History and the basics of the monetary system show that the future of cryptocurrencies, if any, is likely to be a single stablecoin backed by government guarantees.
There’s no need to worry if you’re still confused by the crypto space. It’s largely because of the exorbitant nonsense, misinformation and bombastic claims made daily in mainstream and social media around the supposed future of money.
The common myth is that cryptocurrencies can replace money. To be clear, decentralised cryptocurrencies such as bitcoin cannot replace money, nor the Western system of government-legislated central banks as liquidity suppliers.
In 2022, cryptocurrencies only really exist for speculative purposes, their surging prices a symptom of the excess liquidity pumped into the financial system. Sitthixay Ditthavong
In theory, a decentralised cryptocurrency or one pegged to the value of the US dollar (known as a stablecoin) can be used to exchange wealth on a blockchain and cut out the need for banks, and bank accounts, as intermediaries.
However, decentralised cryptocurrencies cannot replace central banks as providers of liquidity. There will always be a requirement to promote full employment, productivity and export services by pricing a single unit of account – money – via interest rate mechanisms. Decentralised cryptocurrencies with no price control mechanism cannot achieve this.
Almost every major war in history, going back hundreds of years, had to be financed by governments. The French and Spanish empires collapsed because their monarchies were considered un-creditworthy and they couldn’t borrow to finance military action.
In 1971, US president Richard Nixon abandoned the greenback’s fix to the gold standard so the US could expand money supply to finance the Vietnam War. If Russia ran out of liquidity to service its liabilities, it would likely have to retreat from Ukraine.
In reality, if the West lost control of the money supply to decentralised finance (DeFI) and private cryptocurrencies the result would be closer to war than the “world peace” narrative of crypto pumpers. Notably, China has banned crypto in order to tighten its grip on the liquidity supply.
Cryptocurrency assets promoted by exchanges like Coinbase currently have a market capitalisation of about $US1.8 trillion. Bloomberg
A single unit of account is also critical to uniformity. Central banks provide a stable unit of account to price goods and services. This is common sense. There’s no chance a restaurant would accept payment in dozens of different currencies at dozens of different floating rates.
Nor would a landlord sign a tenancy agreement for 12 months’ rent in bitcoin if its value could halve in six months. This is why a currency must be a stable reserve of future purchasing power.
Single weights and measures such as tonnes and kilometres exist to provide uniformity in trade. In theory, you could have hundreds of different private weights and measures to price commodities, but capitalism gravitates to single units of accounts for utility.
All this means the likely future of crypto is a single stablecoin backed by a government as a means to exchange wealth, without banks as intermediaries. Bitcoin as the current lead husky ends up a store of wealth.
Much of the thinking around the potential for central bank digital currencies (CBDC) is also confused, partly because central banks themselves remain unclear.
Private banks create money, but the amount of money in the economy is controlled by central banks setting interest rates – and more recently, via bond buying programs to fund governments’ deficits, known as quantitative easing.
As the Bank of England outlines, whenever a commercial bank makes a loan (such as a mortgage) it simultaneously creates a matching deposit in the borrower’s account to create money.
Therefore, any true CBDC would have to offer users a bank account with the central bank. Otherwise, it wouldn’t be a CBDC. It follows that if an employee could direct their employer to pay their salary into a central bank account it would cause mass disruption for private banks.
The banks’ main customer acquisition and retention tools are liquid debit accounts as reserves of future purchasing power.
The retail and business banking systems also work by offering competitive deals on products such as credit cards or loans to attract customers with central banks as liquidity suppliers. CBDCs cannot replace money in this sense, as they would sacrifice the advantages of competition in the banking system today.
In 2022, cryptocurrencies only really exist for speculative purposes, their surging prices a symptom of the excess liquidity pumped into the financial system.
Bitcoin is too volatile to work as a means to exchange wealth and the proof of work system too slow to process transactions.
The jury is out on the utility of blockchain tech. For now, it has largely delivered synthetic asset price bubbles and other concepts such as non-fungible tokens (NFTs) as solutions to nothing that cannot already be executed off a blockchain.
Whether the future of money includes a cryptocurrency to exchange wealth will almost certainly come down to the willingness of governments to deliver it.
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