I continue to react to the hype and promotion of cryptocurrencies with horror and disbelief as traditional, seemingly reputable companies enter into crypto-related activities. As an economist, part of me gets it, but the better part of me rues these developments.
The purported rationale for cryptocurrencies is to democratize commerce by eliminating the oversight and involvement of government and traditional banking institutions. I don’t buy it. To me, this rationale is little more than a smoke screen, serving as a way for crooks and charlatans to launder money or fleece the ill-informed.
Developers of these digital currencies clearly saw an opportunity. They granted themselves generous allocations of their creations in the hopes of getting rich when the mania of a broader public pushed the prices of these cryptocurrencies up to unsustainable levels. I’m sure that for many, those hopes were realized, well beyond any expectations — to my dismay. I wish the broader public knew better; but, alas, that seems not to be the case. The cryptocurrency originators were betting that the “get rich quick” ethic would to be overriding; and so far, that bet seems to be paying off.
Given the growth in the volume of cryptocurrency transactions, it’s not hard to understand why financial institutions would want to set themselves up as cryptocurrency dealers. Dealing is a classic business activity that plays an essential role in a host of security and commodity markets. Dealers buy from willing sellers in their customer base at the bid price and sell to willing buyers at the offer price, thereby earning a bid/offer spread. The flow of customer orders would thus be expected to generate an attractive source of income. What’s not to like?
Similarly, if cryptocurrency markets can mature to the point where intermediaries can take in deposits at a lower interest rate and make loans at a higher rate, this business would also make sense (and profits). Bankers in dollar-denominated deposits and loans do this kind of activity all day long. It should be understood, however, that these institutions and those activities differ significantly from the buy and hold mentality that drives the speculative component of cryptocurrency markets.
If the institutions that function as intermediaries are smart (as I expect most professionally run firms are), they will arrange their businesses with as little exposure to the underlying cryptocurrency markets as they possibly can. The risk of a devaluation for a large inventory holding is simply too severe. Of course, the danger is that without adequate oversight, some portion of these firms won’t be well run; and they’ll take inordinate risks that could destabilize our financial infrastructure.
Sorry to say, but one of the most disturbing statements I’ve recently heard about cryptocurrencies came from Federal Reserve Chairman Jerome Powell. When asked about the prospect of developing a government-sanctioned cryptocurrency, Chairman Powell said, “…you wouldn’t need cryptocurrencies if you had a digital U.S. currency — I think that’s one of the stronger arguments in its favor.” Need!? The only ones who need cryptocurrencies are crooks and charlatans. And the last thing America needs is for the US government to get in on this racket!
Besides facilitating criminal activity, these markets require an ongoing usage of energy that is unconscionable. CNet reports, for instance, that warehouses of Bitcoin mining rigs run 24 hours a day, consuming more power than the whole of Argentina. And Bitcoin is just a single cryptocurrency, albeit the most popular one. Literally thousands of different cryptocurrencies can currently be traded, making the above measure of energy use a low-end estimate. Are we really ready to turn a blind eye to this level of energy consumption in light of everything we know about climate change? And for what? To make a handful of people millionaires while at the same time abetting criminal activity? I don’t think so.
Let’s not overlook a recent evolution. A further development in this area is the advent of cryptocurrencies that are pegged to (i.e., exchangeable with) the US dollar. Originators of such instruments clearly recognize that the extreme volatility of untethered cryptocurrencies makes them untenable media of exchange. This second-generation cryptocurrency is supposed to address that issue by stabilizing the convertibility to the US dollar. If that’s your concern, however, why not just stick to dollars in the first place. The answer is obvious: reliance on the US dollars is problematic for those who want to evade the law.
(I must admit, the idea of establishing a market for something that is supposed to be exchangeable with the US dollar seems nuts on economic grounds. Why should anyone ever be willing to pay more — or receive less — than a dollar for this coin? It makes no sense to me.)
Senator Elizabeth Warren and SEC Chairman Gary Gensler may be the most visible public figures who appear to share some concerns about the dangers of cryptocurrency markets, publicly; but I’m afraid their likely remedies don’t go far enough. Both appear to be looking to impose a higher degree of regulatory oversight, when the best course of action would be to shut cryptocurrencies down, altogether.
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