Kazakhstan Unrest Roils Crypto Market, Shows Vulnerability as Global Currency

Political instability in Kazakhstan was front and center last week, as major cryptocurrencies like Bitcoin and Ethereum lost a significant portion of their value.

Sources close to the situation say the sell-off was sparked by the central government's decision to shut down the internet, taking nearly 88,000 regional mines off-line and lowering the total global hashrate, the amount of energy being used to mine Bitcoin, by nearly 11% overnight.

The event reveals the vulnerability of cryptocurrencies to non-market forces, with government action and regulation emerging as two major impediments for an industry that seeks to challenge the U.S. dollar and other fiat currencies for international currency hegemony.

"State control of Internet access is obviously concerning, particularly when states have unilateral ability to be able to shut down the internet for political purposes," a cryptocurrency expert told Newsweek under condition of anonymity.

"I think we're going to see more of that around crypto the same way we've seen it happen with social media," the source added. "When there are protests, some governments choose to shut down social media and we will likely see the same thing with cryptocurrencies."

Speaking to the same point, Alan Dorjiyev, President of the National Association of Blockchain and Data Centers Industry in Kazakhstan, told Newsweek that, "In the medium term, the greatest obstacle to the industry is regulation, countries wanting to use cryptocurrency and local governments preventing that."

Bitcoin was initially created as a digital alternative to fiat currencies, allowing users to circumvent the authority of banks and governments. But as cryptocurrency gains popularity and becomes increasingly entangled in finance and commerce, it may no longer be able to escape regulation, he said.

TripleA, a Singapore-based crypto firm that according to its website "helps businesses to increase their revenue by accessing the growing cryptocurrency users," estimates that over 300 million people currently use or own cryptocurrency assets. India leads the way with over 100 million users, followed by Nigeria and the United States.

Most of this adoption came in the last two years, with the total market cap of cryptocurrencies soaring by over 900%, from around $200 billion in 2019 to more than $2 trillion today.

The rising popularity of cryptocurrencies like Bitcoin, Ethereum or stablecoins, as well as decentralized finance (DeFi) and non-fungible tokens (NFTs), has attracted the interest of both institutional and retail investors.

At the same time, massive price volatility, a surge in cryptocurrency scams and hacks and the opportunity for tax evasion have alarmed central governments and regulators around the world, pushing them to take action.

Governments responses and regulations to this emerging industry have ranged from an outright ban on mining operations to adopting crypto as legal tender.

U.S. Federal Reserve Chairman Jerome Powell and Security and Exchange Commission Chairman Gary Gensler have both expressed concern over the lack of standard cryptocurrency regulations.

Powell told reporters in December that he views crypto currencies as "really speculative assets." But despite some initial hesitation, an official regulatory framework is currently being discussed by Congress and the Federal Reserve.

"Smart legislation is on the way in the coming months," said Senator Cynthia Lummis of Wyoming, a Bitcoin holder and congressional crypto champion.

Some are optimistic about the effects of regulation on markets, like Peiying Chua, financial regulation partner at the global law firm Linklaters, who told Forkast that, "Increased regulation may encourage growth in this industry, as investors take comfort from regulatory oversight once the rules of the road for digital assets are made clear."

On the other hand, Colin Harper, Head of Content and Research at Luxor, told Newsweek that he would prefer that the industry remain largely unregulated, though he acknowledges that some level of regulation is inevitable.

"I could see the value for a government wanting to have some structures in place," he said. "But if I was a government, the only thing I would want to think about is how to tax it and prevent illegal transactions."

If cryptocurrency is incorrectly regulated, he argues, it runs the risk of losing its key value proposition.

"If you fold cryptocurrency into the financial regulations that we have for legacy assets," he said, "it loses its purpose in a way."

Citing political instability, market crashes and rapidly rising inflation across the world, Dorjiyev of Kazakhstan said that as fiat currencies in countries like Turkey or Nigeria experience devaluation, the decentralized nature of cryptocurrencies will allow individual users to protect themselves financially.

"Most fiat currencies are a matter of hope and belief," he said. "Their main disadvantage is that without a fixed amount of money, you can easily print five million dollars tomorrow. This will lead to something bad."

"This whole generation of millennials has the inclination not to trust the current monetary system because it looks like it doesn't work," Dorjiyev added.

Luxor's Harper concurred with Dorjiyev's assessment.

"Millenials don't own many assets, equities, or even their own homes," he said. "They are looking for something to actually have a stake in."

"The internet has unlocked opportunities that were not available to our parents or previous generations," he added, "and a lot of people see cryptocurrency as a way out of that."

Despite ongoing conversations about effective regulation in the U.S., Harper noted that national governments have for the most part have shown little interest in the principles that led to the creation of cryptocurrency.

"Congress has not done a good job of actually getting input from the people who are pulling the levers in a lot of the parts of this industry," he said.

The anonymous industry source told Newsweek that the crypto debate is actually about human rights.

"If individuals have a basic human right around freedom of expression and choice, does that apply to what currencies they can access?" he said. "I would argue it does."

Dorjiyev sees the rise of cryptocurrencies as inevitable.

"The old generation is retiring and the new generation is coming," he said.

Jack dorsey elon musk the b word conference
Jack Dorsey (left, pictured at the Bitcoin 2021 Convention on June 04, 2021 in Miami, Florida) and Elon Musk (pictured right on December 01, 2020 in Berlin, Germany), have been front and center in promoting the use of cryptocurrency. Joe Raedle/Getty Images/Britta Pedersen-Pool/Getty Images