Is Crypto in Terminal Decline?

Opinion is divided as to whether the current massive downturn in private digital currencies and related services represents a necessary and healthy shakeout or an existential threat to the crypto industry. While the sector’s true believers no doubt subscribe to the former view, others increasingly wonder whether decentralized finance will turn out to be a flash in the pan.

In this Big Question, we ask Dante Alighieri Disparte, Simon Johnson, Jim O’Neill, and Anne C. Sibert whether the death knell is sounding for the crypto craze.

The short answer is no, although this particular “crypto win

SIMON JOHNSON

The creation of Bitcoin and the rise of cryptocurrencies more broadly offered the prospect of three kinds of economic transformation: full decentralized cash-like payments (Bitcoin); a novel way to fund new ventures (by issuing various kinds of digital coins); and lower-friction peer-to-peer asset transactions (crypto investment vehicles). All three potential accomplishments are now under serious threat for the same simple reason. While the crypto project was founded on the premise of “government bad, private sector good,” it turns out that the private sector by itself – with no government oversight – creates its own vulnerabilities, including a tendency to financial panics and crashes.

Whether we are talking about the collapse of the Terra and Luna stablecoins or the freezing of withdrawals from crypto lenders such as Celsius, the key lesson is that allowing people to operate like banks without a license is very dangerous. If you borrow short and lend long, there is always the risk of a bank run. In that context, offering people extremely high rates of interest is not a sign of strength. In fact, it often indicates a need to keep money coming in the door in order to stay afloat. And simply calling something a “stablecoin” does not necessarily mean it is at all stable, at least when sentiment turns against you.

Restoring the lost credibility of crypto projects will take years. In an environment of higher interest rates, it is also likely that some of the wilder crypto promises will lose their appeal. Bitcoin seems likely to continue, in some fashion. But questions over the broader ecosystem continue to grow.

Letting people run de facto banks without proper supervision is a recipe for disaster. Versions of this have been tried many times in US and world history. It always ends badly.

ANNE C. SIBERT

Both unbacked cryptocurrencies and national currencies are fiat money without intrinsic worth. They have value because of self-fulfilling expectations. But cryptocurrencies have benefits for users that national currencies do not. Rules, rather than political whim, determine their supply. For Bitcoin, the supply is capped. Payments can be made directly from one party to another instead of requiring a trusted intermediary, and can be anonymous. Their portability is helpful to those in precarious circumstances.

But any currency is subject to a network externality: the more people there are who are willing to accept it, the more valuable it is to those who hold it. This externality gives a powerful advantage to a national currency with a long history of use and legal-tender status. So, there is an incentive to hold that rather than a cryptocurrency. But if a cryptocurrency’s user base increases, it becomes more appealing and more likely to persist. Complementary goods such as wallet services provided by financial institutions fuel further growth.

Network externalities mean that most cryptocurrencies will fail, but some will probably reach a tipping point where their wide acceptance ensures their survival. Still, there are challenges. Cryptocurrencies’ exchange rates against key national currencies have been highly volatile, but this may change if they become more widely used. While some governments have embraced cryptocurrencies, others have discouraged their use because their anonymity promotes tax evasion, money laundering, and terrorist financing. And their proof-of-work verification mechanisms are environmentally costly.

Cryptocurrencies are not yet a widely used means of payment, but an estimated 221 million people globally owned crypto assets in June 2021. The desire for a stable store of value has enabled gold to survive as a mostly intrinsically worthless financial asset for thousands of years. There is a good chance cryptocurrency will replace it.

Views expressed in the article are the author’s own and do not necessarily represent the editorial stance of Kashmir Observer. The article was originally published by Project Syndicate