So just like it may be illegal to sell or even hold drugs, it may become illegal to sell or even hold cryptocurrencies. In principle, you may have cryptocurrencies in your living room – just like you may have hashish – but there may obviously exist laws that will send you to prison for XY years if a court gets some evidence that you're selling the cryptocurrencies, e.g. if you happen to sell them to a provocateur hired by the police. At that moment, almost all people will simply abandon cryptocurrencies – much like most people avoid hard drugs. They don't want to have anything to do with illegal things because they don't even want to take the risk of years in prison.
Cryptocurrencies are a classic example of a pyramid scheme in which the founders or early adopters make the largest and safest profit, the profit is diminishing, and the promotional search for new participants is what keeps it going. The ICOs, the offerings of the new "altcoins", are activities by which some people try to keep the positive exponential expansion rate of the bubble. The bubble may keep on expanding up to some point that we can't predict. It's equally plausible that the $5,000 price of the Bitcoin was a historical maximum and we won't see it again.
Now, let's look at the reasons why it may be a good idea, if not a vital decision, to ban the cryptocurrencies.
1. Protection of citizens against too risky trades
I started with that justification not because I consider it the most important one but because that's the justification that China has used to ban the cryptocurrency exchanges in the country. The documents say that these exchanges involve too huge an amount of risk, it's an extreme gambling, and the Chinese citizens need to be protected against it. They need to be protected for the same reasons why gambling is regulated by governments – not only Chinese governments. Some gambling addicts may lose their last money. They become a liability for their families or the whole society. They become screwed. And if there were too many victims like that, it could be a threat for the financial system or the fiscal balance of a whole country. The governments may very well take this attitude and the Chinese government has started with it.
2. Cryptocurrencies are used for illegal drug sales, other types of organized crime, by terrorists, and North Korea
I have clumped these reasons and mentioned three representatives in the headline. There exists evidence of various strength that the organized crime, terrorism, and rogue countries are using the cryptocurrencies. This section also includes more general "money laundering" – efforts to obfuscate the source of money and make illegally obtained money look legal. It's good for the criminals and rogue countries to use cryptocurrencies exactly because these non-currencies are "crypto", i.e. hard to see and trace. This characteristic may be promoted as an advantage of cryptocurrencies but from the legal perspective, it's obviously a huge minus, a reason to go after their neck.
So even the U.S. government may decide that some fight against North Korea, an Islamic terrorist group, or some drug mafias justify the liquidation of a cryptocurrency or all of them, so all of them may be suddenly outlawed. If trading becomes illegal, the value of the cryptocoins will be basically zero for all the people who want to obey the law, and it's a big majority.
3. The transactions work on a consensus of a majority of CPU power but someone big could overtake it, after all
As I discussed e.g. in the analogy between the subjective wave function and the copies of the blockchain, a key advance made by the founder of the Bitcoin, Luboshi Nakamotl, was the decentralization of the trust. When money is stored electronically, something must prevent the people from double spending of their money. Normally, a trusted bank institution has the official ledger of the transactions. It's not good enough for some people.
So the Bitcoin contains this clever idea – in some sense, the only new clever idea – how to make sure that no single authority has to be trusted. The trust is distributed over all users of the Bitcoin. It's cute that it's possible – in some sense, it is analogous to the remarkable fact that classical physics admits a novel cousin, quantum mechanics, that is capable of doing everything that classical physics did correctly and much more even though it's fundamentally completely different.
But in the case of the Bitcoin, I don't really think that it's any progress from the practical point of view. You don't need to trust a single banking institution. Instead, you have to trust someone else – in this case, the majority of the CPU power used for the mining. That's an amusing and creative change of the paradigm but does it really make things "better"?
I doesn't make things better from my viewpoint. I've dealt with dozens of banks in my life and as far as I remember, no single bank has ever made a transaction that I would consider "stealing". I don't have a problem with the banks' integrity. On the other hand, I have no reason to think that an abstract collective known as the "majority of the holders of mining CPU power" are ethically better than a bank that I chose from a list of competitors. You know, whenever I was opening an account, I had a selection of banks to choose from, and the best selected ones seemed more honest to me than the "average member of a herd". The Bitcoin's distribution of the trust moves the power from the bank – which I could select – to the herd which is always "average", so I think it makes things worse for me. It robs me of the freedom to choose.
The arguments between cliques of miners, holders of the Bitcoin – whether to increase the size of blocks, introduce SegWit, and other things – are particular examples of the fact that the people who ultimately "possess the trust" are still people so they may be liked by some others, disliked by others, considered reasonable or ethical or unreasonable or unethical. This broader sociological or psychological point – that some people like some other people more than others – just wasn't changed by the decentralization at all.
And you may easily imagine that some rogue group of folks actually do become the "consensus builders" in the Bitcoin. I think it's enough to grab the majority of the mining CPU power for a few hours and you may basically do anything you want with the rules that govern the currency – and with the list of transactions, too. I can imagine that in a few years, North Korea will have a sufficient number of computers that will be fully dedicated to mining during a certain hour. You know, North Korea may order its citizens to cooperate with the government, too. So North Korean owners of computers could be obliged to get the code that starts mining at some point.
After some minutes or hours of the dominant North Korean mining CPU power, North Korea could become the consensus builder and steal all the Bitcoins or do something else. So it was cute for Nakamotl to design a new system in which the trust is held by someone else – a decentralized group with voting rights dependent on the CPU (well, mostly GPU) power – but again, this doesn't make the system any safer or more ethical. It just gives the power to some people or organization defined in a different way.
In this way, the belief that the world is made "more ethical by a technological fix" is a typical utopia believed by deluded leftists. Technology has nothing to do with morality or people's trust in each other – which can always go away.
I mentioned that North Korea could overtake control over the Bitcoin. Well, there's a much more urgent and realistic threat. China is in the process of banning private cryptocurrency businesses. It may decrease the output, the price may collapse, but something else may happen, too. China is also apparently banning the private Bitcoin miners. Instead of banning them, it could just nationalize their equipment and businesses. In that way, the government of China would control the current fraction of the Bitcoin mining power produced in China – some 65% – which means that according to the rules of the Bitcoin, that government could control and change the rules for the Bitcoin in the whole world and e.g. move all your coins (or a 10% tax) to theirs. That's simply how the Bitcoin works! In some practical sense, all your Bitcoins are already owned by the Chinese government!4. Tax evasion and circumvention of other parts of the financial regulation
Mojmír Hampl, a big animal in the Czech National Bank, wrote that you shouldn't be afraid of the Bitcoin. It isn't a threat for the standard banking system because it's so small, especially when it comes to the volume of transactions, so the right attitude is to neither help nor attack the cryptocurrencies.
This comment depends on their being small – currently around $130 billion capitalization of all cryptocurrencies in the world. When this assumption changes, Hampl's reasoning could change, too.
It seems very likely that a big majority of the transactions that are denominated in the Bitcoin are not taxed. So even if the people sell coffees instead of drugs (which were mentioned above), they probably fail to pay taxes. This brings them extra advantages and it robs the government coffers. There are very good reasons to think that this is actually happening – again, cryptocurrency payments are probably evading taxation more often exactly because they're "crypto" once again – and this could be a very good reason to ban the cryptocurrencies if that grey-like economy gets too big.
Taxation is just one part of the "standard government regulation" that the Bitcoin or similar economy may be avoiding. Normal banks have to obey lots of conditions in civilized countries – to protect the financial system against a collapse, to protect the clients against fraud, and stuff like that. People involved in an IPO or a bank have to have the proper education, degrees, and/or experience. Once again, the cryptocurrencies' intrinsic characteristic is that they make it easier to circumvent all these aspects of the regulation. That's why those who are involved in this industry could be treated exactly on par with "banks" without licenses from central banks and similar people and organizations that work outside the law.
5. The blockchain may permanently store classified, copyrighted, and illegal offensive information
When you want to pay in the Bitcoin independently of any exchanges, you download the whole 150-gigabyte blockchain, the ledger – a sequence of the blocks which contain digital signatures of the people who have paid some Bitcoins. There are lots of codes in the blockchain and many of them may be adjusted.
One funny consequence is that by making payments, sometimes very modest payments, you may store lots of information in the blockchain. The information will be copied to every single full-blown independent user of the Bitcoin, everyone who has the Bitcoin Core wallet, for example! In particular, lots of texts have been stored in the blockchain. You may see some random messages at Cryptograffiti.com. Here you have a medium.com guide how to store the messages in the blockchain. Well, you may store whole photographs and other things, too.
For dozens of dollars, you may make small payments and encode the whole new book by Hillary Clinton on the blockchain. This book will be copied to the hard disks of all users of the Bitcoin blockchain even if they don't want it. Hillary could sue the Bitcoin users and demand the blockchain to be erased from all these hard disks because it violates her copyrights – only she has the exclusive right to whine and blame others because she sucks. I find it plausible that the courts could agree with her.
Needless to say, someone who wants to liquidate the Bitcoin could upload a copyrighted document deliberately, short the Bitcoin, and then start some legal actions against the copying of the copyrighted information.
On top of that, you may use the blockchain to publish and widely distribute classified information. Find that someone is an agent and some evidence. You may announce it through the Bitcoin blockchain. Also, you may upload a photograph of Prophet Mohammed's sex with a sheep. Over a billion of Muslims – who were just explained what the blockchain contains – could get upset because of that and demand the liquidation of the blockchain, too. You can surely invent lots of examples. Calls to eradicate Black Lives Matter may also be illegal somewhere in the U.S. but they may still be uploaded to the blockchain. The comment by Cryptograffiti.com that they will "contact police if you upload something illegal" is laughable. You can't really effectively prevent such things in the long run.
So the 2009 paper by Luboshi Nakamotl outlined some new ideas but they're not terribly practical. They will become more practical and safer when someone well-known and visible, like banks, central banks, or governments, will actually be in charge of the new cryptocurrencies. They should also intervene into the trades with the cryptocurrencies to peg them to old currencies or to target the inflation rate or nominal GDP growth or something else because those stabilizing rules are needed for an actual currency, another big point that the cryptocurrency cult completely fails to understand.