http://thehill.com/opinion/finance/378891-heres-why-cryptocurrencies-are-a-sign-of-the-times
What’s
it take to get a little respect? In a Congressional Financial Services
subcommittee hearing last week, congressmen expressed “deep
skepticism” about cryptocurrencies, echoing critics’ claims that
cryptocurrencies are nothing but a pyramid scheme updated for the electronic
age. Rep. Brad Sherman (D-Calif.) stated
emphatically, “Cryptocurrencies are a crock.” And last week, bitcoin — the best
known of the cryptocurrencies — slipped to a new low under $8,000 after peaking
around $18,000 in late 2017.
But
maybe bitcoin and its cryptocurrency relations are more than that. Maybe they
are a sign of the times.
Cryptocurrencies,
including bitcoin, are built on a bit of sensible digital innovation known as
distributed ledger technology, made possible by the expanding electronic
universe. Remember the term “distributed ledger”; like “email” and “social
media,” it will become a big part of your life.
A
distributed ledger is the electronic record of actions, such as financial
transactions, changes in inventory or legal records, that are recorded nearly
simultaneously at different nodes or locations on the internet through an
algorithmic validation process. Through the magic of programming, distributed
ledgers have the attractive quality of being difficult to falsify and have
advantages of scale, accessibility and transparency over non-electronic
ledgers.
The
best known use of distributed ledger technology is blockchain. Blockchain is
distributed ledger technology that is purpose-built to record a series of
related actions. The possibilities are endless. For example, blockchain is
being used to validate the provenance of
diamonds and the business conglomerate Louis Dreyfus recently
carried out the first blockchain
agricultural trade. The phenomenal range of blockchain uses is
evident from prowling trade publications and specialty blog feeds, where
stories of new business processes using blockchain are everywhere.
But the
best-known use of blockchain is cryptocurrency.
Cryptocurrencies
are blockchain programs that mimic real-world money. They are rising in
popularity because they have attractive qualities made possible by blockchain.
They are “portable,” in the sense you can access them anywhere. They are
durable since there is a permanent record. They have, at least in theory, a
limited supply fixed by blockchain coding, and a value that is market-driven.
In short, cryptocurrencies have all the desirable attributes of
money.
And, if
not entirely anonymous (authorities can track cryptocurrency
transactions), cryptocurrencies are relatively autonomous from state
regulation and oversight and can be harder to hack than bank accounts and
credit cards. Even cryptocurrencies’ limitations are appealing. Limits set by
programming and large energy requirements to produce cryptocurrencies have
contributed to huge valuation increases.
In a
world of distrust of state and financial institutions and of economic
insecurity, techies have happened on a technique that, conceptually, frees one
from the existing ecosystem of regulatory control, legal accountability and bad
guys who want your money.
And, it
is not just dark money seeking safe havens and avenues for money laundering
that account for cryptocurrencies’ popularity. It is also reputable
institutional investors and wealth managers seeking
greater returns and novel hedges against market risk.
Still,
cryptocurrencies are to blockchain a little like a church deacon with a meth
lab in the basement. Blockchain is good because it makes business more
efficient and cost effective, but cryptocurrencies are bad because they involve
risky behavior since they seem to have no real economic or financial anchor to
ensure intrinsic value.
However,
we have been here before. Cryptocurrencies are reminiscent of U.S. “free
banking” in the mid-1800s before 1863 when a U.S. national currency was
established. Prior to 1863, the need to supply liquidity to an expanding
American economic space extending to the Pacific was filled by countless local
banks — often known as “wildcat” banks — that issued their own script. Many of
these bank scripts were based on little more than hopes and promises. Some were
under-capitalized or backed by dubious assets. Some were frauds.
Shaky
as it was, the system worked for a time because of (oft-misplaced) faith in the
security of the underlying assets and in the good faith of the local banks to
honor their obligations. Still, many went bust before the “normalization” of
monetary policy through the establishment of a national currency backed by the
full faith of the federal government, as well as federal bonds and capital
requirements and tighter federal and state regulation. Sound familiar?
A prescient 1996 paper by
the Federal Reserve Bank of Atlanta anticipated the similarity between free
bank notes and “electronic money”:
“Electronic
money is likely to consist of uninsured liabilities of private individuals or
companies. If so, perhaps the most immediate lessons from free banking are that
(1) consumers are not sheep waiting to be sheared (2) attention must be paid to
the importance of the assets into which the electronic money is convertible and
to the issuer’s reputation for making the conversion as promised.”
The
bottom line is, with so much personal and business activity moving to the
expanding digital universe, that universe needs a digital means to record and
store value, just as the American economy in the mid-1800s needed liquidity to
finance growth. Digital innovators are making that possible.
As in
1863, early adoption requires normalization. Blockchain is proving itself by expanding
its uses, and experiments in cryptocurrency are becoming more credible and
mainstream. Even countries with reputations for sobriety, such as Switzerland and Sweden, are
considering the idea of national cryptocurrencies; and yes, Venezuela —
although, in this case, it is a matter of necessity being the mother of
desperate invention.
Will
bitcoin collapse? Who knows. But will cryptocurrencies fade and wither like
hula hoops and the tulip bulb mania? Don’t bet on it. Even governments know
that it is no longer a question of extinguishing but of reining in the
wildcats.
You’ll
be using cryptocurrencies in the future, just as you will live in smart homes
and use driverless cars.
Dirk Mattheisen is a
writer/blogger on political economy and governance. He is a former assistant
secretary of the World Bank Group in Washington (2008-2012) and alternate
secretary of the World Bank Board Ethics Committee.
