The future of central bank digital currency (CBDC) is highly dependent on the actions and decisions of central banks and governments around the world. As of now, some central banks are actively exploring the possibility of issuing their own digital currency. For example, the People's Bank of China has been working on a digital version of the Chinese yuan for several years, and it's expected to be launched in the near future. Other central banks, such as the European Central Bank and the Bank of Japan, are also conducting research and pilot projects on CBDCs. However, the decision to issue CBDCs is not one that should be taken lightly. There are many technical, legal and regulatory challenges that need to be addressed before launching CBDCs. Furthermore, Central Banks will have to ensure that CBDCs will not lead to financial stability risks and that it will coexist with other forms of money. If CBDCs are successfully implemented, they could have a significant impact on the global economy and financial system. They could provide an alternative to private cryptocurrencies, while also making it easier for people to access and use digital payments. Additionally, they could also help to reduce the risks associated with physical cash and improve financial inclusion.
On the other hand, if not properly implemented, CBDCs could lead to unintended consequences such as financial stability risks, erosion of privacy and freedom and a decline in the use of bank deposits and other financial products. Central bank digital currency (CBDC) is a topic that has been gaining a lot of attention in recent years. As the world becomes increasingly digital, many central banks are exploring the possibility of issuing their own digital currency as a way to modernize their monetary systems and stay relevant in the age of digital payments. There are a number of potential benefits to CBDCs. For one, they could help to reduce the risks associated with physical cash, such as the potential for counterfeiting and money laundering. They could also make it easier for people to access and use digital payments, especially in areas where access to traditional banking services is limited. One of the main arguments in favor of CBDCs is that they could provide an alternative to private cryptocurrencies like Bitcoin, which are decentralized and not backed by a government. CBDCs, on the other hand, would be issued and regulated by central banks, providing a level of oversight and stability that is currently lacking in the world of private cryptocurrencies. However, there are also some potential downsides to CBDCs. One concern is that they could further erode privacy and financial freedom, as central banks would have access to detailed information about how individuals are using the currency. Additionally, the introduction of CBDCs could also have an impact on the traditional banking system, potentially leading to a decline in the use of bank deposits and other financial products. Overall, the idea of central bank digital currency is an interesting one that deserves further exploration. While there are certainly potential benefits, it's important for central banks and policymakers to carefully consider the potential downsides and unintended consequences before moving forward. Ultimately, any decision to issue CBDCs should be made with the goal of promoting financial inclusion, stability, and security for all citizens.
0 Comments
The issue of the creation of a BRICS reserve currency has taken on particular significance in recent months after President Putin declared that the creation of such a currency was in the process of discussion. This was followed by a series of statements coming from Russia’s legislative branch on the expediency of creating a new reserve currency — most recently from the Federation Assembly speaker Valentina Matvienko. While the debate on the possibility of creating such a reserve currency is only starting in Russia and more broadly across the global economy, the implications of such a move on the part of the BRICS could have transformational consequences for the global financial system.
Initially, the proposal to create a new reserve currency based on a basket of currencies of BRICS countries was formulated by the Valdai Club back in 2018 — the idea was to create an SDR-type currency basket composed of BRICS countries’ national currencies as well as potentially some of the other currencies of BRICS+ circle economies. The choice of BRICS national currencies was due to the fact that these were the among the most liquid currencies across emerging markets. The name for the new reserve currency — R5 or R5+ — was based on the first letters of the BRICS currencies all of which begin with the letter R (real, ruble, rupee, renminbi, rand). The recent debates concerning the prospects for the creation of a new reserve currency focused more on the risks, fragilities and outright impossibility of the R5 project. Less attention has been accorded to estimating the benefits (including in terms of hard figures) to BRICS economies and EM more generally. There has also been scant attention with respect to the actual modalities of launching the BRICS reserve currency. What is clear at this stage is that the BRICS reserve currency will not be created to replace the national reserve currencies of the BRICS economies — rather it will complement these national currencies and will serve to improve the possibilities for more EM currencies to attain reserve status. Accordingly, the attainment of high trading shares among the BRICS economies is a desirable but not altogether an indispensable condition for launching the new reserve currency. In fact, the new BRICS currency does not have to service all trade transactions among BRICS economies in the very near term. Initially, the new BRICS currency could perform the role of an accounting unit to facilitate transactions in national currencies. In the longer run, the R5 BRICS currency could start to perform the role of settlements/payments as well as the store of value/reserves for the central banks of emerging market economies. Within the composition of the R5 currency basket the share of the Chinese renminbi may be initially set at a relatively high level in order to take advantage of the already advanced reserve status of the Chinese currency. This share may be reduced progressively in stages later on along with the inclusion of new EM national currencies. Outside of the BRICS economies some of the potential candidates that with time could be included into the R5+ currency basket may feature the Singaporean dollar or the UAE’s dirham. One of the potential risks associated with the use of EM currencies in reserves is their high volatility. The basket mechanism of the BRICS reserve currency will allow for reducing some of this volatility via averaging out the exchange rate dynamics of currencies that follow different market trends — if the currencies of Russia, South Africa and Brazil follow the commodity cycle, the opposite is true with respect to commodity importers such as India and China. Importantly, the scope for employing the new reserve currency in the world economy is sizeable given the tremendous potential for de-dollarization. The new BRICS reserve currency can act in concert with the stronger role performed by BRICS national currencies to take on a greater share of the total pie of currency transactions in the world economy. This greater role can be gradually extended from servicing foreign trade transactions to investment flows across the developing world. In line with the original R5 concept developed by Valdai Club in 2018 one of the possible venues for boosting the use of national currencies and the BRICS reserve currency could be the creation of a platform for regional development banks in which BRICS economies are members. Such a platform could develop a portfolio of common/integration projects that may be financed in national currencies. In the end, the launching of a new reserve currency if successful will impart a transformational effect on the international financial system. The Central Banks in the global economy are experiencing a notable shortage of reserve currencies in managing their reserve holdings. In this respect, the emergence of additional reserve currencies from among the EM economies will serve to expand the possibilities for diversifying reserve holdings and reducing the vulnerabilities associated with the dependence on a narrow range of currencies. The R5 project can thus become one of the most important contributions of emerging markets to building a more secure international financial system. The collapse of the FTX exchange threatens to topple more cryptocurrency companies, BlackRock chief executive Larry Fink warned during the New York Times DealBook summit. BlackRock, the world’s biggest asset manager, is among the financial firms affected by the bankruptcy of the Bahamas-based crypto exchange. Fink’s company manages $10 trillion in assets on behalf of clients ranging from huge pension funds to high-net-worth individuals.
“I actually believe most of the companies are not going to be around,” the long-time sceptic of cryptocurrencies stated. Fink also disclosed that his company had invested roughly $24 million in FTX. “Could we have been misled?” he asked. “Until we have more facts, I will not speculate.” According to the businessman, there were “misbehaviours of major consequences” at FTX, but he still sees potential in the technology underlying crypto, despite all the problems. The collapse of the FTX exchange has set off a chain reaction, triggering a crisis of confidence in the cryptocurrency market. This week, leading cryptocurrency lender BlockFi, which was financially entangled with FTX, filed for bankruptcy. Embattled brokerage Genesis is currently trying to avoid the same fate. Major exchange Kraken said on Wednesday it would lay off 1,100 employees despite having “no material exposure” to FTX. According to Bloomberg, more than 130 FTX-affiliated entities have already gone bust. Credit Suisse, the investment bank whose shares plummeted to record lows this week over fears it could be on the brink of collapse, is selling the five-star Savoy hotel in the centre of Zurich for as much as 400m Swiss francs (£361m).
The bank, whose stock has fallen by more than 40% in the past six months, said on Thursday it had put the 184-year-old hotel on Paradeplatz in the heart of the city’s financial district on the market as part of a regular review of its global real estate assets. “As part of this process, the bank has decided to start a sales process for the Hotel Savoy,” a spokesperson said. “We will carefully assess all offers and potential investors and communicate any decision in due course.” The news was first reported by the financial news blog Inside Paradeplatz. It said the hotel, which is undergoing a major refurbishment and due to reopen in 2024 as Hotel Mandarin Oriental Savoy Zurich, was the bank’s last remaining “trophy asset” and described its sale as a “king-size distress signal”. “The intended sale of the Savoy shows how serious the situation at the big bank is. Despite the conversion and restart as Mandarin in 2024, [Credit Suisse] apparently wants to part with the noble building in a top location as an emergency,” said the blog, which is written by Lukas Hässig and has broken a string of market-moving stories in Switzerland. “The CS bosses feel compelled to throw everything that still has value on the market. You need liquidity to stay afloat – too many customers are running away.” Credit Suisse has had to urgently raise capital, stop share buybacks and cut its dividend after a serious of crises and scandals. The bank plunged from a profit of Sfr2.7bn in 2020 to a loss of Sfr1.6bn last year, driven mostly by big losses on its investments in the failed supply chain finance group Greensill and the hedge fund Archegos – where US authorities have charged founder Bill Hwang and three others with racketeering and fraud offences after its collapse. Credit Suisse has also paid large fines after admitting to fraud over bonds it issued that were supposed to be used to fund tuna fishing in Mozambique but where some of the proceeds were diverted by one of its contractors in the country to pay kickbacks, including to bankers at Credit Suisse. And its private banking division – traditionally a cornerstone of Swiss banking – has been put under pressure after Suisse secrets, an investigation conducted by a consortium including the Guardian that exposed the hidden wealth of clients involved in torture, drug trafficking, money laundering, corruption and other serious crimes. Credit Suisse shares, which were worth more than Sfr9 in January, collapsed to a record low of Sfr3.5 on Monday, but have since recovered slightly to Sfr4.2. The BRICS countries are working on establishing a new reserve currency to better serve their economic interests, ambassador at large of Russia’s Foreign Ministry Pavel Knyazev said this week. It will be based on a basket of the currencies of the five-nation bloc. “The possibility and prospects of setting up a common single currency based on a basket of currencies of the BRICS countries is being discussed,” Knyazev said during a discussion about expanding BRICS and the Shanghai Cooperation Organization.
According to the diplomat, member states are “actively studying mechanisms” to exchange financial information to develop a reliable alternative for international payments. In an effort to reduce reliance on the dollar and euro, BRICS is set to build a joint financial infrastructure that will enable a reserve currency to be created. The group, which comprises Brazil, Russia India, China, and South Africa, has been boosting economic ties, with trade turnover steadily growing despite restrictions brought on by the pandemic and conflict in Ukraine. BRICS had previously said it was working on establishing a joint payment network to cut reliance on the Western financial system. The member countries have also been increasing the use of local currencies in mutual trade. The euro inched higher on Tuesday, reversing earlier falls that had taken it to the brink of parity with the dollar, but it stayed under heavy pressure from a potential energy supply crunch and uncertainty over the ECB's rate rise campaign. The euro fell as low as $1.00005, before edging off that level . By 1315 GMT it was up 0.15%, at $1.00540.
Neil Jones, head of currency sales at Mizuho, said markets had been 'short' the euro in anticipation of a break below parity, but "we didn't get it and now these shorts are buying back into the early New York market". One-month implied euro-dollar volatility, a gauge of expected swings, around 12.5% , the highest since March 2020. The biggest pipeline carrying Russian gas to Germany, the Nord Stream 1, began annual maintenance on Monday, with flows expected to stop for 10 days. But governments and markets are worried Russia might extend the shutdown, exacerbating the euro bloc's energy crunch and tipping its economy into recession. A dire reading from the ZEW economic research institute, reinforced the economic gloom, showing German investor sentiment nosedived in July to -53.8 points from -28.0 in June. "The market is playing cat and mouse with euro parity at the moment in the absence of any major macro drivers," said Simon Harvey, head of FX at Monex Europe, adding that Wednesday's U.S. inflation data -- expected at 8.8% for June -- could prove the catalyst. "We may have to wait for U.S. CPI...or a clearer picture for European energy markets once planned maintenance in Nord Stream comes close to finalising for euro-dollar to break the threshold," Harvey added. Euro weakness was most pronounced against the dollar. The dollar index , which tracks the unit against a basket of six counterparts with the euro most heavily weighted, earlier climbed to 108.56, its highest since October 2002, but then eased to $108.10. Analysts also cited growing uncertainty over the European Central Bank's plans to raise interest rates, initially by 25 basis points in July, then by 50 bps in September. Fed funds futures, meanwhile, price U.S. rates reaching 3.50% by March, rising from 1.58% currently. "The expectation is for the (U.S. Federal Reserve) to do 75 bps this month and its aim seems to be to get to neutral (rates) as soon as possible, while with ECB, it's more of a mixed message given the backdrop over gas," said Sarah Hewin, senior economist at Standard Chartered. Euro weakness has been a big part of the dollar index's push higher, but the greenback has been also supported by worries about growth elsewhere, with China in particular implementing strict zero-COVID policies to contain fresh outbreaks. The offshore-traded yuan approached one-month lowsat 6.753 . The dollar slipped however to 136.72 yen , down 0.5%, following Monday's jump to new 24-year highs at 137.75. The stuttering global economyis undermining commodity-focused currencies. Canada is expected to raise interest rates by 75 bps respectively on Wednesday but the Canadian dollar eased 0.2% versus U.S. dollar. Russia is willing to "sacrifice" part of its budget to intervene in the foreign exchange market and weaken its currency, the ruble. This was stated by the Russian finance minister on Wednesday. The ruble is at its highest level since 2015. Before the Russian invasion of Ukraine, a dollar was worth more than 80 rubles, today only 52 rubles. This situation has been created by the measures taken by Moscow to protect the Russian economy against Western sanctions and by the fall in imports. However, a strong ruble is putting pressure on the Russian government as it undermines exports.
"The exchange rate of the ruble is vital for exporters, so we have decided within the government to study proposals on this next week," said Finance Minister Anton Siluanov during a forum with representatives from the business world. Profit from oil and gas The minister said the government is "willing to sacrifice part of the budget" by "using excess oil and gas revenues to intervene in the foreign exchange market" and contain the ruble. Specifically, this would involve buying currencies from "friendly" countries - which Moscow did not impose sanctions on after Russia's invasion of Ukraine - to weaken the ruble against foreign currencies, including the dollar and the euro. "I see that as the ultimate measure with the heavy artillery," said Siluanov, who emphasized that no final decision has been made yet. Economic Development Minister Maxime Rechetnikov already openly criticized his colleague's plan on Wednesday. "We do not see this proposal as a solution to the current situation," he said. Bitcoin fell sharply on Monday, as the sell-off across cryptocurrencies showed no sign of abating and US firm Celsius Network froze withdrawals. The cryptocurrency lending platform, which has around 1.7m customers, also froze swap and transfers between accounts, blaming “extreme conditions market conditions". In a blogpost, it said: “We are taking this action today to put Celsius in a better position to honour, over time, its withdrawal obligations. “We’re taking this necessary action for the benefit of our entire community in order to stabilise liquidity and operations while we take steps to preserve and protect assets. “There is a lot of work ahead as we consider various options, this process will take time, and there may be delays.”
Shortly afterwards, cryptocurrency exchange Binance halted the withdrawal of bitcoins. The company insisted customer funds were safe, and blamed the move on a backlog in the company’s systems. As at 1430 BST, bitcoin had lost 12% and was trading at its lowest levels since the end of 2020, tumbling below $24,000 to reach $23,375.9. Ethereum, the second largest token after bitcoin, was 16% lower, at $1,205.15. The value of the digital asset market has now fallen below $1trn to touch a low of $940bn. Like traditional assets, cryptocurrencies have become vulnerable to the weakening global economic outlook alongside concerns about the market's stability. The sell-off then ramped up on Friday, following weaker-than-expected inflation numbers in the US, and after ethereum’s developers announced that a long-awaited transition to version 2.0 had been postponed. Marcus Sotiriou, analyst at GlobalBlock, said: “Despite the fear, uncertainty and doubt the Celsius debacle has caused, the sell-off started at the beginning of the weekend after US inflation data was released. “I think this is a bigger contributor to the decline, as its results in a more hawkish Federal Reserve. It is now forced to remove more liquidity from the market, to bring down inflation. When liquidity is removed, risk-on asets are hit the hardest, which includes crypto.” Walid Koudmani, chief market analyst at xtb, said: “Almost all altcoins are wiping out gains made in 2020 as sentiment around cryptocurrencies was worsened on Friday by alarming data from the US economy. “It is not very surprising to see such a strong downturn as we have noticed an increased correlation over the last few years between traditional stocks, which have also tanked recently, and the cryptocurrency market.” The euro slumped to a near two-year low on Thursday after the European Central Bank (ECB) remained vague about when it will raise interest rates in the face of soaring inflation. The drop in the single currency helped boost European stocks, while Wall Street equities resumed a downward slide amid worries over tightening U.S. monetary policy. The ECB stood still in the face of record eurozone inflation, keeping its stimulus plans and rates unchanged, as the fighting in Ukraine cast a pall over the eurozone economy. Meeting for the second time since the outbreak of the conflict, the bank's 25-member governing council stuck to a plan that "should" see its bond-buying scheme come to an end in the third quarter. An interest rate hike would follow "some time" after the stimulus program comes to an end, and any increases "will be gradual."
The decision leaves the ECB further out of step with many of its peers. Central banks such as the Bank of England, the U.S. Federal Reserve and the Bank of Canada have already triggered their first interest rate rises in response to soaring inflation. The euro took a knock after the ECB's decision, slipping under $1.08 for the first time since May 2020, falling as low as $1.0758. The ECB "continues to show little sign of looking to hike rates after leaving rates unchanged at their policy meeting today, while being even handed over the risks facing the eurozone economy," said market analyst Michael Hewson at CMC Markets UK. The ECB announcement provided a boost, however, for eurozone stocks, which moved into positive territory and ended the day higher. Musk's Twitter bid Wall Street meanwhile retreated, concluding a holiday-shortened week on a weak note, as the yield on the 10-year U.S. Treasury note surged above 2.8 percent. Treasury yields are seen as a proxy for interest rates. "Right now, we're tied to this correlation between rising yields and falling tech shares," said Art Hogan, strategist at National Securities. All three major indices fell, with the Nasdaq leading the group by falling 2.1 percent. Citigroup gained 1.6 percent, while Goldman Sachs dipped 0.1 percent and Wells Fargo tumbled 4.5 percent. Elsewhere on the corporate front, Tesla chief Elon Musk launched a hostile takeover bid for Twitter, offering to buy 100 percent of its stock and take it private, according to a stock exchange filing. The move follows Musk's criticism of the platform. Some analysts expressed skepticism about the bid, noting Musk's history of outrageous and unpredictable conduct. President Putin: ‘unfriendly countries’ must switch to Ruble Russian President Vladimir Putin has authorized the government, the central bank, and Gazprombank to take the necessary steps to switch all payments for Russian natural gas from “unfriendly states” to rubles starting March 31. The measure targets “member states of the EU and other countries that have introduced restrictions against citizens of the Russian Federation and Russian legal entities,” the mandate published on the Kremlin website reads. Russia will stop shipping natural gas to countries refusing to settle payments in rubles, Kremlin spokesperson Dmitry Peskov said on Monday. The decision, first announced last week, came as Russia’s oil trade has been left in disarray as importers put orders on hold due to the latest sanctions introduced against Moscow over its military operation in Ukraine.
The conflict in Ukraine and the anti-Russia sanctions that followed have raised concerns of a global economic crisis. Skyrocketing commodity prices are sending the costs of consumer goods, energy, and food ever higher, giving rise to fears of a possible recession in many countries and even hunger in some parts of the world. Russia’s decision to switch payments to its domestic currency has been made in response to the unprecedented penalties imposed by the US and its allies on the country’s financial system. The ruble plummeted to record lows after Western nations and Japan blocked Russia’s access to some of its international reserves. Since last week’s currency-switch announcement, the ruble has reached its strongest level against the US dollar and the euro in nearly a month.
The US left more and more of the production to China, leaving them with a huge package of dollars. Those dollars were then invested in US government bonds, completing the circle again. China thus increasingly became the factory of the United States. Oil producers also saw the pile of dollars increase considerably. And there too, those dollars were reinvested in American government paper. It was a deal that everyone was relatively happy with until the financial crisis hit in 2008. The US started printing dollars en masse to save the banks and the economy and if you keep a large part of your reserves in this currency, like China, Saudi Arabia and Russia, you start to question the value of those assets.
Surely it cannot be that the Chinese mine raw materials, import energy and labor to produce goods and then be compensated with a stack of banknotes that the Federal Reserve creates at the touch of a button? And the Saudis and Russians also wondered whether it was such a good idea to pump up finite oil reserves in exchange for freshly printed dollars. The first cracks in the dollar's status as a reserve currency became visible. China, Saudi Arabia and Russia continued to export goods in exchange for dollars, but they were no longer willing to invest those dollars in US bonds. They saw the dollar out of business and turned to gold as a historical reserve asset. Dollars received from trade with the US were instantly converted to gold. Countries with dollar surpluses had expressed dissatisfaction with the Federal Reserve's loose monetary policy through massive gold purchases, but it seemed to make little impression on Americans. In fact, the US began to abuse the unique privilege of the world reserve currency in yet another way. The US started to use the dollar as a weapon by cutting off access to dollars from countries such as Iran, but also recently Russia. According to a report published by German cryptocurrency media outlet BTC-ECHO, the European Parliament, one of the legislative branches of the European Union, has moved to ban Bitcoin and other proof-of-work (PoW) cryptocurrencies. The final draft of the Markets in Crypto-Assets (MiCA) framework, the much-anticipated package of cryptocurrency regulations, includes a provision forbidding the “environmentally unsustainable” consensus mechanism. This means that Bitcoin could become illegal within the European Union starting from Jan. 1, 2025. Businesses would be prohibited from offering any services associated with proof-of-work cryptocurrencies.
Stefan Berger, the center-right rapporteur behind the framework, told the outlet that the proposal was “very likely” to be greenlit. It was pushed by centre-left Social Democrats, the Greens and the Left Party. Some Christian Democrats and right-wing conservatives opposed the addition of the Bitcoin ban, but it was a deal-breaker for the parties that supported cracking down on proof-of-work. The European Commission, the executive branch of the European Union, will be engaging in a trialogue with the member states and the Parliament before reaching a final decision later this year. Patrick Hansen, head of growth and strategy at decentralized finance start-up Unstoppable Finance, described the proposal as “suicidal,” predicting that it would kill the entire crypto industry in the EU. When Turkish finance minister Nureddin Nebati this week announced plans to encourage households to convert their gold holdings into Turkish liras in a bid to shore up Turkish central bank reserves, he was targeting people like Esra G. Ms. G., whose last name has been abbreviated to preserve her anonymity, has had a life-long troubled relationship with gold. When she was barely three years old, her distaste for it as an adornment was already so strong that she dumped all her gold rings, bracelets, necklaces, and earrings into the Bosporus.
Nonetheless, Ms. G. grew up to be an avid collector of gold, including an assortment of five- and 10-gram Credit Suisse coins. As a young woman, Ms. G. preferred antique silver jewelry and wouldn’t wear gold but kept her gold collection under her pillow. The government and central bank in Russia have reached an agreement on how to regulate cryptocurrencies, according to a Tuesday announcement. Russia’s government and central bank are now working on a draft law that will define crypto as an “analogue of currencies” rather than digital financial assets set to be launched on Feb. 18. Cryptocurrencies would function in the legal industry only if they have complete identification through the banking system or licensed intermediaries.
Kommersant noted that Bitcoin (BTC) transactions and possession of cryptocurrency in the Russian Federation are not prohibited; however, they must be done through a “digital currency exchange organizer” (a bank) or a peer-to-peer exchange licensed in the country. The report also highlights that cryptocurrency transactions of more than 600,000 rubles (roughly $8,000) would have to be declared; otherwise, it could be considered a criminal act. Those who illegally accept cryptocurrencies as payment will incur fines. This news comes after months of speculation about how the Russian government will handle digital currencies. While it is still unclear what this decision will mean for businesses and citizens in Russia, it seems that the country is slowly warming up to the idea of cryptocurrencies. In January, the Bank of Russia called for a nationwide crypto ban in a report that warned about the speculative nature of the industry. The bank also stated that financial firms should not facilitate crypto transactions as part of that proposal to ban digital assets. However, the proposal generated opposition from the Russian Ministry of Finance. A few days after the central bank’s call for a ban, Ivan Chebeskov, a ministry official, said that the government should regulate crypto rather than prohibiting it entirely. He warned that a total ban might result in Russia falling behind in technology. Reports have also emerged that President Vladimir Putin supports efforts to regulate the country’s crypto mining sector. "Bitcoin’s recent over 25% plunge illustrates why it will never be a true currency"
Nowadays, of course, no one would think of shelling out Bitcoin for something as mundane as a pizza without thinking first about how much money they might be giving up in the future. In the years since Hanyecz’s splurge, Bitcoin has gone from being an interesting experiment in decentralized finance to being the best-performing asset of the decade, rising more than 10,000,000% since 2010 and jumping 220% last year alone. There’s a Bitcoin ticker on every finance website. Legendary investors like Paul Tudor-Jones, Stanley Druckenmiller, and Bill Miller speak approvingly of its prospects, and companies like Square and MicroStrategy have invested their corporate cash into Bitcoin. Despite being extraordinarily risky and volatile — as evidenced by the 25% drop it took between last Friday and Monday afternoon — Bitcoin has, in some sense, been admitted to the club and is now seen by many as a plausible competitor to assets like gold. But along the way, something odd happened: Bitcoin completely lost its original reason for being. Bitcoin was, after all, not designed to be a speculative asset. It was designed to be a currency, a new medium of exchange that people could, and would, use to transact daily business with each other. (That’s why we call it a cryptocurrency.) When Bitcoin was first introduced to the world in 2008 in a white paper, its mysterious creator, who dubbed himself Satoshi Nakamoto, described it as “a purely peer-to-peer version of electronic cash [which] would allow online payments to be sent directly from one party to another without going through a financial institution.” He billed Bitcoin as “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party,” like a bank or credit card company. And that’s exactly what Hanyecz was doing on that day in 2010: sending an electronic payment directly from himself to another person without any third party being involved. He may have unknowingly made a terrible investment decision, but he was using Bitcoin exactly as it had been designed to be used. It’s easy to forget now, but Bitcoin’s promise in those early days was that it would be a new currency, one that could challenge the hegemony of so-called fiat currencies like the dollar (which are issued by governments) by being untraceable money that would allow people to conduct business cheaply and anonymously. And because Bitcoin was designed to have a fixed number of coins — it will have 21 million coins by 2140, and then no more — people could use it without worrying about inflation debasing its value. It was a kind of cyberpunk fantasy that enchanted many. As recently as 2018, Twitter CEO and Square founder Jack Dorsey said, “The world will ultimately have a single currency. I personally believe that it will be Bitcoin.” Even today, you can still find pundits who trumpet Bitcoin’s revolutionary possibilities and point to things like PayPal’s plan to offer its merchants the ability to transact in cryptocurrencies in 2021 as evidence that radical change is afoot.
Most Bitcoin transactions have been trades: people simply buying and selling it. The blockchain analysis company Chainalysis, for instance, found that in the first four months of 2019, just 1.3% of total transactions involved merchants. And that trend has only accelerated as the value of Bitcoin has soared. Strikingly, despite the speculative fervour that has surrounded Bitcoin, the total number of transactions has risen only mildly over the past two years. And that number is so small relative to the total number of electronic bank and credit card transactions as to be barely worth mentioning. On average, there are now around 325,000 Bitcoin transactions — including trades — per day. There are roughly a billion credit card transactions per day.
Some of the failure of Bitcoin to live up to its promise as a currency has to do with practical problems with the way it works, most obviously the fact that Bitcoin’s design makes it very slow at processing transactions. For instance, Visa processes approximately 6,000 transactions a second and has the capacity to do many times that. Bitcoin can do seven. So Bitcoin transactions often take a long time to complete, which doesn’t work so well if you’re trying to use Bitcoin at the local convenience store or even buying something online. Bitcoin’s transaction fees have also, at different points, been shockingly high. During the last Bitcoin boom, in 2017, fees reached as high as $55 per transaction, and while they’ve come down sharply since then, as recently as last May it cost more than $6 to buy something with Bitcoin. That’s not a problem if you’re making an investment, but it’s a big obstacle if you want to buy a pizza. The more fundamental problem for Bitcoin as a currency, though, has to do with the very thing lots of people like about it—namely that the supply of Bitcoin is controlled and limited. Because the supply is limited, when demand for Bitcoin rises (because, say, people are convinced they can get rich quick by buying it), then the value of Bitcoin is going to rise as well. So, if you believe your Bitcoin is going to become more popular, then it’s foolish to spend it on a pizza: You should hoard it and then sell it once its price rises. And since you can get along perfectly well without spending Bitcoin, there’s never been anything pushing people to stop hoarding. The more people hoard Bitcoin, treating it as a speculative asset, the less appealing it seems as a currency. On top of this, the extraordinary volatility of Bitcoin’s price — which, as we’ve seen in the past week, can fall 10% to 20% overnight — discourages businesses and individuals from accepting Bitcoin in exchange for real goods and services, since few people want to get paid today with something that might be 10% less valuable tomorrow. (Of course, it might also be 10% more valuable. But that kind of gamble isn’t one most businesses are interested in making.) Bitcoin’s transformation from putative currency to speculative asset, in other words, was effectively built into the system from the start. It’s where Bitcoin was headed all along. (Cryptocurrencies have emerged in Bitcoin’s wake that are better designed to function as currencies, but paradoxically they’re nowhere near as popular as Bitcoin.) Even though it may have been designed as a payment system and a medium of exchange, Bitcoin’s real appeal was, inevitably, going to be as what economists call a “store of value,” a kind of digital analogue to gold. Like gold, Bitcoin is valuable to the extent that people think it’s valuable: You buy it because you think someone else will pay more for it in the future. And like gold, its value can’t be inflated away by a central bank. The fact that Bitcoin has no intrinsic value (the way a stock or bond does) doesn’t mean it’s headed to zero. It just means that Bitcoin has become totally untethered from its original purpose. What was supposed to be a way to revolutionize people’s everyday financial lives is now mostly a way for people to get rich quick (or lose their shirts) or, in an ideal scenario, for people to protect their wealth against inflation. Bitcoin began as a cryptocurrency. It has ended as a cryptoasset. |
Thank you for choosing to make a difference through your donation. We appreciate your support.
This website uses marketing and tracking technologies. Opting out of this will opt you out of all cookies, except for those needed to run the website. Note that some products may not work as well without tracking cookies. Opt Out of CookiesCategories
All
Archives
April 2024
|