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Cryptocurrency after FTX

from Jamie Morgan

If you think cryptocurrency is priapic capitalism’s latest attempt to dick you, you are probably not alone. In the last year or so most people’s perception of cryptocurrency has fallen about as far as it could. Opinion, much like the value and solvency of the assets, has plummeted from ‘the sky’s the limit’ to a soft sewage-landing. Great swathes of the population of the US and UK invested in cryptocurrency over the pandemic period. Since then, a swift spiral of contagions and bankruptcies has hit the headlines and FTX is only the highest profile of these. The anodyne mainstream economics term ‘market correction’ scarcely does justice to what has gone on.

At the heart of the problem were crypto exchanges. These provided customers with ‘accounts’, paid interest on assets in those accounts, offered ‘brokerage-type’ services and allowed customers to buy and trade on margin. This produced all of the hallmarks of a regulated financial sector with little of the reality. Disclaimers and small-print notwithstanding, the language invited self-deception. Offering an ‘account’ does not make a service equivalent to a bank account and offering brokerage-type services does not make one a broker. Protections were few and the temptations many… The situation was ripe for a Kindleberger and Aliber style Mania, Panic and Crash and the only surprise is that anyone would be surprised how this has turned out.

We have, however, been here before, and not just in the sense that crypto is prone to bubbles. Two decades ago the dot.com boom produced its own ‘this time is different’ hysteria with the standard gravitational pull of fortunes to be made by the bold. Then the great debate was how to evaluate the business model of a digital platform-based company and how to assess its future prospects (and hence in standard financial economics terms its current equity price). The eventual rise of the Tech Giants proved how little most economists understand technology, firms and ultimately capitalism and its drivers.

While acknowledging Matt Levine at Bloomberg’s comment that ‘I have never read a profile of someone becoming a billionaire by using crypto to solve a problem other than trading more crypto’, it is important to maintain a distinction. Socio-economic change creates scope for exploitation in the negative sense of that word, but ultimately if there are recognisable technological potentials to exploit someone will… Regulation can be more or less proactive or reactive depending on how the scope for regulation is understood, but the distributed ledger and smart contract technology on which cryptocurrency are built are not likely to go away. Issues are multiple insofar as they provide an alternative to dollarisation in some countries with weak domestic currencies, can be used for remittances and evasion of capital controls, and offer corporations their own money, a corporate coin that enables a further step in monopoly power…  These and other more technical reasons are why almost every country in the world has felt the need to research its own central bank digital currency.

Energy use is, of course, a significant barrier in the adoption of the technology, and any sane person might baulk at the ecological and climatological consequences of cryptocurrency mining in particular, but capital accumulating economies have rarely allowed sanity to get in their way and it is not inconceivable that solutions might be found (there is already change afoot). Perhaps the main dividing line at the moment is between a version of the technology that lends itself to general means of payment and one that remains a speculative asset. Again, there are numerous issues here, but not necessarily the ones one might think. As the Bank of England points out, private issue money is not new, retail banks are producing it all the time, and fiat money has no intrinsic value. The challenge is how to position something to act as a money, how to instil trust and facilitate social diffusion. In twenty years time, who knows, maybe a future version of ChatGPT will be waxing lyrical about the quaint world of bank money – assuming someone can afford its services, of course, while hoping that maybe we find a better solution to permission structures for society than money as we understand it today.

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