $\endgroup$ – AlexP Dec 12 '17 at 15:05
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    $\begingroup$ You might want to look into en.wikipedia.org/wiki/Pump_and_dump $\endgroup$ – Stephan Dec 12 '17 at 20:13
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    $\begingroup$ What prevents all your wealthy individuals from just buying lots of cryptocurrency and therefore also being wealthy in the new "cryptocurrency world"? $\endgroup$ – immibis Dec 12 '17 at 23:19
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The current path is already aligned against crypto currencies, with many governments refusing to accept it as a form of tender (such as the United States).

While this makes for difficulties, what really happens is a parallel, underground economy is being created, and much of what the tax regulators, bank officials and people who make their money on fiat currency are trying to prevent is simply growing beneath their feet (so to speak). People are still going to use it as tender between themselves, or use underground exchanges to convert cryptocurrency into legal tender (underground, since they will probably have to avoid taxation in your scenario).

Some economic activity will also go offshore, as people who see the advantages of cryptocurrency choose to move to jurisdictions where there are fewer or no restrictions on the use of cryptocurrency, depriving many economies of tax revenues and investment dollars.

So the only real way to crush cryptocurrency is to impose draconian tax and regulatory schemes to track every single dollar in circulation and transaction in the economy. Ironically, this is somewhat like the underlying blockchain technology of bitcoins themselves, but without the built in ability to limit the amount of "currency" in circulation. In fact, this sets up the rather counterintuitive scenario where the United States or other polity creates the institutional backbone for a national cryptocurrency, once the political climate becomes right for the people and legislatures to choose to do so.

Edit to add: Since the underlying technology of Blockchains is poorly understood (even by me) here is the link to an article which may help understand: https://townhall.com/columnists/lindsaymarie/2017/12/11/the-operational-revolution-behind-bitcoin-n2421122?utm_source=thdaily&utm_medium=email&utm_campaign=nl&newsletterad=

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  • $\begingroup$ I never thought about a solution quite like that, tracking every dollar in circulation. Like you said, pretty ironic. Anyway, do you think there could ever be a tipping point that crypto-currencies could reach? For example, if enough underground transactions are carried out could it get to the point where it displaces the existing tender? And I suppose that would thereby force the hand of governments? Or is that very unlikely? $\endgroup$ – Arash Howaida Dec 12 '17 at 15:09
  • $\begingroup$ The true tipping point may be when governments are desperately devaluing their currencies to cover or eliminate their debts and unfunded liabilities. When the US needs to cover $100 trillion dollars of unfunded Social Security, Medicare and Medicaid liabilities starting in the 2030's, turning the USD into "monopoly money" will pretty much force people to cryptocurrency in order to retain some sort of store of value. This process might happen faster in the EU, or even in China, depending on the true state of their debt and unfunded liabilities. $\endgroup$ – Thucydides Dec 12 '17 at 15:57
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    $\begingroup$ @Thucydides " will pretty much force people to cryptocurrency in order to retain some sort of store of value. " Or... they could use pretty much any other asset? Most 'wealth' is stored in assets, not cash. With the exception of bonds, your average portfolio doesn't really care what it is denominated in. $\endgroup$ – NPSF3000 Dec 13 '17 at 0:27
  • $\begingroup$ The issue is barter economics are slow and inefficient. A form of currency with has actual value rather than devalued paper or electrons will be far more attractive to people, being more portable and convenient to use. $\endgroup$ – Thucydides Dec 13 '17 at 4:28
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There should be a pretty simple and straight-forward approach:

you create a story where (name well-known evil terrorist group of your choice) allegedly uses said crypto-currency to buy (name horrible means of pursuing evil deeds as you seem fit). Spread that story. It will be hard to verify, but as long as you make sure your story is repeated over and over again people will believe it, no matter if there is the tiniest grain of truth.
They will believe it even if the opposite can be proven.

Then, for the sake of our security, banish the currency, and make sure the general public thinks of anyone even considering using this or a similar currency as being traitors, aides of terrorists, and generally really unpleasant people.

While you are at it, banish cash entirely. After all, monetary rtansactions that cannot be traced can only help terrorists, right? And no loyal citizen has anything to fear, right? Let people use credit cards only for any transaction.

That way not only do paranoid governments gain total traceability of every transaction of every citizen (not of the banks, though, who control those records), but also do the banks gain perfect control over anyone who wishes to live, since they need to be customers of those banks to even buy a loaf of bread.

Since the banks gain a lot from such a setup, you can be sure to have not only them support your scheme, but almost anybody who already depends on their services, lest their credit-worthiness be questionned...

Obviously, in a real world this could never work. No citizen in their right mind would ever vote for such a government, or pay a bank for providing services if that same bank didn't have a perfect record of conducting only morally sound business, so i guess this setup can only work in your fictional world. Thank goodness!

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    $\begingroup$ Well I know what's going to be on the news tomorrow. Thanks, Satan. $\endgroup$ – corsiKa Dec 13 '17 at 6:14
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The same way you crash any market: corner it.

Let's cut to the chase: assuming every Bitcoin is worth 17,000 USD (which it hit recently), there's only 280 billion USD worth of Bitcoin, total, right now. Since the number of Bitcoins is capped at 21 million, there's only 357 billion USD worth of Bitcoin possible (still assuming 17,000 USD for a single Bitcoin).

Even now, Bitcoin is only worth so much because it's the "hot new" investment thing, and most real transactions with it are illegal transactions where anonymity and untraceability are key. Most of the rest of Bitcoin is held by "investors" who are riding its wave of popularity, and miners who have "created" the Bitcoins and are looking to turn them into usable currency. This creates a serious problem for Bitcoin: without the ability of normal people to make normal transactions with Bitcoin, it will never have enough staying power to maintain a stable level of worth. As investors realize only criminals are using the currency as currency, the investors will start pulling out, which will likely cause the worth of the currency to crash.

So the question is, how do your financial institutions reduce Bitcoin's ability to be used as a currency? They can stage a hostile takeover of Bitcoin and just sit on it. We're talking about a currency with no intrinsic value. That means that it's only as useful as its purchasing power, and stockpiling it inflates its worth in the short-term, but reduces its purchasing usefulness in the long-term.

Merchants don't like accepting unstable currency. You can't plan your financial forecast if the money coming in is suddenly worth 1% of what it was yesterday, and tomorrow will be worth 1,000%. By destabilizing the currency by buying it all up, your financial institutions can scare away merchants from accepting the currency. As the purchasing ability of Bitcoin drops, so will its price, and you can buy a bunch more, riding this cycle until Bitcoin completely crashes.

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  • $\begingroup$ That's a solid strategy, thanks for sharing your thoughts on it. I tend to agree with your logic here. The only intrinsic value I have heard bitcoin having is that it is a supposed "safe store of data." Yet, I'm not sure if that will be enough to merit higher or even current prices in the long run stably. As you said stability is a big factor. $\endgroup$ – Arash Howaida Dec 12 '17 at 15:38
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    $\begingroup$ The main problem is that while you may destroy a specific currency like Bitcoin, the underlying technology of cryptocurrency is now out in the wild, and many alternative cryptocurrencies can be created with different properties. Even Venezuela is proposing a cryptocurrency "backed" by its reserves of natural resources.... $\endgroup$ – Thucydides Dec 12 '17 at 16:03
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    $\begingroup$ @Thucydides The proliferation of many different cryptocurrencies is actually a benefit to large, centralized financial institutions, IMO. This creates consumer confusion, hinders cryptocurrency adoption, and everyone stays on Big Bank's currency. Once the Big Banks create their own cryptocurrencies, all they have to do is outcompete the other ones, and you have centralized cryptocurrencies controlled by the banks. $\endgroup$ – Azuaron Dec 12 '17 at 16:31
  • $\begingroup$ What is "hostile takeover of Bitcoin"? Someone would try to buy all the Bitcoins on the market? $\endgroup$ – Alexander Dec 12 '17 at 22:36
  • $\begingroup$ Many banks in Canada and the Untied States issued currency during the era of "Free Banking" (before the establishment of the Federal Reserve or the Bank of Canada), and having multiple currencies is already a fact of life throughout the world, many malls have currency exchange kiosks, for example. The strength of cryptocurrency is that it cannot be manipulated like fiat currency, so savers and investors will gravitate towards this, while borrowers (especially large scale ones) will wish to be able to devalue their debt through inflation, thus only want to borrow in fiat currencies. $\endgroup$ – Thucydides Dec 13 '17 at 4:34
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Massive control and regulation over the internet:

  • Think China

  • Begin with something like 'Net Neutrality' to keep things 'free and fair', for your 'benefit'.

  • Track all Bitcoin transactions (note: using the term 'Bitcoin' to cover all crypto. Quicker to type, with understanding implied).

  • Shut down all related sites.

False Flag EMP

  • Crash and burn the internet

  • Millions lose their Bitcoins

  • Blame another country i.e. NK

Drive the cost of electricity high:

  • Tax oil and coal production.

  • Blame on Global Warming

Media Control:

  • Constantly badger Bitcoin as not backed by anything.

  • Report Bitcoin crashes, call it unstable and volitile.

  • When Bitcoin goes up, call it a bubble.

  • (Insert media fear tactics here)

Disable, destroy, and/or control the electric grid. [Project Stone Age]:

  • Control: Gov run electric grid. Throttle amount for households (slow miners)

  • Control: Monitor electricity usage. Raid houses, buildings. Jail miners.

  • Destroy: (See EMP)

  • Disable: (See Tax and Regulation)

AI intercept:

  • Create new Gov Department of AI.

  • Pour Billions of dollars into an AI program, with one goal. Destroy/disable/disrupt Bitcoin/Blockchain.

Population Control

  • Expand current and develop new population control methods (be creative)

  • WWIII go nuclear (also see Project Stone Age)

  • Develop/release virus to wipe out population (you and friends have antidote)

  • Keep all Bitcoin for yourself and friends.

  • Repopulate the Earth in your own vision.

Build Deathstar [Project Vader]:

  • Blowup Earth.

  • Live in outer-space.

  • Maybe regen Mars.

Ultimately, in my opinion, it would take some sort of massive top down, global centralized government effort, with long term vision and goals.

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  • $\begingroup$ Welcome to WorldBuilding John! If you have a moment please take the tour and visit the help center to learn more about the site. Have fun! $\endgroup$ – Secespitus Dec 12 '17 at 23:51
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Governments or at least the two richest ones (US and China) have significantly more money at their disposal than there are bitcoins in total. US with its form of democracy may have a hard time to pull this off, but China can do this VERY easily if they choose to.

This will be a multi-pronged attack:

The first stage to doing this will obviously be to make owning, mining or trading in crypto-currencies illegal. This would get all the regular people off the system and we'll only be left with the criminals. Now we can fuck them up.

  1. The first thing to do would be to start buying and holding bitcoins.... TONS OF IT. With its current resources, China could buy all the bitcoins in existence and not even care (Not that they need to buy them all). Then once the market is right, dump it all in to sell. This will drive the value of Bitcoin to the Ground. The real reason why Bitcoins are so valuable right now is because it is used to hoard money. People hold bitcoins and usually don't trade them for money. A sudden surge in supply will hurt it bad. And seeing the value go down will make people nervous and may even have a cascade effect.

  2. The second part will be much difficult and may even involve a bit of sci-fi. Bitcoins come into existence from what we call mining. And mining is nothing but the act of maintaining a ledger. Millions of miners worldwide use their computing power to try and be the first one to finish a block. To finish a block, one needs to record all the given transactions into the block, and then add a value to it such that the hash of the block contains a given number of zeros in the beginning. This task is VERY difficult and takes massive computational capabilities. A country could try using its own supercomputers and other infrastructure, optimise it and beat all the miners thereby driving the mining industry to the ground. This is easier said than done because most mining pools have mind-boggling computational power. One way to surely beat them all will be to use (sci fi) Quantum Computing to calculate the hashes instantly. This would give you the power to mess up the entire system and add in ANY transaction you want. You can now start stealing people's money and force them off.

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Fastest way and most effective is to ban the use and purchase of it and hit any one that uses/mines/buys/sells it as hard as legally possible.

You stated that in your depicted ecosystem the politics are corrupt(no difference to reality imo but still) so as a bank best bet is to bribe the politicians that can make cryptocurrencies illegal.

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