Cryptocurrencies will be the Architects of their Own Demise
With the formal financial sector responding to their challenge, cryptocurrencies will simply become illicit currency for illicit trade.
Views on cryptocurrencies – a digital currency operating independently of a national central bank – vary considerably. For some, they offer the promise of cheaper, faster and more secure transactions; for others, they are an opportunity for organised crime and terrorist financing.
Yet, thus far, the reality has lagged the hype by some distance. For bad actors, cash and the use of money service businesses and remittance companies remain dominant; for benign users, the complexity and limited opportunity to use cryptocurrencies to transact payments remains tiresome, making them attractive for their novelty value, rather than their other potential advantages.
Given the extent to which near-field communication technology, which allows credit card and smartphone users to ‘tap-and-pay’, has simplified payments, cryptocurrencies have a long way to go before they are a credible payment competitor.
But one issue above all others challenges users. Cryptocurrencies, as most commonly conceived, are created by independent actors and not backed by the ‘full faith and credit’ of a government, its economy and central bank, and are thus prone to wild swings in value.
A dollar is worth a dollar and, subject to inflation, holds its value. The value of a Bitcoin is determined by market demand and its credibility is contingent on a sufficiency of supply and demand and the integrity of the decentralised system that supports the currency’s creation and transfer.
If the ATM network suffers a glitch, the value of a national currency remains unchanged, despite the aggravation this causes. If a cryptocurrency’s distribution and transfer system is hacked or otherwise disrupted, however, the resulting crash in the currency’s value can be ruinous.
Cryptocurrencies are not ‘currencies’ in the traditional sense; they are commodities or stock market investments whose value floats freely, and are entirely and solely subject to market forces
When Bitcoin exchange Bitfinex suffered a security breach in August 2016, the price of Bitcoin fell 20% in one day to less than $500 per Bitcoin. Today, the price stands at around $2,700, having reached a high of nearly $3,000 earlier in the month.
Put simply, cryptocurrencies are not ‘currencies’ in the traditional sense; they are commodities or stock market investments whose value floats freely, and are entirely and solely subject to market forces.
Perhaps contrary to the traditional view, therefore, it is unlikely that, as currently conceived, cryptocurrencies will attain the status that the hype would have you believe. They will certainly be revolutionary, but most likely in a manner that will trigger their own demise, or at least relegate their use to those who want to operate outside the legal financial system. Here’s why.
If there is one thing at which the financial sector excels, it is innovation. Not always for the better (it was 'innovation’ that led to the 2008 Global Financial Crisis), but the innate instinct of ‘survival of the fittest and smartest’ courses through the financial services industry.
When bankers spot the good ideas of others, they are quick to co-opt them as their own, stress them and improve on them. Joseph Schumpeter’sÂ