Originally published at Project-Syndicate | June 30th, 2022
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.
DANTE ALIGHIERI DISPARTE
The short answer is no, although this particular “crypto winter” will prove to be longer, colder, and harder than that of 2018, which was the last time the industry saw such a broad decline.
This time around, the crypto crash will most closely resemble the collapse of the dot-com bubble, when many fast-growing internet companies that lacked guardrails and business models handed over Web 1.0 to today’s tech titans. The handover of the future of the internet to a new generation of “blockchain billionaires,” some of whom are running a veritable crypto troubled-asset-relief program (like the TARP scheme that saved the real economy in 2008), will continue.
Yes, we have seen a calamitous decline of the broad crypto asset class, as well as the eye-watering failure of many stalwarts who promised to revolutionize finance. But a foundational technology that is second only to the internet remains intact, and we are nearing the end of the beginning.
The builders of safe, well-regulated, always-on digital finance will have weathered nothing short of crypto’s Great Depression and will be better for having survived another major stress test. Even typically conservative central bankers acknowledge that the firms that survive this correction could be the Amazons of the future. In sum, the crypto crash is merely giving long-term players (HODLers in crypto parlance) a temporary discount.
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.
JIM O’NEILL
I suspect that crypto is a victim of Western central banks’ move toward monetary tightening. In this regard, it would seem as though there is more pain ahead. I have always been rather skeptical about the claim that crypto is going to replace mainstream currencies. After all, for good or bad, governments and their central banks control the use, and effectively the value, of their currencies. Why would they ever give that up?
But some of the basics of crypto, including, for example, Bitcoin, probably won’t disappear. They will just remain massively volatile, quite illiquid speculative instruments that people can play with while kidding themselves that they know what will happen to their price. I often think of cryptocurrencies as like an illiquid version of gold trading. But if we return to a more normal world where short-term interest rates are at some kind of positive premium to the level of inflation, which surely we eventually will, I cannot see the world of crypto becoming mainstream or even close to it.
If cryptocurrencies ever fall to some ridiculously low level (still dramatically below where we are now), I might even be daft enough to have a dabble myself. But I pray that I wouldn’t kid myself that this was anything more than a speculative punt on a highly speculative instrument that normal human beings should stay a million miles away from.
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.
Dante Alighieri Disparte: Chief Strategy Officer and Head of Global Policy at Circle, a leading digital financial-services firm and principal architect of the USD Coin, is a member of the Digital Currency Governance Consortium at the World Economic Forum, and a member of the Council on Foreign Relations.
Simon Johnson: A former chief economist at the International Monetary Fund, is a professor at MIT’s Sloan School of Management and a co-chair of the COVID-19 Policy Alliance. He is the co-author (with Jonathan Gruber) of Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream and the co-author (with James Kwak) of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown.
Jim O’Neill: A former chairman of Goldman Sachs Asset Management and a former UK treasury minister, is a member of the Pan-European Commission on Health and Sustainable Development.
Anne C. Sibert: Professor of Economics at Birkbeck, University of London, is a former member of the Central Bank of Iceland’s Monetary Policy Committee.