According to a report by Bank of America, the cryptocurrency industry may face risk and potential market disruptions due to government measures to combat privacy.
The report says that cryptocurrencies “are challenging the ability of governments to collect taxes and control the flows of capital in a broader sense”. Uncertainty about how the U.S. government will act to limit these crypto asset use cases poses a key risk for investors.
“Encrypted private wallets with digital assets that can be transferred across borders have the potential to undermine the monetary sovereignty of each nation state,” the report notes.
In a “last resort”, regulators can simply prohibit all institutions and intermediaries from making transactions with cryptocurrencies. Or the government could strengthen customer reporting and access requirements for cryptocurrency exchanges, which the report describes as a more likely possibility.
According to analysts, the development of state-owned cryptocurrencies is not “just a form of payment competition.” State-owned cryptocurrencies are an attempt to replace private digital assets with assets under state control.
How effective the government’s anti-privacy measures will be is a separate issue. The report’s authors acknowledge that no matter how burdensome the changes to the law against privacy may be, “they may be meaningless.”
Users committed to transaction privacy “can potentially create a second’ truly confidential ‘ wallet to which they will send currency from their public wallet, and continue to make anonymous cross-border transactions.”
“At some point, banning private digital assets will become too politically risky, too disruptive for voters,” the report says. “But carefully crafted rules designed to limit privacy can place a serious burden on users.”
Analysts said they are closely monitoring the risks and expected reactions of the US government to restrict confidential cryptocurrency transactions. Given the ” uncertainty as to how the cryptocurrency market will respond to the anti-privacy situation, “the report’s authors suggest investors should”approach digital assets cautiously.”
A recent Bank of America survey of fund managers found that bitcoin is now receiving more capital inflows compared to other investment assets.