LONDON, Nov 25 (Reuters Breakingviews) – The crypto winter is bitterly cold. The freeze set in earlier this year with the collapse of Terra, a digital token believed to be pegged to the US dollar. The recent failure of Sam Bankman-Fried’s FTX exchange has further lowered the temperature. According CoinMarketCap.com. As institutional investors run for the hills, financial regulators are closing in. The inevitable question arises: do cryptocurrencies have a future? To which the answer is: not under circumstances resembling normal circumstances.
True believers have not lost faith. They point out that cryptocurrencies were originally intended to provide a decentralized alternative to government-issued fiat currency, which did not require users to trust intermediaries such as banks. Instead, transactions would be recorded on a distributed ledger. In fact, most cryptocurrency transactions have ended on centralized exchanges such as FTX. The opacity, leverage, illiquidity and shady dealings in this new financial world resembled the worst of Wall Street.
Believers argue that crypto must return to its roots. That’s easier said than done, though. Holding bitcoins or competing tokens in offline digital wallets comes with a lot of risks. If the owner loses their encryption key or sends parts to the wrong address, they have no recourse. Additionally, cryptocurrencies are too volatile to serve as currency. This is why crypto pioneers developed stablecoins, which peg their market price to old-school fiat currencies. But, as Terra’s collapse demonstrates, stablecoins haven’t lived up to their name.
Bankman-Fried seemed aware of the inherent flaws in crypto. The founder of FTX agreed that digital tokens were impossible to value because they didn’t generate any cash flow. He also pointed out the incredibly slow transaction speed on the Ethereum network. In this respect, bitcoin is not much better. There is another problem. Most cryptocurrencies require so-called “proof of stake” where large holders verify transactions. But it’s theoretically possible for these “whales,” as they’re called, to take over a room, robbing the plankton of their stake.
Bitcoin has a different design, based on “proof of work” to verify transactions. But this process consumes large amounts of energy, which is problematic in times of high oil and gas prices. As Hyun Song Shin of the Bank for International Settlements points out, rewards for transaction verification rise and fall with market turnover. “Crypto only really works when coin prices go up and there are influxes of new buyers,” he concludes. In other words, the whole crypto world has the mechanics of a Ponzi scheme.
Then there is the regulatory backlash. Officials complain that the only practical use of cryptocurrencies is for money laundering or demanding ransom payments. In August, the US Treasury sanctioned Tornado Cash, a company whose software provided anonymity to crypto users. This could be more important than the potential regulations spurred by the collapse of FTX. Dylan Grice Calderwood Capital suggests that the founding dream of cryptography is dead: “Cryptography is now de facto authoritative, highly centralized, and void of privacy,” he writes.
To top it off, central bankers are reacting to the threat crypto poses to their money monopoly. China is testing a digital yuan. More than 50 million Brazilians use the low-cost Pix payment system, operated by the country’s central bank.
It is conceivable, however, that central bank digital currencies (CBDCs) will turn out to be the salvation of crypto. If money, as Fyodor Dostoyevsky said, is “invented freedom,” then CBDCs have the potential to create a digital panopticon where central authorities monitor every transaction. In the wrong hands, a CBDC could be used to sanction willful individuals, determine what transactions are permitted, or freeze financial assets without due process. No totalitarian has ever wielded such absolute power.
In such a nightmare scenario, access to a decentralized and anonymized digital currency could prove indispensable. This is the message of “Network status», a recent book by entrepreneur Balaji Srinivasan. He envisions a world in which the United States enters a civil war and the Chinese digital yuan is used to track people around the world. In this world, bitcoin serves as a lifeboat for civilization, providing protection against both anarchy and the surveillance state.
Readers must judge for themselves whether this dystopian vision is believable. The Covid-19 pandemic has taught us how quickly long-established societal norms can be upended. In China, fintech apps have been adapted to facilitate confinements and issue individuals with stay-at-home orders. In the West, PayPal (PYPL.O) recently frozen accounts of those deemed to have violated the “acceptable use policy” of the online payment company. After Russia invaded Ukraine, Western governments froze President Vladimir Putin’s access to the country’s foreign exchange reserves and restricted Russia’s access to the SWIFT global payment system.
In less dramatic scenarios, it’s hard to see a future for cryptocurrencies, except perhaps as tokens for the online gaming community. In recent years, their primary function has been to provide access to a vast online casino. Near-zero interest rates and quantitative easing sparked enthusiasm for crypto. Digital tokens have provided the most hyperreal form of wealth – what French philosopher Jean Baudrillard called a simulacrum, defined as something that simply has the shape or appearance of a thing, without possessing its substance or qualities. clean.
Back on planet Earth, investors need a store of wealth that protects them against inflation and economic disaster. They better reject “digital gold,” as bitcoin is sometimes dubbed, and embrace reality. Like bitcoin, gold is energy-intensive to produce and its supply is limited. Like bitcoin, it is quite difficult to value. Tradition has it that one ounce of gold should buy about 15 barrels of oil or 350 loaves of bread. The gold-oil ratio is in line with its long-term average. A 650 gram sourdough loaf at UK supermarket Waitrose costs 4.11 pounds ($4.98). Multiplied by 350, this is also close to the current gold market price of around $1,750 per ounce.
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Edward Chancellor is the author of “The Price of Time: The True Story of Interest”.
Editing by Peter Thal Larsen, Streisand Neto and Oliver Taslic
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