Authoritarian Central Banks Can be Very Good for Bitcoin, Until They’re Not

Look at how bitcoin performed overnight in Turkey and India, and you’ll get an excellent picture of how an authoritarian central bank can be very good for crypto, until it is very bad.

Start with Turkey, where President Tayyip Erdogan has aggressively interfered with the central bank as he wages an “economic war of independence” in which he claims cutting interest rates will stem soaring inflation — a position Reuters said economists have “ridiculed.” Overall the Turkish lira is down 42% this year.

Bitcoin hit a new all-time high in Turkey on Nov. 24, briefly passing 700,000 lira, according to TradingView.

That came in the wake of a 15% drop in the lira Tuesday after President Erdogan defended a trio of recent cuts that have dropped the country’s interest policy rate to 15% — despite inflation of 20%.

Reacting to the new bitcoin all-time high, Moskovski Capital CIO Lex Moskovski tweeted, “Central banks are just Bitcoin marketing departments.”

Which is true enough when the central banks are screwing up the economy — you only have to look at Venezuela’s embrace of bitcoin — now usable in department stores, global fast food chains and even the country’s main airport — as its central bank sent the economy into hyperinflation under President Nicholas Maduro over the past few years.

An Outright Ban

Now switch to India, where the government on Tuesday (Nov. 23) revealed plans to ban cryptocurrencies outright.

Bitcoin collapsed on the major local exchange WazirX, where a sell-off slashed the price of BTC 14.8% from about 4.6 million rupees ($61,820) to 3.9 million rupees ($52,650) late Tuesday night, according to Cointelegraph.

That came as bitcoin’s price dropped a bit globally, with CoinMarketCap showing a 24-hour high/low of $57,875/$56,169, but nowhere nearly as sharply as in India.

Nor was the rapid decline limited to bitcoin. Even the leading stablecoin Tether (USDT) collapsed briefly, dropping from 74 rupees to 60 rupees on WazirX before climbing back again. A steeper but just as short-lived drop happened in January, when the lower house of parliament first brought up reintroducing the cryptocurrency ban, CoinDesk noted.

In India’s case the Reserve Bank of India (RBI) has been relentlessly opposed to cryptocurrency, limiting the industry’s growth by forcing banks to refuse to do business with crypto firms for several years — until the policy was quashed by the Supreme Court in March 2020.

While the RBI is a strong supporter of a central bank digital currency (CBDC) — a digital rupee — RBI Governor Shaktikanta Das said last week “we have serious concerns [about cryptocurrencies] from the macroeconomic and financial stability points of view.”

On Nov. 23, the government reintroduced a two-year old bill that would outlaw private cryptocurrencies. A new addition was creating a legal framework for a CBDC.

Skirting Capital Controls

Taking a step back from government-induced changes to the price of bitcoin, and you’ll see something interesting happening on the broader forex market: BTC is becoming another currency to be traded on 24-hour foreign exchange marketplaces.

In July, Finance Monthly noted that bitcoin “has managed to draw the attention of numerous forex brokers, and is widely available to be traded as part of the BTC/USD currency pair.”

While bitcoin and cryptocurrencies broadly were supposed to be immune to forex — and they generally are if you never convert your digital assets back into national fiat currencies — both the risks and rewards are greater if you make a forex bet in bitcoins.

For one thing, it’s another way to long or short a currency, and one based on a very volatile asset — meaning the impetuous to flee a fiat currency could rise or fall suddenly without real-world events driving it.

The problem is that while normal fiat forex trading has systemic risks — notably that traders can move huge amounts of money out of countries fast if there are real or perceived threats to its currency’s value — most countries have capital flow limits in place.

But trading fiat currencies into bitcoin or cryptocurrencies can fly under the radar of those controls, making it easier to get large sums out of a country during a crisis — a systemic risk.

That said, it hasn’t happened at that scale yet, but as bitcoin is increasingly perceived as a store of value — a hedge against inflation — by large institutional investors, it becomes yet another “safe currency” to flee to.