Regulation is more likely to be a negative than a positive for cryptocurrencies, Mohamed El-Erian says

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Regulation is more likely to be a negative than a positive for cryptocurrencies, Mohamed El-Erian says
REUTERS/Lucy Nicholson
  • Mohamed El-Erian says regulation is likely to be negative for cryptocurrencies.
  • The noted economist believes gov. fears over illicit payments and their desire to compete in the space make regulation an issue.
  • China is already trying to make space for its centralized digital currency by crowding out the competition, according to the economist.

Mohamed El-Erian, the chief economic advisor at Allianz and president of Queen's College, Cambridge, told CNBC on Monday that he believes regulation is likely to be a negative for cryptocurrencies.

"So I think you have to take regulations really seriously and it's more likely to be a negative than a positive for a decentralized currency," El-Erian said.

The Queen's College president's comments echo statements from Coinbase's CEO Brian Armstrong, who said regulation poses one of the biggest risks to the crypto market in an interview in April.

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El-Erian gave two main reasons why regulation is bearish for decentralized cryptocurrencies like bitcoin or ethereum in his mind.

First, governments' fears over illicit payments could cause them to crack down on decentralized cryptocurrencies after recent ransomware attacks.

Hackers from the group Darkside reportedly received $90 million in bitcoin ransom payments after the Colonial Pipeline attack that shut down approximately 5,500 miles of oil pipelines in the eastern US, causing fuel outages.

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El-Erian and other experts are worried that bitcoin's decentralized nature helps hackers make off with ransom payments after attacks, creating cybersecurity concerns that could force government intervention.

Second, governments have a strong desire to compete in the digital currency space.

"Governments have understood that they should be in this game," El-Erian said. "I think of China as trying to make room for a centralized digital currency. They want to occupy that space. So you have to crowd out the decentralized one and that's what they're trying to do."

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El-Erian did say that, at the end of the day, both centralized, government-backed digital currencies and decentralized cryptocurrencies like bitcoin can exist at the same time.

However, the top economist also noted that the prospects for decentralized currencies could be damaged by the new, competing offerings.

In a Sunday Bloomberg op-ed, El-Erian laid out the case for why China is cracking down on cryptocurrencies, saying the country fears the crypto space could threaten its national security and economic stability.

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"Many governments and central banks remain worried about the risks that cryptos pose for national security and economic and financial stability," El-Erian wrote.

"Long-standing concerns have focused on the facilitation of illicit payments, weak investor protection, the possibility of eroding the effectiveness of monetary policy, and the loss of the seigniorage that comes with the widespread issuance and use of competing currencies," he added.

If regulations like those in China spread to the US and Europe, it would be a negative for the crypto space, in El-Erian's view.

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