Is crypto too cool to question?
What exactly is cryptocurrency? Is it secure? Should I invest in it? We’ve all heard and been asked these questions. The most recent thefts of $600 million of cryptocurrencies from the non-fungible token (NFT) gaming company Axie Infinity and $182 million from the algorithmic stablecoin Beanstalk adds to the questions. Perhaps that is part of what caused a 20 percent decrease in crypto stocks and a 60 percent decrease in crypto-focused companies in the first quarter of 2022. The algorithmic stablecoin TerraUSD lost no time in “breaking the buck” and causing fear and dislocations in the stablecoin market just this month.
But hype continues to overwhelm common sense, and fundamental stability questions about cryptocurrency go unanswered. Crypto is simply too cool to question. As TV commercials featuring Larry David suggest, it is old-fashioned to disbelieve in cryptocurrency’s bright future.
More significantly, questioning the bona fides of cryptocurrencies runs afoul of the interests and desires of businesses, governments and users who have become both too infatuated with and too invested in them. Cryptocurrencies are making too many people too much money and creating too many jobs for there to be a groundswell of concern for the significant risks being created.
Make no mistake about it, crypto represents a unique and innovative brand of financial instrument. But that shouldn’t camouflage the fact that it also raises very traditional safety and stability issues. It is not like buying stock in a company that has measurable financial metrics, a cash flow and marketable assets that can be liquidated in a worst-case scenario.
Crypto investors (here referring to floating rate cryptocurrencies rather than stablecoins, which are their own basket of issues) own intangible instruments that have no intrinsic value. Cryptocurrencies pretend to be a medium of exchange. But they are not used for everyday necessities and are not likely to be as long as they fluctuate in value, are expensive to use and lack the reliability that comes with government backing.
Cryptocurrency relies on a bet that the sheer volume of people using it will create acceptance and value that is happily devoid of any involvement or interference by the government. Perhaps some more sophisticated investors are buying a piece of the blockchain future or a decentralized Web3. We don’t yet understand whether these traits describe a transformative innovation in financial services or the ingredients of potential financial reckoning.
Cryptocurrencies change the fundamental relationship among parties exchanging value. The economic assurance of the stability of the dollar used to buy a car is missing in a cryptocurrency transaction. Maybe it doesn’t matter, but it has mattered in the past. It is part of the reason that the country moved past wildcat banking and individual banknotes in the 19th century and the economy was able to shift into another gear as the industrial revolution flourished and the country grew westward.
Ask yourself if you can name a situation where something that had no intrinsic underlying value and grew rapidly worked out well? I can’t. There are, however, many such situations that turned out disastrously. And most of those involved bubbles built with assets that actually had intrinsic value.
That is not to say that cryptocurrencies may not be a bridge to the future. Indeed, their most obvious long-term value to date seems to be anchored in their reliance on blockchain technologies that have the capacity to create new personal and commercial networks devoid of traditional financial intermediaries. These kinds of financial innovation are important, but the removal of traditional intermediaries that are closely regulated also raises critical systemic issues that policymakers have been slow to recognize and evaluate. That is dangerous.
Cryptocurrency should get the chance to prove that it is the future. But setting ground rules for this experiment is critical, particularly in a world with variables like war and social unrest ready to detonate the many financial explosives embedded in the market. We need a fundamental reset and new rules of the road that can provide a stable environment for crypto to mature safely and at the same time protect the economy and consumers.
Financial regulation must manage whatever transition occurs by beginning to monitor financial activities rather than companies. That is for Congress to do. If a bank can’t issue, store or transfer cryptocurrency coins without regulatory oversight, why should Meta be permitted to? And why shouldn’t the integrity and experience of those who want to be involved in the business not be screened like those that control banks?
A recent report on stablecoins noted that a popular coin was being transferred by “Inspector Gadget’s” Bahamian bank in exchange for digital tokens “conjured by the Mighty Ducks guy,” all under the watchful eye of executives who were targets of a U.S. criminal investigation.
When the fundamental financial stability issues have been fully evaluated, we can begin to have some confidence that we are not allowing the next financial crisis to unfold before our eyes. That’s when I may buy some cryptocurrency.
Thomas P. Vartanian is executive director of the Financial Technology & Cybersecurity Center and author of “200 Years of American Financial Panics: Crashes, Recessions, Depressions And The Technology That Will Change It All.” His next book, “The Unhackable Internet: How Rebuilding Cyberspace Can Create Real Security and Prevent Financial Collapse” arrives in February 2023.
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