Cryptocurrency and trust
The driving inspiration of the concept of cryptocurrency has always been that money is too important to be left in the hands of central bankers and their masters. The paper by Satoshi Nakamoto, taken to be crypto’s founding document, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ proposes a “system for electronic transactions without relying on trust”. Nakamoto’s thesis made its appearance at the height of the 2007-08 financial crash, when banks were collapsing and costly taxpayer bailouts of them were being imposed by governments. Nakamoto’s lack of confidence in central banks and governments’ handling of money is shared by Glint.
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Distrust of government lies at the heart of the more than 20,000 cryptocurrencies that the UK’s Financial Conduct Authority (FCA) calculates have been developed. The world of cryptocurrency seems to be constantly changing; the regulation of its operations is continually shifting. New cryptocurrencies appear as old ones die; scandals have erupted, investors and users have lost huge sums of fiatmoney. But Bitcoin, the original crypto, survives, and will survive as long as individuals distrust the issuers of fiatcurrency and yearn for some way of achieving stability in their assets. Not that Bitcoin has proved to be very stable, as this chart shows.
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According to Bloomberg, Augustin Carstens, head of the Bank for International Settlements (BIS), has “settled” the argument that crypto is an alternative to fiat currency. It isn’t, says Carstens. “Only the legal, historical infrastructure behind central banks can give great credibility” to money; crypto is a financial activity that can really only exist “under certain conditions”, said Carstens. Mind you, he warmly endorsed Central Bank Digital Currencies (CBDCs); they can “aid efficiency” he thought.
The stifling of private cryptocurrencies by the imposition of state-backed CBDCs is the ambition of many central bankers; the executive director of the Reserve Bank of India (RBI) told CNBC-TV18 that India’s digital Rupee will be an alternative to cryptocurrencies. The RBI’s deputy governor claims that the digital rupee should be able to do anything cryptocurrency can do but without the associated risks of crypto. Sir Jon Cunliffe, deputy governor for financial stability at the Bank of England (BoE), said at a recent parliamentary hearing: “Nobody would use [crypto tokens] as money—well, some people would, but they are probably outside criminal law as well as financial regulation”. He favours a UK CBDC, a so-called ‘Britcoin’ but as many have said this idea would have serious unintended consequences, not least to do with anonymity. CBDCs have many flaws but the world seems in a headlong charge to introduce them.
Cryptocurrencies are associated with criminal activity, with scandals, with huge losses. Yet the highest profile ones – Bitcoin especially – refuse to die. That is testimony to people’s distrust of fiat currencies.
Cryptocurrency confusion
The International Monetary Fund (IMF) discussed in early February a paper on ‘Elements of Effective Policies for Crypto Assets’ which concluded that “efforts to put in place effective policies for crypto assets have become a key policy priority for authorities, amid the failure of various exchanges and other actors within the crypto ecosystem, as well as the collapse of certain crypto assets. Doing nothing is untenable as crypto assets may continue to evolve despite the current downturn”. Financial institutions fret about how to contain the crypto assault on their authority.
Regulators in the US, the UK, and elsewhere are struggling to deal with or define cryptocurrencies in a harmonized fashion; are they a form of legal tender? Are they securities (as the US Securities and Exchange Commission, SEC says)? Are they commodities (as the Commodities Futures Trading Commission or CFTC has ruled)? Their status differs not just within but between countries. In some jurisdictions, retail investors are welcomed – Hong Kong is now trying to rival Singapore as a digital assets hub – even though research from the BIS found last November that around 75% of retail investors have lost money. Only in the Central African Republic and El Salvador is Bitcoin legal tender. El Salvador has been buying Bitcoins since September 2021; as the value of Bitcoin has fallen, it may have notched up a paper loss of 50% on those purchases. El Salvador’s experience demonstrates one key thing about cryptocurrencies – the ‘currency’ tag isn’t true; nothing so unstable will be universally trusted as a form of money.
The divided world
Cryptocurrency is being used, albeit in small amounts, in the Russia-Ukraine war. Chainalysis, a US software company that specialises in cryptocurrency data, recently published a report asserting that since the start of the conflict Ukraine has received cryptocurrency donations worth nearly $70 million, while pro-Russia organizations have received donations of almost $5.4 million. Other sources suggest that “more than $200 million of crypto” has gone to pro-Ukrainian causes, with more than $80 million sent directly to the Ukrainian government.
Intriguingly Russia and Iran have reportedly started discussing the launch of a new cryptocurrency that would be backed by gold and which would be used in their bilateral trade. The Russian news agency Vedomosti quoted Alexander Brazhnikov, executive director of the Russian Association of the Crypto Industry and Blockchain, as saying the token would be developed as a stablecoin, backed by gold reserves. In July 2020, President Vladimir Putin signed a regulation on digital financial asset transactions which legalized cryptocurrency transactions but prohibited their use as payments for goods and services. Russia has been building its gold reserves; a gold-backed stablecoin would serve the dual purpose of avoiding use of Dollars and demonstrating Russia doesn’t need ‘Western dominated’ payments’ systems.
Cryptocurrency market activity in Russia has been big, around $500 billion as of 2021. Russians have embraced crypto not so much because they relish innovation as because many Russians have recent experience of their savings being devastated – first during soaring inflation in the 1990s and again when the Rouble collapsed following international sanctions after it annexed Crimea in 2014. Such financial disasters also help explain the huge appetite Russian consumers have developed for gold.
The European Union (EU) last October implemented a ban on all crypto services to Russia, but the very nature of cryptocurrencies’ anonymity means they remain a powerful method of eluding government sanctions. Iran has been under US sanctions for almost 40 years; in August 2022, the country made its first cryptocurrency payment (worth $10 million) to import vehicles. The US lags behind when it comes to crypto regulation; it has a fragmented regime with different government agencies vying for supreme authority over digital assets. But whatever universal regulatory regime finally evolves – and that probably means the imposition of CBDCs with the hope they will drive private cryptocurrencies out of existence – cryptocurrencies are here to stay. They may not be any use as a form of money, but they can facilitate payments if the parties involved wish to keep a low profile.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
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