US economist Paul Krugman was one of many who predicted cryptocurrencies were a passing fad and would be another bubble that would soon burst like the dot.com boom in the early 2000s. But national and international players are now getting serious about regulation, mulling restrictions that could go to the heart of cryptocurrencies' appeal.
France said this week it was establishing a Group of Seven Nations (G7) task force to look into how central banks can ensure cryptocurrencies adhere to money-laundering and consumer protection rules.
Fears have intensified after Facebook's decision to enter the field. The social media giant plans to partner with financial institutions, including Mastercard, and fellow technology companies such as Uber and PayPal to create Libra Association.
US Treasury Secretary Steven Mnuchin said: "They're going to have to convince us of very high standards before they have access to the US financial system." US Federal Reserve Chairman Jerome Powell, German Finance Minister Olaf Scholz and his French counterpart Bruno Le Maire have also spoken out against Libra.
Mark Carney, the Bank of England's governor, said issues such as money laundering, terrorist financing controls and data protection needed to be addressed before Facebook can be allowed to launch its digital coin. He said the central banks would need to have direct oversight.
Bitcoin prices crashed on the G7 announcement. They had risen 55% in just nine days after Facebook unveiled its Libra cryptocurrency, before sliding this week by about 30% from 18-month highs of almost $14,000 (€12,000). The top four so-called altcoins, or alternative cryptocurrencies, also rose between 10% and 33% after Facebook's announcement. This week, however, the second biggest coin, Ethereum, crashed by nearly 50%. The third largest, Ripple's XRP, was down 40%, while Litecoin and Bitcoin Cash slumped 40% and 42%, respectively.
"Bitcoin developers, crypto users and speculators refused to see the regulatory writing on the wall," Allan C. Hutchinson, a research professor at Osgoode Hall Law School, said. "With a combustible mix of greed and naivete, they put their heads in the digital cloud and simply hoped against hope that the day of regulatory reckoning would not come."
Skepticism has been further fueled by the fears that widespread adoption of the new digital currency by Facebook's 2.38 billion users could undermine the financial system.
"They agreed that projects such as Libra may affect monetary sovereignty and the functioning of the international monetary system," a French statement said on Thursday after a meeting of G7 finance ministers near Paris.
"The days of an unregulated crypto market are numbered," Hutchinson said.
Apart from imposing licensing, disclosure and auditing requirements on cryptocurrency exchanges, the role of software programmers needs to be tackled, he added.
"Some will rejoice at this prospect; its use for money laundering, terrorist financing and tax evasion is a problem in need of a serious solution. Others will be horrified at the encroachment of government and big banks in their efforts to reclaim control of the financial sector," Hutchinson added.
"The government and the crypto sector are locked in an unnecessary all-or-nothing battle: Cryptocurrency will continue in its original, pristine form or it will be legislated beyond recognition."
But Hutchinson says it need not be that way. "With some common sense and a willingness to compromise, cryptocurrency can move forward and play an important, if marginal, role in banking and finance."