Cryptocurrencies: the Past Reinvented
As the first country to industrialise in the 1760s, Britain’s manufacturing revolution set the world on one of the greatest practical and ubiquitous changes in human history. Even more extraordinary is the fact that Britain’s industrialisation remained way ahead of potential competition for decades. Only in the early 1900s did historians get to grips with the issues of causation. Max Weber’s pithy answer “the Protestant work ethic” pointed to Puritan seriousness, diligence, fiscal prudence and hard work. Others include the establishment of the Bank of England in 1694 as an essential corollary by creating the necessary conditions for financial stability. In contrast, Continental Europe lurched from one national debt crisis to another, then through itself headlong into the Napoleonic wars. Unsurprisingly, it was not until after 1815 industrialisation took place on the European mainland where it was spearheaded by the new country of Belgium.
250 years later with the launch of Bitcoin another revolution had begun; though this one more commercial in nature than industrial. Though the full impact has yet to be played out, the parallels between these two historical events are already striking. Bitcoin may not match the obviousness of industrialisation, but the underlying pragmatics touch on the very foundations of the non-barter economy. Like the establishment of the Bank of England, the creation of the cryptocurrency infrastructure has been prompted by ongoing and worsening threats to financial instability; systemic fault-lines created by macroeconomic challenges flowing from the 2008 crash.
For those who could “join the dots” in 2008, there was the realisation that central banks no longer existed as guardians and protectors of national currencies but the tools of creating politicised market distortions; abandoning their duty to preserve wealth in favour of creating the conditions for limitless, cheap government debt. While many of the underlying intentions were benign, inherently the process worked to punish savers and reward reckless debt.
This anticipation of on-going instability surrounding fiat currencies and the viability of crypto alternatives has proved more prescient than could have ever been previously imagined. Within a short space of time a wave of undercurrents gave rise to new vocabularies, outlooks and expectations which have impacted commercial and investment transactions, a change never more acutely observed than today, when even against the backdrop of the COVID crisis Central Banks are rushing to create their own “digital” Krona, Pound, Dollar etc. “Digital” may represent a confusing nomenclature, however, as these are not cryptocurrencies in the true sense, and certainly not part of decentralised finance (DeFi). The Digital Krona does, however, manifest the increasingly powerful impact that the cryptocurrency ecosystem is having on mainstream banking and government behaviour.
As with Britain’s industrial revolution, it has taken time for the potential of crypto-coins to find more energetic traction. Over the past 12 years, cryptocurrencies have moved from unknown, to novel, to significant and growing interest. As a result, profound changes are underway affecting the mechanics by which investors, the investment industry, wealth managers and even the commercial banking sector is engaging with cryptocurrencies. This interest has quickened as we enter into a period of deep economic unknown and growing awareness that structural soundness is shifting away from traditional investment options.
Intelligent engagement requires cryptocurrency investors/wealth managers to accurately understand and correctly explicate the nature of these influences and assess their potential impact. This article suggests seven distinct elements (a non- exhaustive list) as currently ranking definitive importance:
- Cryptocurrencies comprise account for only a tiny fraction of the global economy. At an estimated value of $375 billion, this is several orders of magnitude smaller than a world GDP of $35 trillion (2019). Assuming other factors are favourable, there is clearly room for growth.
- Cryptocurrency success will mark the end of critical aspects of Central Banking monopoly; by revealing the fictitious nature of fiat currencies as a principle; by offering a more competitive vehicle for facilitating commercial transactions; and providing a more stable medium to store monetised assets. Apart from stability, cryptocurrencies offer real returns on “cash” deposits, something which the fiat banking system has long since abandoned. (The reasons for the latter are deeply significant and will be followed up in a subsequent article).
- Cryptocurrency success will hasten the end of the dollar monopoly in global commerce. Indeed, at current trending, changes in trading mechanics may speedily evolve to the point that such “reserve currencies” no longer have a function at all. Analysts once speculated that it was only a matter of time before the Chinese yuan displaced the dollar, in the same way that the dollar displaced the pound. The edifice which supports the concept of a “global reserve currency” is weakening. The latter’s demise will have significant implications regarding reducing political influence over global finance, as well as nations’ abilities to run long-term balance of payments deficits, current account deficits and borrow at little or no interest.
- Cryptocurrencies as an ecosystem — assuming the current direction of evolution continues — will increasingly constrain, redirect and set the parameters to government macroeconomic policies. Certainly, sound alternatives to fiat currencies will drive the latter to the periphery of commercial life, concomitantly reducing the number of tools the nation-state has at its disposal to regulate or respond to changing economic conditions. This especially means setting meaningful interest rates. Above all, it means that government financial engagement can no longer be a rule unto itself, it will have to engage by the same principles as everyone else. A level playing field here has dramatic implications — and will again be picked up in a subsequent article.
- Cryptocurrencies represent a wider range of disruptive elements affecting the commercial ecosystem. Among the most direct is the ability to raise finance or enter into other commercial transactions with little to no red tape, intrusive regulation or political interference. In short it de-politicises, de-institutionalises and de-centralises investment and payment options, while retaining many of the protective and other beneficial aspects present in traditional finance.
- Cryptocurrencies offer rapid commercial advances enfranchising the one- third of the global population who do not have a bank account — but do have a mobile phone — and concomitantly enable business that currently cannot accept electronic forms of payment to move into digital commerce. In the way that cellular communication revolutionised Sub-Saharan Africa in the early 2000s, so we may anticipate some parallel here as regards ease and ubiquity of payment “wallets” and their positive impact on developing economy dynamics.
- Cryptocurrency potential increasingly offers a route to security and liquid asset preservation/growth in a world where fundamentals are being shifted out of all recognition; driven by economic policies predicated firstly on the priority of COVID management and secondly on the move away from rules-based multilateralism towards bilateralism. Global cooperation is yielding to the demands of national integrity, security of supply and highly aggressive competition in key enabling technologies such as 5G, AI, quantum computing and encryption, which themselves will have as profound of an impact on cryptocurrency evolution as the creation of the bitcoin itself.
Against the backdrop of the essential limits of fiat currencies, current geo- macroeconomic policies and a new emerging world order, cryptocurrencies offer vast potential:
- An efficiency facilitating frictionless commerce/investment.
- A medium of stability against the backdrop of uncertainty and inflation.
- Increased security in value transfer and wealth management.
- Optimum autonomy in an increasingly intrusive climate.
- “Cash” asset preservation/growth in a world of negative interest rates.
In all this, we may well have come full circle to 1694 and the stability and security that the establishment of the Bank of England was intended to entrench — but now it is now de-centralised finance that will get us there.
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