Cryptocurrency Bans and the Prisoner’s Dilemma
Recently in the New York Times, articles have been written detailing the latest efforts by governments across the world to ban or regulate cryptocurrency transactions and mining operations. In China, an outright ban on cryptocurrency transactions and mining has taken place, giving many who have built businesses around mining and exchanging cryptocurrency no choice but to leave the country. In the US, lawmakers seek to clamp down on some of the elements of the cryptocurrency ecosystem that they find dangerous to the existing financial system, and make cryptocurrency more predictable and controllable. The news of these developments may frighten many investors in the cryptocurrency space, and rightfully so. Attempts to make cryptocurrencies analogous to existing financial institutions can only detract from their value as decentralized currencies to many across the world. Investors can most likely rest assured, however, that these regulations will not turn into bans like in the case of China in most cases, due to the concept of the Prisoner’s Dilemma.
This situation of banning cryptocurrencies is analogous to the Prisoner’s Dilemma, in which there are two parties, each with two strategies they can employ. From the perspective of one country, there are two options available. One strategy is to ban cryptocurrencies in their country, and the other strategy is to keep them legal or regulated. The benefits of banning cryptocurrency from the perspective of one country are that the government loses no control over the financial systems in that country, and that the government can continue to rely upon traditional methods of taxation to fund itself. If a country were to ban cryptocurrency, however, it must depend upon every other country also banning cryptocurrency to gain these benefits. If any other country did not ban cryptocurrencies, then the country would have a worse outcome, where they maintain control over the financial system in their own country, but many investors and intelligent people working on the technology leave the country (“brain drain”). Likewise, if a country chooses to keep cryptocurrencies legal when all others outlaw it, they gain the benefits of increased immigration (“brain gain”). Thus, there is a Nash Equilibrium between all of the countries, where the most likely outcome of this game is to not ban cryptocurrencies.
www.nytimes.com/2021/09/24/business/china-cryptocurrency-bitcoin.html
www.nytimes.com/2021/09/23/us/politics/cryptocurrency-regulators-rules.html