The 88-year-old Bank for International Settlements (BIS), a concentration of 60 central banks representing 95% of global GDP, does not like cryptocurrencies but is compelled by blockchain. In a newly published report, BIS researchers make the assertion that cryptocurrencies could break the Internet and that the only way to organize a globally accepted money supply is in a heavily centralized manner. While this is a naturally self-serving posture for the BIS and many centralized banking and financial authorities, some of the analysis negates the fact that cryptocurrencies, as an economic experiment, are still in their infancy. True of all eras of rapid development, prototyping, and innovation, how blockchain and cryptocurrencies transform finance and economics is yet to be seen. Meanwhile, billions of people have been left on the margins of the modern banking system, whose friction, high-burden of proof and expense structures support our one-sided world.
The traditional analog economy, of which the BIS is an instrument as are central banks, has had a very long head start over their decentralized cousins – the evolving landscape of cryptocurrencies and the thesis behind low-friction economics. As is true of the early days of cryptocurrencies, the early days of physical money were rife with banditry, corruption, fraud and a multitude of other perils. Indeed, even the BIS has a checkered past and as a new economic order was established under the Bretton Woods system, there was a consensus to disband the institution. This much is true of the earliest foundations of cryptocurrencies, but to completely dismiss them claiming they serve no other purpose than money laundering, terrorism finance, and online crime not only smacks of hypocrisy, as traditional fiat currencies have been fueling the underworld for centuries, it misses the true opportunity this new asset class represents. A banking system rife with friction, hinged on brick and mortar banking, high levels of intermediation and centralized trust (with a decentralized tax-payer woven safety net) is a banking system that has quite literally left billions of people on the margins of economic activity. While the jury is out on whether cyrptocurrencies will fix this, they have already demonstrated the power of democratizing access to the investment world, which has been the traditional domain of the well-heeled and those who could afford speculation. Indeed, with little more than an internet connection, a digital wallet and some expendable money, a cryptocurrency portfolio can be constructed.
Even the critical BIS report acknowledges blockchain’s potential to create a lower friction, higher trust model when it comes to cross-border payments, such as the $608 billion remittance market. The same holds true in trade finance, which labors under high degrees verification, friction, and low levels of trust. While some of the criticism in the report is not unfair, it is perhaps way too dismissive of a technology and economic revolution that is still in its early days. Indeed, dismissing the crypto movement prematurely would be tantamount to dismissing the ubiquity of Google based on the decidedly clunky user environment of its predecessors, or to have dismissed the likelihood of the social media revolution based on the adoption rates of first movers. The fact is cryptocurrencies as an asset class are now starting to become mainstream, to the degree to which they now enjoy increasing regulatory clarity, particularly favoring decentralized structures, such as Bitcoin and Ether. At the same time the wave of innovation continues in the ambitious quest of creating truly stable digital currency’s, or so called stablecoins. Central banking authorities and the BIS should not turn a blind eye to the opportunity implicit in cryptocurrencies coexisting and even augmenting the traditional economy, rather than disrupting it or adding to criminalization.
Most central banks will have a role to play in many economies around the world, the BIS, however, as a structural institution maybe in the crosshairs of blockchain-based solutions, as many of its activities can be readily changed, digitally transformed or made redundant. This much is proving to be true of the money transfer segment, where a highly concentrated market that has persisted for many years is being challenged by a wide number of firms and technology startups. The outcomes in money transfer, as with international settlement activities, matter more than the process or the largely analog asset base on which these systems ride. Indeed, many countries and regulators at the centralized level are looking at alternatives to plugging into analog banking systems, which has played host to some truly destructive systemic risks. Notwithstanding the steady hands central bankers have demonstrated on many occasions saving the global economy from itself and from greed run amuck in large systemic institutions, these cases, including the most recent financial crisis, were examples of privatizing gains, while socializing losses. The true promise of cryptocurrencies, especially when the base of acceptance is broadened, is to invert this risk-reward pyramid by spreading gains and losses in a more distributed manner.
While the computing power and the “break the Internet” assertions, along with the adverse environmental impact of cryptocurrency mining, are all valid areas of concern, they also take a rather short-term view of how rapidly the sector is evolving. Just as Moore’s law makes cyber threats very difficult to pin down technologically, Moore’s law also works in the favor of reducing negative externalities in mining and other computationally intense activities that are the veritable backbone of the crypto economy. Technological innovations such as the lightning network, anchoring and tethering transactions on parallel tracks of the Bitcoin blockchain are but some examples of how many in the crypto community, such as the Bitfury Group, are committed to efficiency, equity, transparency and the net positive impacts of their activities. Indeed, this much holds true in the crime fighting domain, wherein Bitfury’s Crystal platform is now being headed by a former top cybercrime official and deployed to track down cryptocurrency ne’er-do-wells. With these changes not only will constraints in transaction volumes be resolved, it is very likely that the drive for energy efficiency in cryptocurrency mining activities, which coexists with the renewable energy movement, will advance in lockstep.
On the key question of whether cryptocurrencies will ever replace or add to more transactional money, the BIS and traditional players would be wise in remembering that mobile teledensity is higher around the world than people who have access to brick-and-mortar banking. For the analog economy and the systemic firms that dominate it under the macroprudential framework and coordination of centralized institutions, reaching the billions left on the sidelines cannot be achieved without digital transformation. For this, the rise of more than 1,600 cryptocurrencies and the friction-fighting powers of blockchain should be celebrated as a path to achieving a safer, more equitable economic system, wherein fiat currencies and their digital twins can coexist. Casually dismissing what may be the largest example of decentralized coordination in order to preserve financial status quo is not only short-sighted, it will continue to imperil the world to insidious rates of income inequality and low economic connectivity.