Views on cryptocurrencies – a digital currency operating independently of a national central bank – vary considerably. For some, they offer the promise of cheaper, faster and more secure transactions; for others, they are an opportunity for organised crime and terrorist financing.
Yet, thus far, the reality has lagged the hype by some distance. For bad actors, cash and the use of money service businesses and remittance companies remain dominant; for benign users, the complexity and limited opportunity to use cryptocurrencies to transact payments remains tiresome, making them attractive for their novelty value, rather than their other potential advantages.
But one issue above all others challenges users. Cryptocurrencies, as most commonly conceived, are created by independent actors and not backed by the ‘full faith and credit’ of a government, its economy and central bank, and are thus prone to wild swings in value.
Cryptocurrencies are not ‘currencies’ in the traditional sense; they are commodities or stock market investments whose value floats freely, and are entirely and solely subject to market forces.
Perhaps contrary to the traditional view, therefore, it is unlikely that, as currently conceived, cryptocurrencies will attain the status that the hype would have you believe. They will certainly be revolutionary, but most likely in a manner that will trigger their own demise, or at least relegate their use to those who want to operate outside the legal financial system. Here’s why.
If there is one thing at which the financial sector excels, it is innovation. Not always for the better (it was ‘innovation’ that led to the 2008 Global Financial Crisis), but the innate instinct of ‘survival of the fittest and smartest’ courses through the financial services industry.
When bankers spot the good ideas of others, they are quick to co-opt them as their own, stress them and improve on them. Joseph Schumpeter’s ‘creative destruction’ and the desire for profit led to relentless progress, limited only by the intervention of regulation.
Cryptocurrencies are inefficient as a form of payment, volatile in price and not guaranteed to hold their value as they are not backed by the full faith and credit of a national government.
Today’s cryptocurrencies are playing a valuable role in spurring creativity in the formal sector, but it seems most probable that they will quickly present value only to those who are seeking to hide their identity and operate, like the currencies themselves, outside the law.
Eulogy made by Tom Keatinge