Project Syndicate: cryptocurrencies are a bet on dystopian future

The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. That means that cryptocurrencies are not entirely worthless, writes American economist Ken Rogoff in Project Syndicate.

With the price of Bitcoin down 80% from its peak a year ago, and the larger cryptocurrency market in systemic collapse, has “peak crypto” already come and gone? Perhaps, but don’t expect to see true believers lining up to have their cryptocurrency tattoos removed just yet.

At a recent conference I attended, the overwhelming sentiment was that market capitalization of cryptocurrencies is still set to explode over the next five years, rising to $5-10 trillion. For those who watched the price of Bitcoin go from $13 in December 2012 to roughly $4,000 today, this year’s drop from $20,000 is no reason to panic.

Still, just because the long-term value of Bitcoin is more likely to be $100 than $100,000 does not necessarily mean that it definitely should be worth zero. The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states, or perhaps in countries where citizens have already lost all semblance of privacy. It is no coincidence that dysfunctional Venezuela is the first issuer of a state-backed cryptocurrency (the “Petro”).

The ultimate obstacle for any cryptocurrency is that eventually there has to be a way to buy a range of goods and services beyond illicit drugs and hit men. And if governments ever make it illegal to use coins in retail stores and banks, their value must ultimately collapse.

It is too soon to say how the new world of digital currencies will play out. Central banks will get into the game (their reserves are already a form of wholesale digital currency), but that is not the end of the story. US Treasury Direct, for example, already offers retail customers an extremely low-cost way to hold very short-term Treasury debt for amounts as little as $100, tradable to others in the system. Still, heavy security makes the system relatively cumbersome to use, and just maybe governments might adopt one of today’s private digital technologies.

For the moment, the real question is if and when global regulation will stamp out privately constructed systems that are expensive for governments to trace and monitor. Any single large advanced economy foolish enough to try to embrace cryptocurrencies, as Japan did last year, risks becoming a global destination for money-laundering. (Japan’s subsequent moves to distance itself from cryptocurrencies were perhaps one cause of this year’s gyrations.) In the end, advanced economies will surely coordinate on cryptocurrency regulation, as they have on other measures to prevent money laundering and tax evasion.

But that leaves out a lot of disgruntled players. After all, many today – including Cuba, Iran, Libya, North Korea, Somalia, Syria, and Russia – are laboring under United States financial sanctions. Their governments will not necessarily care about global externalities if they encourage cryptocurrencies that might have value as long as they are used somewhere.

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