tag:theconversation.com,2011:/us/topics/stablecoin-79020/articlesstablecoin – The Conversation2023-07-24T03:01:23Ztag:theconversation.com,2011:article/2090252023-07-24T03:01:23Z2023-07-24T03:01:23ZThe future of money is digital – but NZ needs a careful framework to prevent the pitfalls of cryptocurrency<figure><img src="https://images.theconversation.com/files/538682/original/file-20230721-23-hklbnt.jpg?ixlib=rb-1.1.0&rect=15%2C15%2C3537%2C2349&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>New Zealand’s central bank is preparing for a future that includes the mainstream use of cryptocurrency. </p>
<p>At the end of last year, the Reserve Bank of New Zealand (RBNZ) published an issues paper, <a href="https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/consultations/future-of-money/fom-private-innovation.pdf">Private Innovation: Te Auahatanga</a>, on digital currencies. The paper sparked a wide-ranging discussion on the development of the <a href="https://www.ird.govt.nz/cryptoassets/what-cryptoassets-are">cryptoasset</a> market and how to respond to the challenges it presents. </p>
<p>The RBNZ received 50 submissions on its paper, with consultation ending in April. A <a href="https://www.rbnz.govt.nz/hub/news/2023/06/rbnz-ramps-up-monitoring-of-stablecoins-and-cryptoassets">summary of the submissions</a> was recently published. </p>
<p>We took a look at the key concerns held by those who participated in the consultation and what these concerns could mean for the uptake of cryptocurrencies in New Zealand.</p>
<h2>The future of money in NZ</h2>
<p>The RBNZ has mapped out a near future where businesses could accept digital currencies for payments, reducing currency conversion issues for international customers. Cryptocurrencies could also be used to streamline payments to suppliers or employees, particularly those based overseas. </p>
<p>And by leveraging the <a href="https://www.ibm.com/blog/how-transparency-through-blockchain-helps-the-cybersecurity-community/">transparency of blockchain</a>, businesses could improve trust by efficiently tracking transactions and supply chains. </p>
<p>But businesses will need to improve their security measures to protect against online threats as well as manage the potential market volatility associated with cryptocurrencies.</p>
<p>While outlining a path for cryptocurrencies, the RBNZ noted the challenges of regulating organisations that are entirely digital and decentralised. The bank also raised the question of how New Zealand’s existing rules on money laundering and the financing of terrorism would apply to cryptocurrencies.</p>
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<h2>The key hurdles for cryptocurrency</h2>
<p>Five key themes emerged out of the submissions received by the RBNZ. These core themes highlighted the concerns held by regulators, businesses and everyday New Zealanders.</p>
<ul>
<li><strong>A clear but flexible regulatory framework</strong> </li>
</ul>
<p><a href="https://www2.deloitte.com/us/en/insights/industry/public-sector/future-of-regulation/regulating-emerging-technology.html">Research</a> on other markets has shown that regulations cannot be static. The rules need to evolve with the technology. That said, regulations need to initially be quite prescriptive. </p>
<p>The New Zealand Financial Markets Authority (NZFMA) could establish a regulatory “sandbox” for cryptoassets, allowing businesses to test their crypto-related technologies in a controlled environment under close supervision. This would encourage innovation as well as help shape effective regulations, balancing the growth of the sector with risk management and consumer protection. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/welsh-mining-towns-had-alternative-currencies-200-years-ago-heres-what-the-crypto-world-could-learn-from-them-205511">Welsh mining towns had alternative currencies 200 years ago – here's what the crypto world could learn from them</a>
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<p>The NZFMA could also demand that New Zealand residents transact their cryptoassets through exchanges that are based in New Zealand and thus under the country’s regulations in order to develop trust. These can be relaxed once the market matures. </p>
<ul>
<li><strong>Information and accessibility</strong> </li>
</ul>
<p>The submissions also highlighted the need for clear, accurate and accessible information on cryptocurrencies. Some respondents expressed concern about the general lack of knowledge about cryptocurrencies and how they work.</p>
<p>The lesson from the collapse of the <a href="https://www.techtarget.com/whatis/feature/FTX-scam-explained-Everything-you-need-to-know">digital trading platform FTX</a> is that New Zealand investors have to be protected, or at least made aware of, the risks of transactions through exchanges in more lenient jurisdictions. </p>
<ul>
<li><strong>Risks and opportunities</strong></li>
</ul>
<p>Risk and opportunities were also points of discussion. Respondents to the RBNZ paper acknowledged the risks associated with cryptocurrencies, such as financial crime and the risk to the wider financial system. </p>
<p>At the same time, they saw a significant opportunity to enhance competition and further innovation in New Zealand.</p>
<ul>
<li><strong>A monitoring approach</strong></li>
</ul>
<p>Respondents supported the RBNZ’s proposed monitoring approach which underscored a “same-risk, same-regulation” principle. This holds that if a cryptoasset presents similar risks to an existing financial product, it should be regulated in a similar manner. </p>
<p>This implies a flexible regulatory stance that evolves based on the risk profile of the asset, thereby creating a fair and balanced regulatory environment for all financial instruments, traditional or digital. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/scams-and-cryptocurrency-can-go-hand-in-hand-heres-how-they-work-and-what-to-watch-out-for-182033">Scams and cryptocurrency can go hand in hand – here's how they work and what to watch out for</a>
</strong>
</em>
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<p>The RBNZ has proposed working closely with international regulators and private sector information providers – companies or organisations that provide data, analysis and insights about the crypto market. This could include blockchain analytics firms, crypto exchange platforms, research institutions and financial technology companies.</p>
<p>Our own <a href="https://link.springer.com/book/10.1007/978-3-030-78873-5">earlier research</a> supports the belief that external regulations are not enough. It is essential that financial intermediaries dealing in cryptoassets develop a corporate culture of “performance with integrity”, one in which each member of the organisation is centred on the best interest of the client. </p>
<p>We need to monitor cryptoasset businesses and ensure they have robust corporate governance. Another lesson from the FTX failure is that exchanges themselves can not be custodians of customers’ assets – this must be done by regulated third party institutions.</p>
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<ul>
<li><strong>Stablecoins</strong></li>
</ul>
<p>Stablecoins, a type of cryptocurrency with value pegged to fiat currencies (a government-issued currency that is not backed by a commodity such as gold) or gold, drew interest during consultations. Participants saw their stability as beneficial. Stablecoins were seen as combining the benefits of cryptocurrencies with the stability of traditional currencies. </p>
<p>However, it must be noted that stablecoins differ in risk exposure according to the collateral they use; the <a href="https://www.sciencedirect.com/science/article/abs/pii/S1544612322005359">crash of the Terra stablecoin</a> in May 2022 versus the <a href="https://www.cnbc.com/2023/02/09/stablecoin-giant-tether-records-surprise-700-million-profit.html">resilience of Tether</a> is testament to this. Regulations must be very clear on the reserve assets demanded, and market supervisors must monitor these reserves very closely. </p>
<h2>The future is digital</h2>
<p>Although promising, the future of cryptocurrency in New Zealand is not without its challenges. The RBNZ will need to keep a close eye on things. The central bank will need to walk a fine line between encouraging new ideas and managing the risks. </p>
<p>For the moment, the RBNZ is taking a cautious approach. While there won’t be any immediate policy changes, the RBNZ will be enhancing its monitoring of the financial ecosystem, tracking global regulatory trends and collaborating with financial organisations to address data gaps.</p>
<p>The goal should be to make sure people understand cryptocurrencies, manage the risks and promote innovation. As one respondent put it: </p>
<blockquote>
<p>The future is digital. Let’s embrace it, understand it, and make it work for us.</p>
</blockquote><img src="https://counter.theconversation.com/content/209025/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New Zealand’s central bank is taking a long, hard look at cryptocurrencies and the role they will play in future business. Here’s what businesses had to say about our digital future.Abhishek Mukherjee, Lecturer in Accounting and Finance., University of WaikatoParesha Sinha, Associate Professor, University of WaikatoPaul David Richard Griffiths, Professor of Finance; (Banking, Fintech, Corporate Governance, Intangible Assets), EM NormandieLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1977772023-01-17T20:16:09Z2023-01-17T20:16:09ZCryptocurrencies are in crisis, but they are not going to disappear<figure><img src="https://images.theconversation.com/files/504333/original/file-20230112-22-3byu1u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A worker from Hope House, an organization that sponsors the use of cryptocurrencies on El Zonte beach, makes a purchase at a small shop that accepts bitcoins, in Tamanique, El Salvador, June 9, 2021.</span> <span class="attribution"><span class="source">(AP Photo/Salvador Melendez)</span></span></figcaption></figure><p>Cryptocurrencies are experiencing their worst crisis <a href="https://www.investopedia.com/terms/c/cryptocurrency.asp">since the arrival of the first crypto assets and virtual currencies</a> in the 1990s and their democratization in the 2010s. </p>
<p>Bitcoin had an unprecedented tumble in late 2020 and has yet to recover. In addition to this sharp decline, there is much discussion about the worrisome collapse of some so-called <a href="https://www.investopedia.com/terms/s/stablecoin.asp">stablecoins</a>, which are supposed to be less volatile. </p>
<p>This is compounded by the fall of cryptocurrency giants, particularly due to <a href="https://www.investopedia.com/what-went-wrong-with-ftx-6828447">allegations of fraud in cases like the FTX scandal</a>. At its peak, FTX had one million users and was the third-largest cryptocurrency exchange in terms of volume.</p>
<p>Experts agree that the aftershocks of its collapse have hit investors hard and will likely slow the pace of crypto asset adoption <a href="https://www.cnbc.com/2022/12/19/three-ways-the-ftx-disaster-will-reshape-crypto.html">for the next few years</a>. </p>
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<p>
<em>
<strong>
À lire aussi :
<a href="https://theconversation.com/investir-dans-les-cryptoactifs-voici-comment-limiter-le-risque-detre-expose-a-une-fraude-182835">Investir dans les cryptoactifs : voici comment limiter le risque d’être exposé à une fraude</a>
</strong>
</em>
</p>
<hr>
<p>As an expert in the field of cryptocurrencies, I will try to answer the following question: are cryptocurrencies really here to stay, or are they just a fad?</p>
<h2>Speculation and extreme volatility</h2>
<p>Cryptoassets include tokens that can be used for digital currency purposes (i.e. cryptocurrencies such as Bitcoin and Ethereum). They are also used for investment in an entity (a <a href="https://www.bitpanda.com/academy/en/lessons/what-is-the-difference-between-utility-tokens-and-security-tokens">“security token,”</a> which entitles the holder to ownership of a portion of an entity), or for products or services (a <a href="https://www.bitpanda.com/academy/en/lessons/what-is-the-difference-between-utility-tokens-and-security-tokens">“utility token,”</a> which entitles the holder to a product once it has been produced, for example).</p>
<p><a href="https://blog.bitpanda.com/en/what-are-stablecoins">Stablecoins</a>, which are supposed to be associated with lower volatility, are unique in that they are backed by a currency (e.g. the U.S. dollar), a commodity (e.g. gold) or a financial instrument (e.g. a stock or a bond). This is to keep the value of the digital currency stable.</p>
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<a href="https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="man shows the screen of his phone on which his cryptocurrency balance can be seen" src="https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/478155/original/file-20220808-7938-ivi7mn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Erich García, a 33 year-old programmer and YouTuber, poses with his bitcoin wallet, at his home in Havana, Cuba, in March 2021.</span>
<span class="attribution"><span class="source">(AP Photo/Ramon Espinosa)</span></span>
</figcaption>
</figure>
<p>Bitcoin’s plunge is followed in the <a href="https://www.nbcnews.com/tech/crypto/bitcoin-plunge-breaks-24000-200-billion-wipe-crypto-market-weekend-rcna33234">headlines</a> on a daily basis. While this is not the first time it has fallen, it is particularly noteworthy as it is the biggest drop in value <a href="https://www.cnbc.com/2022/05/12/bitcoin-btc-price-falls-below-27000-as-crypto-sell-off-intensifies.html">since late 2020</a>. The collapse is partly due to rising interest rates and the flight of investors from these risky investments. Although it is recovering, Bitcoin is still a long way from the heights it once reached.</p>
<p>This media coverage raises many questions about the sustainability of these cryptoassets. Indeed, the latter are marked by extreme volatility in their <a href="https://news.harvard.edu/gazette/story/2021/09/regulating-the-unregulated-cryptocurrency-market/">unregulated markets</a> in addition to being associated with <a href="https://medium.com/wolverineblockchain/the-surprising-similarities-between-cryptocurrencies-tulips-4c4ab5a1bea1">speculation by many players in the financial world</a>.</p>
<p>Indeed, the BBC recently reported that cryptocurrency laundering <a href="https://www.bbc.com/news/technology-60072195">rose 30 per cent in 2021</a>. The <a href="https://www.ftc.gov">U.S. Federal Trade Commission</a>, which aims to protect U.S. consumers, reported that in 2021, fraud schemes cost investors <a href="https://www.ftc.gov/business-guidance/blog/2022/06/reported-crypto-scam-losses-2021-top-1-billion-says-ftc-data-spotlight">more than $1 billion in cryptocurrencies</a>. Needless to say, very few of the defrauded investors have recovered their money.</p>
<h2>One billion users by 2022</h2>
<p>Yet we are seeing a slow but sure increase in the adoption of cryptocurrencies by companies. In an ongoing study of the impact of cryptocurrency adoption by public companies on their social responsibility, I noted that many of them, such as Starbucks and McDonald’s, have started to accept Bitcoin as a form of payment. This is particularly the case in their branches in El Salvador, following that country’s adoption of <a href="https://globalnews.ca/news/8171521/el-salvador-adopts-bitcoin-legal-tender/">Bitcoin as legal tender</a>.</p>
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<p>Others, such as Japanese online retail giant <a href="https://www.rakuten.ca/">Rakuten</a>, have chosen to accept cryptocurrencies even if their country is not pushing to adopt Bitcoin as a currency. They say they are driven by a desire to offer more payment options to their customers.</p>
<p>The user base for cryptocurrencies is growing year on year. For example, Crypto.com, an exchange platform, estimated that about 295 million people had entered the cryptocurrency market as of <a href="https://assets.ctfassets.net/hfgyig42jimx/5i8TeN1QYJDjn82pSuZB5S/85c7c9393f3ee67e456ec780f9bf11e3/Cryptodotcom_Crypto_Market_Sizing_Jan2022.pdf">December 2021</a>. The platform expected the number of users to cross the one billion mark by December 2022.</p>
<p>Cryptocurrencies also allow people with unreliable or insecure banking systems to access a parallel banking system that is independent of the traditional banking system. Offering a less affluent part of the population access to a different form of banking system is one of the reasons the President of El Salvador gave <a href="https://www.nytimes.com/2022/07/05/world/americas/el-salvador-bitcoin-national-currency.html">for making Bitcoin legal tender in the country</a>.</p>
<h2>A healthy fluctuation</h2>
<p>The growing interest in <a href="https://www.cnbc.com/2021/06/18/whats-defi-crypto-based-decentralized-finance-explained.html">decentralized finance (DeFi)</a>, as well as the development of the metaverse, are also factors that influence the sustainability of cryptocurrencies. Decentralized finance often relies on stablecoins for its operation. Meanwhile, the metaverse, a <a href="https://theconversation.com/what-is-the-metaverse-and-what-can-we-do-there-179200">universe of 3D virtual worlds</a>, also allows the use of cryptocurrencies to purchase goods or services, creating an immersive world.</p>
<p>Experts in the sector believe that, despite the debacle that the cryptoasset market has experienced recently, decentralized finance — particularly via products backed by cryptoassets — <a href="https://www.cnbc.com/2022/06/03/crypto-firms-say-thousands-of-digital-currencies-will-collapse.html">is here to stay</a>. This is because there is a market and players willing to participate.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="person holds a Bitcoin coin in front of a screen" src="https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/478162/original/file-20220808-7938-udt4nr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Cryptocurrencies can be used for transactional purposes in the metaverse.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<p>Moreover, they argue that while this sharp decline in cryptocurrency-related markets does remove some players, this is a welcome change. By the admission of <a href="https://www.youtube.com/watch?v=H1FYJlaxlOg">Raoul Ullens</a>, co-founder of <a href="https://blockchainweek.be/">Brussels Blockchain Week</a> (an annual conference devoted to blockchain and cryptocurrencies):</p>
<blockquote>
<p>it is healthy, for the adoption, the maturation of these Web3 technologies, to skim, to rebalance the sector. […] An unhealthy ecosystem will not attract the masses.</p>
</blockquote>
<p>According to these players, such a drop in the cryptoasset markets is not only necessary, but also healthy, contributing as it does to rebalancing the valuation of cryptocurrencies.</p>
<h2>Cryptocurrencies are here to stay</h2>
<p>The launch of cryptocurrencies by central banks, via central bank digital currencies (CBDCs), also lends weight to the argument that cryptoassets are here to stay. Indeed, the Bank of Canada is currently working on the <a href="https://www.bankofcanada.ca/research/digital-currencies-and-fintech/projects/central-bank-digital-currency/">creation of a CBDC</a>. According to the institution, a CBDC issued by the Bank of Canada would be an “official digital currency (that) would retain its face value in Canadian dollars because it is issued by the <a href="https://www.bankofcanada.ca/research/digital-currencies-and-fintech/projects/central-bank-digital-currency/?_gl=1*11n5guo*_ga*NTA4MDM3MDQwLjE2NzM1NTYyOTg.*_ga_D0WRRH3RZH*MTY3MzU1NjI5Ny4xLjAuMTY3MzU1NjI5Ny4wLjAuMA..&_ga=2.93130141.106029617.1673556298-508037040.1673556298">Bank of Canada</a>, just like bank notes.”</p>
<p>Other nations in the world have already issued such a currency, including the <a href="https://www.ndtv.com/business/here-are-the-timelines-and-status-of-central-bank-digital-currencies-in-some-countries-2820164">Bahamas (Sand Dollar) and Nigeria (eNaira)</a>. One reason CBDCs are different from privately issued digital currencies (such as Bitcoin or Ethereum) is that their intended use is for transaction purposes only, not for investment or speculation. They offer the same possibilities of use as cash. </p>
<p>CBDCs also aim to promote the financial inclusion of a part of the population that has little or no access to the traditional banking system, and to simplify the implementation of monetary and fiscal policy in the issuing countries.</p>
<p>Developments in the world of digital currencies, whether in the metaverse or with the arrival of the CBDC, and the craze that they continue to generate, mean cryptocurrency is here to stay.</p>
<p>This durability means the form of cryptoassets take will continue to evolve and transform with the technologies that support them (notably, blockchains) and the variation in demand from users and/or investors.</p><img src="https://counter.theconversation.com/content/197777/count.gif" alt="La Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Annie Lecompte has received funding from the Fondation des CPA du Québec.</span></em></p>An expert in the field of cryptocurrencies answers the question: Is crypto really here to stay or is it just a fad?Annie Lecompte, Assistant prof - Audit, Université du Québec à Montréal (UQAM)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1623482021-06-13T20:06:16Z2021-06-13T20:06:16ZCan Bitcoin be a real currency? What’s wrong with El Salvador’s plan<figure><img src="https://images.theconversation.com/files/405800/original/file-20210611-18-1ooewxl.jpg?ixlib=rb-1.1.0&rect=0%2C308%2C5020%2C2502&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Salvador Melendez/AP</span></span></figcaption></figure><p>Nayib Bukele, president of El Salvador, has got himself a pair of laser eyes – on his Twitter profile at least. </p>
<p>Laser eyes are something social media users give themselves to show they love cryptocurrency – and Bukele proved his crypto-enthusiasm last week by having El Salvador become the world’s first nation to make Bitcoin legal tender.</p>
<p>El Salvador’s parliament passed Bukele’s proposed legislation on June 9, after he announced his plan just a few days earlier. The law will take effect in September.</p>
<p>Some Bitcoin fans have leapt on this as a step towards <a href="https://www.cnbc.com/2021/06/08/bitcoin-2021-el-salvador-adoption-could-be-huge-for-cryptocurrency.html">much broader acceptance</a>. But the changes in Bitcoin’s market value since Bukele announced his plan gives crypto-sceptics reason for doubt. </p>
<figure class="align-right ">
<img alt="Nayib Bukele's Twitter profile image." src="https://images.theconversation.com/files/405840/original/file-20210611-17-1jhlyzz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/405840/original/file-20210611-17-1jhlyzz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/405840/original/file-20210611-17-1jhlyzz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/405840/original/file-20210611-17-1jhlyzz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/405840/original/file-20210611-17-1jhlyzz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/405840/original/file-20210611-17-1jhlyzz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/405840/original/file-20210611-17-1jhlyzz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Nayib Bukele’s Twitter profile image.</span>
<span class="attribution"><a class="source" href="https://twitter.com/nayibbukele">Twitter</a></span>
</figcaption>
</figure>
<p>Over the past week Bitcoin’s value was as high as US$38,200 (about A$49,000) and as low as US$31,428. Over the past month it has fallen from more than US$58,000. This isn’t the type of price volatility any government generally wants to see in a currency. </p>
<p>Such fluctations show Bitcoin’s weakness as a viable alternative to central bank currencies – good only for transactions you don’t want traced and as a speculative investment.</p>
<p>So what is Bukele thinking in wanting to make Bitcoin legal tender for the small central American nation (population about 6.5 million) whose economy accounts for less than 0.05% of global GDP? </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/el-salvadors-facade-of-democracy-crumbles-as-president-purges-his-political-opponents-161781">El Salvador's façade of democracy crumbles as president purges his political opponents</a>
</strong>
</em>
</p>
<hr>
<h2>What does ‘legal tender’ mean?</h2>
<p>Before we get to that, let’s clarify what making Bitcoin legal tender means. </p>
<p>Using Bitcoin is already legal in El Salvador, as it is in most countries. If you want to pay for something in bitcoins, and the recipient is willing to accept them, it’s all good.</p>
<p>Making bitcoins legal tender mean a payee will have to accept them. As the new legislation <a href="https://twitter.com/nayibbukele/status/1402446890466217985/photo/2">states</a>, “every economic agent must accept Bitcoin as payment when offered to him by whoever acquires a good or service”. </p>
<p>El Salvador making this move isn’t as significant as it would be for most nations, because it is one of about a dozen countries – most of them micro-states such as Andorra and Nauru – without its <a href="https://www.bis.org/publ/bppdf/bispap17c.pdf">own currency</a> (or a common currency such as the Euro). </p>
<p>El Salvador abandoned its own currency (the “colon”, named after Christopher Columbus) in 2001 and adopted the US dollar as its legal tender. This process of “official dollarisation” was seen as a reform that would <a href="https://www.latimes.com/archives/la-xpm-2007-aug-04-fi-dollarize4-story.html">curb inflation</a> and increase trade with the US (by far its major trading partner). </p>
<p>So El Salvador has less to lose than other nations in adopting a second currency as legal tender. There is no controversy about losing sovereignty and monetary policy autonomy. There will be no loss of “seignorage” – the profit made on issuing currency that’s worth a lot more than the cost of making it. </p>
<h2>Highly volatile</h2>
<p>But having two legal tenders will complicate matters – particularly when one of those currencies is subject to wild swings in its value. </p>
<p>Consider the provision in the new law that “all obligations in money expressed in USD, existing before the effective date of this law, may be paid in bitcoin”. </p>
<p>Even that is complicated. How, and by whom, will the amount of bitcoins necessary to pay a debt be determined? Will it be based on the Bitcoin price at the time the debt was incurred, or when the debt falls due? </p>
<p>The difference of even a few days could be significant. </p>
<p>If the expectation is the price of Bitcoin is going to rise, why would you want to buy things with it? Why not wait? If the expectation is the price is going to fall, why would you want to accept it? For most transactions, using US dollars will still make the most sense. </p>
<p>So making Bitcoin legal tender could help destabilise El Salvador’s economy. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/bitcoin-this-year-i-stand-to-make-200-million-more-than-elon-musk-155469">Bitcoin: this year I stand to make $200 million more than Elon Musk</a>
</strong>
</em>
</p>
<hr>
<h2>Increasing El Salvador’s GDP</h2>
<p>Things would have been simpler if El Salvador had adopted a “stablecoin” whose price is fixed at one US dollar – such as Tether, the third-largest cryptocurrency. </p>
<p>But that would have not been nearly so newsworthy, and would have defeated the apparent reason Bukele has championed this move.</p>
<p>Bukele’s reasoning, delivered via Twitter on June 6, is that Bitcoin has “a market cap of US$680 billion” and:</p>
<blockquote>
<p>If 1% of it is invested in El Salvador, that would increase our GDP by 25%.</p>
</blockquote>
<p>This argument – which appears to be the only “analysis” Bukele has made public – seems very confused. </p>
<figure class="align-right ">
<img alt="El Salvador President Bukele explains his Bitcoin plan on Twitter" src="https://images.theconversation.com/files/405818/original/file-20210611-19-1vw8eh0.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/405818/original/file-20210611-19-1vw8eh0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/405818/original/file-20210611-19-1vw8eh0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/405818/original/file-20210611-19-1vw8eh0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/405818/original/file-20210611-19-1vw8eh0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/405818/original/file-20210611-19-1vw8eh0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/405818/original/file-20210611-19-1vw8eh0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bukele explains his Bitcoin plan on Twitter.</span>
<span class="attribution"><span class="source">Twitter</span></span>
</figcaption>
</figure>
<p>Market capitalisation typically refers to a listed company’s valuation, based on multiplying the share price by the number of shares. The $US680 billion Bitcoin market cap Bukele referred to represents the currency’s market value multiplied by the number of bitcoins created so far. (For comparison, the market cap of Tether’s 63 billion coins in circulation is US$63 billion.)</p>
<p>But it is flawed logic to think Bitcoin’s total market value equals money bitcoin owners around the globe are looking to invest anywhere. </p>
<p>In very few cases do people buy bitcoins to invest in other things. Bitcoins are their investment. Neither major funds nor average punters holding bitcoins are likely to want to start investing in El Salvador. </p>
<p>Nor is foreign investment a component of GDP (which is the value of market transactions in an economy). Foreigners using bitcoins to buy assets such as land in El Salvador would bid up its price but not necessarily increase GDP. A surge in foreign investment into new infrastructure and businesess that increase productive capacity would contribute to GDP, but there’s no reason to think giving Bitcoin legal tender status will make this more likely.</p>
<h2>Facilitating remittances</h2>
<p>A second reason given by Bukele is that Bitcoin “will have 10 million potential new users” and is “the fastest growing way to transfer 6 billion dollars a year in remittances”. </p>
<p>This apparently refers to both the population of El Salvador (about 6.5 million) and Salvadorans living abroad, many of whom send money home to help their families. In 2020 these remittances totalled US$5.9 billion, or <a href="https://apnews.com/article/san-salvador-coronavirus-pandemic-el-salvador-1623416c0ddc7aa238911f8a422b6c8b">23% of El Salvador’s GDP</a>. </p>
<p>While any cryptocurrency can well facilitate more efficient transfers (without the charges banks impose), the significance of remittances to the Salvadoran economy points to another issue. El Salvador is a poor country, with one of the lowest rates of internet use in the Americas – 33% in 2017, according to <a href="https://data.worldbank.org/indicator/IT.NET.USER.ZS?locations=SV">World Bank data</a>. </p>
<p>How many vendors, street hawkers or farmers are equipped to handle cryptocurrency transactions? US dollars will more than likely remain the default currency.</p>
<p>The benefits of making Bitcoin legal tender are far from clear. El Salvador is already facing higher interest rates as international investors are <a href="https://www.reuters.com/technology/el-salvador-presidents-bitcoin-push-casts-shadow-over-imf-efforts-2021-06-07/">worried about the move</a>. There are concerns wider use of Bitcoin will facilitate the black economy and make tax avoidance easier.</p>
<p>So this is a <a href="https://theconversation.com/bitcoin-el-salvadors-grand-experiment-162382">great experiment</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/bitcoin-el-salvadors-grand-experiment-162382">Bitcoin: El Salvador's grand experiment</a>
</strong>
</em>
</p>
<hr>
<p>For the sake of El Salvador’s people, let’s hope it is successful. But the odds are on it being further evidence of the cryptocurrency’s unsuitability for use as a real currency – confirmation that Bitcoin is nothing more than a speculative gamble.</p><img src="https://counter.theconversation.com/content/162348/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins formerly worked for the Bank for International Settlements and two central banks,</span></em></p>El Salvador has become the first nation in the world to make Bitcoin legal tender. So what exactly is President Nayib Bukele thinking?John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society and NATSEM, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1527652021-01-07T14:58:23Z2021-01-07T14:58:23ZBitcoin: why the price has exploded – and where it goes from here<figure><img src="https://images.theconversation.com/files/377566/original/file-20210107-16-s68pom.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">B is for blast-off (but also bubble).</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/blue-bitcoin-rocket-fly-sky-on-770892166">3DJustincase</a></span></figcaption></figure><p>Bitcoin achieved a remarkable rise in 2020 in spite of many things that would normally make investors wary, including US-China tensions, Brexit and, of course, an international pandemic. <a href="https://www.tradingview.com/symbols/BTCUSD/?exchange=COINBASE">From a year-low</a> on the daily charts of US$4,748 (£3,490) in the middle of March as pandemic fears took hold, <a href="https://theconversation.com/uk/topics/bitcoin-1358">bitcoin</a> rose to just below US$30,000 by the end of the year. </p>
<p>Since then it has climbed to all-time highs above US$38,000, making headlines day after day and driving up the prices of other cryptocurrencies at the same time. So what has driven this huge price appreciation and is it different to the <a href="https://theconversation.com/the-bitcoin-bubble-how-we-know-it-will-burst-88511">bubble of 2017</a>?</p>
<p><strong>Bitcoin/US$ price 2016-21</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/377574/original/file-20210107-19-160gxni.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bitcoin price graph" src="https://images.theconversation.com/files/377574/original/file-20210107-19-160gxni.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/377574/original/file-20210107-19-160gxni.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=310&fit=crop&dpr=1 600w, https://images.theconversation.com/files/377574/original/file-20210107-19-160gxni.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=310&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/377574/original/file-20210107-19-160gxni.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=310&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/377574/original/file-20210107-19-160gxni.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=389&fit=crop&dpr=1 754w, https://images.theconversation.com/files/377574/original/file-20210107-19-160gxni.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=389&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/377574/original/file-20210107-19-160gxni.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=389&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com/chart/?symbol=COINBASE%3ABTCUSD">Trading View</a></span>
</figcaption>
</figure>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-is-bitcoins-price-at-an-all-time-high-and-how-is-its-value-determined-152616">Why is Bitcoin's price at an all-time high? And how is its value determined?</a>
</strong>
</em>
</p>
<hr>
<p>One reason for the massive price rise is that there has been a big influx of investors from <a href="https://cointelegraph.com/news/why-institutions-suddenly-give-a-damn-about-bitcoin">large-scale institutions</a> such as pension schemes, university endowment funds and investment trusts. This was not the case during the last bull market in 2017, in which the bitcoin price rose about 20-fold to almost US$20,000, only to slide back to the low US$3,000s a year later. </p>
<p>In 2017, the cryptocurrency ecosystem was dominated by individual retail investors, many of whom were attracted to <a href="https://theconversation.com/uk/topics/bitcoin-1358">bitcoin’s scarcity</a> and the fact that it stood outside the global financial system. The 2017 bull market had all the signs of a classic financial bubble and investors who were buying in “fear of missing out” (FOMO). </p>
<h2>The move mainstream</h2>
<p>This time, big names such as billionaire investor <a href="https://www.coindesk.com/hedge-fund-pioneer-paul-tudor-jones-says-he-holds-1-2-of-assets-in-bitcoin">Paul Tudor Jones</a> and insurance giant <a href="https://www.bloomberg.com/news/articles/2020-12-10/169-year-old-insurer-massmutual-invests-100-million-in-bitcoin?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosmarkets&stream=business">MassMutual</a> have invested heavily, while even former naysayers like JP Morgan now <a href="https://www.financemagnates.com/cryptocurrency/news/jpmorgan-predicts-600-billion-bitcoin-demand/">say that bitcoin could have</a> a bright future. This all helps to increase trust in the cryptocurrency and indicates that it is becoming more mainstream. </p>
<p>Bitcoin has also been backed by a few <a href="https://theconversation.com/bitcoin-why-a-wave-of-huge-companies-like-tesla-rushing-to-invest-could-derail-the-stock-market-154966">large consumer-facing payment names</a>. <a href="https://finance.yahoo.com/news/bitcoin-hits-2020-high-paypal-allows-cryptocurrencies-platform-160511168.html">PayPal now allows</a> customers to buy, hold and sell bitcoin directly from their PayPal accounts. Rival digital payment firm <a href="https://finance.yahoo.com/news/square-tops-3q-estimates-174-070545375.html">Square reported</a> in November that more of its Cash App users are buying the digital currency, and buying more on average than before. The <a href="https://icoholder.com/blog/places-accept-bitcoin/">number of vendors</a> accepting bitcoin as a form of payment is growing rapidly. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/jSJVeCg2wS8?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>Possibly most importantly, Visa has <a href="https://usa.visa.com/visa-everywhere/blog/bdp/2020/07/21/advancing-our-approach-1595302085970.html">been warming</a> to bitcoin. In October <a href="https://www.theverge.com/2020/10/28/21538278/coinbase-card-visa-debit-cryptocurrency-bitcoin-stellar-lumen-spending-money">it announced</a> a handful of bitcoin-related credit and debit cards with leading crypto exchange Coinbase. With more and more ways of using bitcoin, it should mean that more people will want to hold it. </p>
<p>Bitcoin has also become <a href="https://theconversation.com/bitcoins-rebound-3-reasons-this-bubble-may-not-burst-150731">much more mature</a> since the days when it was used mainly as a method to purchase drugs on the dark web <a href="https://www.oxygen.com/crime-time/ross-ulbricht-silk-road-darknet-dream-market-wall-street">on Silk Road</a>. Bitcoin digital wallets, keys and exchanges are easier to access and there is a lot more reliable information out there than before. </p>
<p>The introduction of financial products such as bitcoin futures and options, as well as <a href="https://www.investopedia.com/news/3-blockchain-etfs-buy-2018/">blockchain-related funds</a>, has allowed investors who might otherwise have been fearful of volatility to get involved. Bitcoin futures mean that investors can speculate on falling prices by “going short” on the cryptocurrency. Nobel laureate Robert Shiller <a href="https://www.nytimes.com/2017/12/15/business/bitcoin-investing.html">has suggested that</a> the 2017 bubble could have been linked to the fact that there were no bitcoin futures at the time. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/bitcoins-rebound-3-reasons-this-bubble-may-not-burst-150731">Bitcoin's rebound: 3 reasons this bubble may not burst</a>
</strong>
</em>
</p>
<hr>
<h2>The inflation hedge</h2>
<p>Besides all this mainstream enthusiasm, the carnage brought by COVID-19 has led to huge stimulus packages from governments around the globe and many central banks printing more money. This could drive up inflation, which in turn lowers people’s purchasing power. Indeed the US Federal Reserve last year signalled it would be slightly more tolerant of rising prices <a href="https://www.bbc.co.uk/news/business-53933239">when it relaxed</a> its 2% inflation target. </p>
<p>In the face of this threat, investments like bitcoin are being consider a store of value. The maximum number of <a href="https://theconversation.com/uk/topics/bitcoin-1358">bitcoin</a> that will ever exist is set at 21 million (unless the protocol changes), and <a href="https://www.buybitcoinworldwide.com/how-many-bitcoins-are-there/#:%7E:text=How%20Many%20Bitcoins%20Are%20There%20Now%20in%20Circulation%3F,adds%206.25%20bitcoins%20into%20circulation.">there are already</a> about 18.5 million in circulation. </p>
<p>The supply of new coins is also slowing down because the reward that bitcoin miners receive for verifying transactions on the blockchain <a href="https://theconversation.com/bitcoin-halving-qanda-what-its-all-about-and-what-it-means-for-the-cryptocurrency-138570">halves roughly every four years</a> – it fell from BTC12.5 to BTC6.25 last May. This scarcity is comparable to that of precious metals. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/377563/original/file-20210107-16-1c8e32j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graphic illustration of bitcoins being mined from a hole" src="https://images.theconversation.com/files/377563/original/file-20210107-16-1c8e32j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/377563/original/file-20210107-16-1c8e32j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/377563/original/file-20210107-16-1c8e32j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/377563/original/file-20210107-16-1c8e32j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/377563/original/file-20210107-16-1c8e32j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/377563/original/file-20210107-16-1c8e32j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/377563/original/file-20210107-16-1c8e32j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Can you dig it?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/mining-golden-bitcoins-670198525">SPF</a></span>
</figcaption>
</figure>
<p>Even central banks are embracing cryptocurrencies. Russia, China, Canada, the EU and many others are either already working on <a href="https://www.coindesk.com/what-is-a-cbdc">central bank digital currencies</a> (CBDCs) for their countries or publishing white papers detailing their intentions to do so. This is an obvious sign that the powers that be in the old financial world are seeing cryptocurrencies as the future. Meanwhile, the <a href="https://www.coindesk.com/occ-banks-stablecoin-payments">US federal regulator has announced</a> that retail banks can carry out payments with stablecoins, which are cryptocurrencies pegged to traditional currencies. </p>
<h2>Where next</h2>
<p>It therefore seems that the recent bitcoin price appreciation may have more substance than in 2017. <a href="https://theconversation.com/bitcoin-uk-banks-are-getting-tough-on-crypto-but-money-laundering-rules-are-the-real-problem-159651">But not everyone agrees.</a> Chief economist and strategist at Rosenberg Research and Associates, <a href="https://markets.businessinsider.com/currencies/news/bitcoin-price-bubble-david-rosenberg-supply-mining-cryptocurrency-outlook-record-high-2020-12-1029903485">David Rosenberg</a>, believes bitcoin is in a bubble and investors don’t understand how it works. </p>
<p>Rosenberg is well placed to comment on bubbles since he is known for identifying the US housing market bubble that led to the global financial crisis of 2008-09. He believes investors don’t understand how bitcoin works and it is in a classic, follow-the-herd bubble (though he has <a href="https://news.bitcoin.com/economist-david-rosenberg-ignorance-bitcoin-massive-bubble/">since conceded</a> he is no expert on the cryptocurrency himself). Meanwhile, large volatility in the price is still a major issue, which will still worry some institutional investors. </p>
<p>So what to believe? There are plenty of very bullish forecasts for the bitcoin price in 2021. Tyler and Cameron Winklevoss, the founders of leading crypto exchange Gemini, <a href="https://cointelegraph.com/news/bitcoin-price-rise-to-500k-is-inevitable-winklevoss-twins-say">believe bitcoin</a> will eventually hit US$500,000 per coin, while a <a href="https://cointelegraph.com/news/citibank-makes-tentative-318k-bitcoin-prediction-for-december-2021">Citigroup analyst</a> suggests a price of US$318,000 by December 2021. </p>
<p>Obviously these parties have “skin in the game” and these numbers may be too optimistic. However, in March 2020 the prospect of bitcoin reaching US$30,000 seemed impossible. Wherever the price goes from here, the fortunes of the leading cryptocurrency are clearly going to be one of the world’s biggest financial stories in the year ahead. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/bitcoin-this-year-i-stand-to-make-200-million-more-than-elon-musk-155469">Bitcoin: this year I stand to make $200 million more than Elon Musk</a>
</strong>
</em>
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<img src="https://counter.theconversation.com/content/152765/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns some cryptocurrencies including bitcoin. </span></em></p>Some say the world’s leading cryptocurrency will hit six figures before Christmas. Are they right?Andrew Urquhart, Associate Professor of Finance, ICMA Centre, Henley Business School, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1448832020-08-26T10:26:42Z2020-08-26T10:26:42ZWhat is DeFi and why is it the hottest ticket in cryptocurrencies?<figure><img src="https://images.theconversation.com/files/354672/original/file-20200825-18-464f1s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There has been massive growth in decentralised finance in the past three years. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/smartphone-finance-market-icons-symbols-concept-258766883">ESB Professional</a></span></figcaption></figure><p>One area in cryptocurrencies attracting huge attention is DeFi or decentralised finance. This refers to financial services using <a href="https://blockgeeks.com/guides/smart-contracts/">smart contracts</a>, which are automated enforceable agreements that don’t need intermediaries like a bank or lawyer and use online blockchain technology instead. </p>
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<iframe id="noa-web-audio-player" style="border: none" src="https://embed-player.newsoveraudio.com/v4?key=x84olp&id=https://theconversation.com/what-is-defi-and-why-is-it-the-hottest-ticket-in-cryptocurrencies-144883&bgColor=F5F5F5&color=D8352A&playColor=D8352A" width="100%" height="110px"></iframe>
<p><em>You can listen to more articles from The Conversation, narrated by Noa, <a href="https://theconversation.com/uk/topics/audio-narrated-99682">here</a>.</em></p>
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<p>Between September 2017 and the time of writing, the total value locked up in DeFi contracts <a href="https://defipulse.com/">has exploded</a> from US$2.1 million to US$6.9 billion (£1.6 million to £5.3 billion). Since the beginning of August alone it has risen by US$2.9 billion. </p>
<p>This has driven a massive rise in the value (market capitalisation) of all the tradeable tokens that are used for DeFi smart contracts. It is <a href="https://www.coingecko.com/en/defi">now around</a> US$15 billion, <a href="https://decrypt.co/37397/defi-brings-ethereum-market-cap-to-highest-level-since-august-2018">almost double</a> the beginning of the month. Numerous tokens have risen in value by three or four times in a year – and some considerably more. For example, <a href="https://www.coingecko.com/en/coins/synthetix-network-token">Synthetix Network Token</a> has increased more than 20-fold, and <a href="https://www.coingecko.com/en/coins/aave">Aave</a> almost 200-fold. So if you had bought £1,000 of Aave tokens in August 2019, they would now be worth nearly £200,000.</p>
<h2>Maximum disruption</h2>
<p>DeFi, most of it built on the <a href="https://www.blockchain.com/learning-portal/ether-basics#:%7E:text=Ethereum%20is%20a%20distributed%20public,currency%2C%20also%20known%20as%20ETH.">ethereum blockchain network</a>, is the next step in the revolution in disruptive financial technology that began 11 years ago with bitcoin. One area in which in which these decentralised applications (dApps) have taken off is cryptocurrency trading on decentralised exchanges (dexs) such as <a href="https://uniswap.org/">Uniswap</a>. These are entirely peer-to-peer, without any company or other institution providing the platform. </p>
<p>Other DeFi services now in use allow you to:
</p><ul>
<li>Borrow and lend cryptocurrencies to earn interest using platforms such as <a href="https://defipulse.com/blog/what-is-cdai/">Compound</a> or <a href="https://www.coinbureau.com/review/aave-lend/">Aave</a>.</li>
<li>Bet on the outcome of events using <a href="https://augur.net/">Augur</a>.</li>
<li>Create and exchange derivatives of real-world assets such as currencies or precious metals on <a href="https://decrypt.co/resources/what-is-synthetix-explained-ethereum-trading-learn">Synthetix</a>.</li>
<li>Take part in a no-loss lottery on <a href="https://www.pooltogether.com/">PoolTogether</a>, where everyone gets their money back and one lucky participant wins all the interest that has accrued in a shared pot.</li>
<li>Buy cryptocurrencies known as stablecoins, which are pegged to the value of a particularly currency or commodity. For example, DAI and USDC are both pegged to the US dollar.</li>
</ul><p></p>
<p>DeFi is sometimes known as “Lego money” because you can stack dApps together to maximise your returns. For example, you could buy a stablecoin such as DAI and then lend it on Compound to earn interest, <a href="https://blockgeeks.com/guides/smart-contracts/">all using</a> your smartphone. </p>
<p>Though many of today’s dApps are niche, future applications could have a big impact on day-to-day life. For example, you will probably be able to purchase a piece of land or house on a DeFi platform under a mortgage agreement whereby you repay the price over a period of years. </p>
<p>The deeds would be put up in tokenised form on a blockchain ledger as collateral and, in the event that you defaulted on your repayments, the deeds would automatically shift to the lender. Because no lawyers or banks would be required, it could make the whole process of buying and selling houses cheaper.</p>
<h2>Why the craze?</h2>
<p>First, regulators have been behind the curve, and DeFi has been able to flourish in this vacuum. For instance, in traditional unsecured lending, there is a legal requirement that lenders and borrowers know one another’s identities and that the lender assesses the borrower’s ability to repay the debt. In DeFi, there are no such requirements. Instead, everything is about mutual trust and preserving privacy.</p>
<p>Regulators are having to weigh the delicate balance between stifling innovation and failing to protect society from such risks as individuals putting their money into an unregulated space, or banks and other financial institutions potentially being unable to make a living as intermediaries. But it seems more sensible to embrace change – and that seems to be happening. In July, the US Securities and Exchange Commission (SEC) made a major shift towards embracing DeFi <a href="https://www.hedgeweek.com/2020/07/07/287239/arca-offers-first-sec-registered-fund-issuing-digital-securities">by approving</a> an ethereum-based fund, Arca, for the first time. </p>
<p>This is welcome and important, since one of the major challenges towards financial innovation is the hostile environment created by archaic regulations written for a bygone era. This has caused some DeFi projects to fail – including major ones such as New-Jersey-based Basis, which <a href="https://techcrunch.com/2018/12/13/basis-backed-with-133-million-from-top-vcs-to-build-a-price-stable-cryptocurrency-says-its-shutting-down-and-returning-the-money/?guccounter=1">returned US$133 million</a> to investors in 2018 when it concluded it couldn’t work within the SEC rules. </p>
<p>A second reason for the DeFi surge is that mainstream players are getting involved. Many high-street financial institutions are beginning to accept DeFi, and seeking ways to participate. For example, 75 of the world’s biggest banks are trialling blockchain technology to speed up payments as part of the <a href="https://internetofbusiness.com/75-major-banks-join-blockchain-payments-network/">Interbank Information Network</a>, spearheaded by JP Morgan, ANZ and Royal Bank of Canada. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/354679/original/file-20200825-14-offtru.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Hands on a keyboard doing futuristic financial stuff." src="https://images.theconversation.com/files/354679/original/file-20200825-14-offtru.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/354679/original/file-20200825-14-offtru.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/354679/original/file-20200825-14-offtru.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/354679/original/file-20200825-14-offtru.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/354679/original/file-20200825-14-offtru.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/354679/original/file-20200825-14-offtru.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/354679/original/file-20200825-14-offtru.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">DApps are going mainstream.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/smartphone-finance-market-icons-symbols-concept-258766883">PhongPhan</a></span>
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</figure>
<p>Major asset management funds are starting to take DeFi seriously as well. Most prominent is <a href="https://grayscale.co/">Grayscale</a>, the world’s largest crypto investment fund. In the first half of 2020, it was managing over US$5.2 billion of crypto assets, including US$4.4 billion of bitcoin. </p>
<p>Third is the effect of COVID-19. The pandemic has driven global interest rates even lower. <a href="https://theconversation.com/negative-interest-rates-will-not-fix-the-global-economy-just-ask-switzerland-130718">Some jurisdictions</a>, such as the eurozone, are now in negative territory and others such as <a href="https://markets.businessinsider.com/news/stocks/negative-us-interest-rates-still-possible-datatrek-treasury-yields-earnings-2020-8-1029462846">the US</a> and <a href="https://theconversation.com/bank-of-england-is-considering-negative-interest-rates-it-doesnt-need-to-yet-144029">UK</a> could potentially follow. </p>
<p>In this climate, DeFi potentially offers much higher returns to savers than high-street institutions: Compound, for example, has been offering an annualised interest rate of 6.75% for those who save with stablecoin Tether. Not only do you get interest, you also receive Comp tokens, which is an added attraction. With <a href="https://www.worldbank.org/en/news/press-release/2018/04/19/financial-inclusion-on-the-rise-but-gaps-remain-global-findex-database-shows">two-thirds of people</a> without bank accounts in possession of a smartphone, DeFi also has the potential to open up finance to them. </p>
<p>One final important reason for the surge in people putting money into DeFi tokens is to avoid being left out of their explosive growth. Many tokens are worth nothing or close to nothing in practical terms, so we are seeing a lot of irrational exuberance. </p>
<p>But like it or not, we are heading towards a new financial system that is more liberalised and decentralised than before. The central question is how best to guide its development with checks and balances that minimise the risks and spread the potential benefits as widely as possible. That is the challenge for the next few years.</p><img src="https://counter.theconversation.com/content/144883/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeremy Eng-Tuck Cheah does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Welcome to the financial revolution that you probably haven’t even heard of.Jeremy Eng-Tuck Cheah, Associate Professor of Cryptofinance and Digital Investment, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1291012020-01-06T11:41:34Z2020-01-06T11:41:34ZBitcoin’s threat to the global financial system is probably at an end<figure><img src="https://images.theconversation.com/files/308427/original/file-20200103-11909-1gq8toc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">No ifs or bits. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/gold-bitcoin-falling-apart-graph-crashing-1038671149">ImageFlow</a></span></figcaption></figure><p>2020 could well be the year that the cryptocurrency dream dies. This is not to say that cryptocurrencies will die altogether – far from it. But to all the financial romantics who have cheered the rise of bitcoin and other digital currencies over the past decade, there is a reckoning coming. Like it or not, the vision of a world in which these currencies liberate money from the clutches of central banks and other corporate giants is fading rapidly. </p>
<p>It is not that these currencies have no place in the future of money. The encrypted blockchain technology that underpins them is extremely difficult for governments to control, so it is unlikely that they will ever be eliminated. In any case, they have a valid role to play as a geopolitical hedge – witness <a href="https://u.today/bitcoin-price-jumps-five-percent-as-trump-strike-escalates-us-iran-tensions">the surge</a> in bitcoin and cryptocurrencies after the latest escalation in tensions between the US and Iran, for instance. </p>
<p>But 11 years on from bitcoin’s <a href="https://www.theguardian.com/books/2019/jun/26/the-white-paper-satoshi-nakamoto-review">remarkable beginnings</a>, cryptocurrencies are a long way from supplanting the financial system. At the time of writing, the <a href="https://www.coingecko.com/en">total value of</a> all the bitcoin in circulation is US$133 billion (£102 billion); in comparison, the market value of all the world’s gold is <a href="https://news.bitcoin.com/when-bitcoin-overtakes-gold-how-high-can-it-go/">around US$8 trillion</a>, while the total worth of mainstream currencies worldwide is roughly the <a href="https://money.visualcapitalist.com/worlds-money-markets-one-visualization-2017/">same again</a>. </p>
<h2>No new hope</h2>
<p>The so-called bitcoin maximalists foresee a day when their currency of choice rises into the top league. They point to the <a href="https://www.ig.com/uk/bitcoin-btc/bitcoin-halving">bitcoin “halvening”</a> expected in May – the moment every four years when the number of new coins being added to the network is halved – as the next event that will drive prices up. </p>
<p>Yet the long-term prospect for bitcoin and other cryptocurrencies is stasis on the peripheries of the financial system. The chances of a new bitcoin look increasingly slim: it’s several years since ethereum rose to become the prime challenger, before falling back to a fraction of the bitcoin price (click on the chart below to make it bigger). </p>
<p><strong>Bitcoin vs altcoins</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/308429/original/file-20200103-11919-1u0a2lu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/308429/original/file-20200103-11919-1u0a2lu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/308429/original/file-20200103-11919-1u0a2lu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=293&fit=crop&dpr=1 600w, https://images.theconversation.com/files/308429/original/file-20200103-11919-1u0a2lu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=293&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/308429/original/file-20200103-11919-1u0a2lu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=293&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/308429/original/file-20200103-11919-1u0a2lu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=368&fit=crop&dpr=1 754w, https://images.theconversation.com/files/308429/original/file-20200103-11919-1u0a2lu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=368&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/308429/original/file-20200103-11919-1u0a2lu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=368&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Share of total market cap of crypto by coin.</span>
<span class="attribution"><a class="source" href="https://coinmarketcap.com/charts/">Coin Market Cap</a></span>
</figcaption>
</figure>
<p>More importantly, a much bigger threat to the current system is afoot – as evidenced by <a href="https://theconversation.com/facebooks-libra-cryptocurrency-can-still-take-off-and-revolutionise-money-125504">Facebook’s attempts</a> to get its libra digital currency off the ground. JP Morgan has <a href="https://www.bbc.co.uk/news/business-47240760">already launched</a> a JPM coin for <a href="https://cointelegraph.com/news/jpmorgan-will-pilot-jpm-coin-stablecoin-by-end-of-2019-report">major institutional clients</a>, while numerous other major banks are <a href="https://www.ft.com/content/9fd8e8ea-83e5-11e9-b592-5fe435b57a3b">set to</a> follow suit. Other tech giants like <a href="https://articles2.marketrealist.com/2019/08/is-amazon-moving-into-cryptocurrency/#aprd">Amazon</a>, <a href="https://cointelegraph.com/news/google-coin-within-2-years-as-fangs-will-go-crypto-say-winklevoss">Google</a> and <a href="https://www.computerworld.com/article/3435851/apple-exec-confirms-cryptocurrency-is-on-company-radar.html">Apple</a> are rumoured to be looking at launching rival currencies as well. </p>
<p>Their model is what are known as stablecoins – a sort of crypto hybrid that lives on blockchains but is pegged to mainstream currencies. But aside from this connection to the status quo, these multinationals would be challenging sovereign money. They want to opt out of the clunky system that they have been forced to operate in, <a href="https://theconversation.com/blockchains-first-revolutionary-product-could-be-online-id-128028">with its</a> transaction fees and international payment delays, to present customers with an alluring alternative instead. </p>
<p>The reason these companies are not throwing their weight behind bitcoin et al is because today’s cryptocurrencies have <a href="https://theconversation.com/blockchains-first-revolutionary-product-could-be-online-id-128028">at least as many</a> drawbacks as the mainstream system. Their prices are too volatile to act as a serious store of value, for instance, while their ability to process financial transactions is not yet particularly impressive. </p>
<p>It has dawned on the corporate giants that as per their products or services, they can make money part of their brand – part of the customer experience. Sell people goods and services, yes, but also offer them a new monetary system to take care of the purchases. It begins to look like almost total control. </p>
<h2>The empire strikes back</h2>
<p>The state has been late to wake up to this challenge, but has now done so in a powerful and surprising way. The traditional global infrastructure has proved strong enough to <a href="https://www.pymnts.com/cryptocurrency/2019/global-bankers-meet-with-fb-jpm-on-stablecoins/">derail</a> the corporates at least temporarily <a href="https://www.cnbc.com/2019/11/21/new-bill-would-make-facebooks-cryptocurrency-a-security-under-the-law.html">with</a> <a href="https://www.euractiv.com/section/economy-jobs/news/commission-wary-of-side-effects-of-libra-regulation/">red tape</a>. Yet make no mistake – the goalposts have completely changed, and it will be difficult to present a united regulatory front around the world. Ironically, it is the same lack of global uniform regulatory approval for the existing cryptocurrencies that has hindered their meaningful adoption. </p>
<p>The other response under examination is to launch state cryptocurrencies. <a href="https://theconversation.com/when-china-and-other-big-countries-launch-cryptocurrencies-it-will-kick-off-a-global-revolution-128678">The likes of</a> China and Russia are in pole position to launch the first within a couple of years. Deutsche Bank <a href="https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000503196/Imagine_2030.pdf">recently</a> published a report <a href="https://cointelegraph.com/news/deutsche-bank-research-crypto-to-replace-fiat-currencies-by-2030">suggesting that</a> cryptocurrencies could overtake national fiat currencies within ten years, envisaging that these state-backed versions will lead the charge. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/308430/original/file-20200103-11939-10v0hkf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/308430/original/file-20200103-11939-10v0hkf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/308430/original/file-20200103-11939-10v0hkf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/308430/original/file-20200103-11939-10v0hkf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/308430/original/file-20200103-11939-10v0hkf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/308430/original/file-20200103-11939-10v0hkf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=506&fit=crop&dpr=1 754w, https://images.theconversation.com/files/308430/original/file-20200103-11939-10v0hkf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=506&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/308430/original/file-20200103-11939-10v0hkf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=506&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Yuan 2.0.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/china-map-silhouette-symbols-chinese-yen-1543942793">KachuraOleg</a></span>
</figcaption>
</figure>
<p>In short, the future of cryptocurrency lies in either corporate or sovereign digital coins – or more likely, an uneasy cohabitation of the two. The system supposedly under threat from bitcoin and the other so-called bank killers is instead assimilating them. The coins that emerge <a href="https://thenextweb.com/hardfork/2019/09/02/european-central-bank-bigwig-outlines-why-facebooks-libra-isnt-real-cryptocurrency/">maybe</a> won’t <a href="https://ftalphaville.ft.com/2019/06/18/1560849057000/Facebook-s-Libra--blockchain--but-without-the-blocks-or-chain/">even use</a> blockchains, acting more akin to Paypal or WeChat Pay than as cryptocurrencies as we know them. </p>
<p>Where the previous half century saw the rise of corporates to a size and influence comparable to nation states, the next half century could produce a new paradigm in which they increasingly behave like nation states. When we reflect on the way these companies already manage our data, the way they exert lobbying influence on our governments, the trend is clearly well underway. Call it the next phase of globalisation. </p>
<p>Money in 2030 will probably therefore be almost unrecognisable compared to what we use today. The dream of universal people-powered monetary substitutes is being crushed by this unanticipated but in hindsight inevitable institutionalisation. It is from within the multinational world that the “next bitcoin” will emerge – wrapped in the liveries of a corporate brand, if not a sovereign flag. As for the great dream of bitcoin liberation, may it rest in peace.</p><img src="https://counter.theconversation.com/content/129101/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gavin Brown is a non-executive director and co-founder of Winterbar Associates Limited, a start-up digital assets fund which has yet to launch. It would not benefit directly from this article but does have an interest in digital asset investments such as bitcoin which leverage blockchain technology.</span></em></p><p class="fine-print"><em><span>Whilst Richard Whittle has received no direct funding for this article, the background research was conducted as part of his ESRC-funded PhD.</span></em></p>Will 2020 be the year that the new threat to fiat currencies reaches maturity?Gavin Brown, Senior Lecturer, Finance, Manchester Metropolitan UniversityRichard Whittle, Research Fellow in Economics, Manchester Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1286782019-12-12T12:07:54Z2019-12-12T12:07:54ZWhen China and other big countries launch cryptocurrencies, it will kick off a global revolution<figure><img src="https://images.theconversation.com/files/306575/original/file-20191212-85367-1uu5emz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cash of the titans. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/global-network-connection-currency-coin-money-1458477173">Artistdesign29</a></span></figcaption></figure><p>One of the hottest topics in cryptocurrencies is the prospect of major economies launching state-backed digital coins. China’s central bank <a href="https://fortune.com/2019/11/01/china-digital-currency-libra-wakeup-call-us/">recently accelerated</a> plans for what is currently known as the Digital Currency Electronic Payment (DCEP). It could launch within the next 18 months, while the European Central Bank <a href="https://www.reuters.com/article/ecb-cryptocurrency/update-1-ecb-could-speed-up-plans-for-public-digital-currency-if-cash-use-drops-idUSL8N28E583">is looking</a> at something similar. </p>
<p>Meanwhile, Russia has been <a href="https://www.coindesk.com/russias-central-bank-is-considering-launching-a-digital-currency">working on</a> a state-backed cryptoruble for several years, and <a href="https://www.finextra.com/newsarticle/32856/swedens-central-bank-prepares-for-cashless-future-with-e-krona">Sweden has</a> its e-krona project. Indeed, several countries have got there already: <a href="https://cointelegraph.com/news/senegal-introduces-cryptocurrency-based-on-its-national-currency">Senegal</a> and the tiny <a href="https://www.internationalinvestment.net/news/4004628/marshall-islands-launches-national-cryptocurrency">Marshall Islands</a> now have digital coins that sit alongside their existing currencies, while others such as <a href="https://www.bloomberg.com/news/articles/2019-05-10/venezuela-s-failed-cryptocurrency-is-the-future-of-money">Venezuela</a> and <a href="https://cointelegraph.com/news/state-issued-digital-currencies-the-countries-which-adopted-rejected-or-researched-the-concept">Ecuador</a> have tried but failed to gain traction. </p>
<p>Make no mistake, these developments will completely change the international monetary system. Today’s system dates to the <a href="http://news.bbc.co.uk/1/hi/business/7725157.stm">Bretton Woods conference of 1944</a>, in which to create a stable trading environment the Allied nations agreed to peg their currencies to the US dollar and the US agreed to peg the dollar to gold. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/306373/original/file-20191211-95159-11f4yop.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/306373/original/file-20191211-95159-11f4yop.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/306373/original/file-20191211-95159-11f4yop.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=424&fit=crop&dpr=1 600w, https://images.theconversation.com/files/306373/original/file-20191211-95159-11f4yop.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=424&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/306373/original/file-20191211-95159-11f4yop.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=424&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/306373/original/file-20191211-95159-11f4yop.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=533&fit=crop&dpr=1 754w, https://images.theconversation.com/files/306373/original/file-20191211-95159-11f4yop.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=533&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/306373/original/file-20191211-95159-11f4yop.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=533&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Allies gathering at Bretton Woods in 1944.</span>
<span class="attribution"><a class="source" href="https://www.britannica.com/biography/Edward-Morris-Bernstein">Brittanica</a></span>
</figcaption>
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<p>The dollar has been at the heart of the monetary system ever since, despite Bretton Woods being gradually replaced by free-floating exchange rates after the dollar/gold commitment was abandoned by the Americans in the 1970s. Today, <a href="https://www.brookings.edu/research/has-the-dollar-lost-ground-as-the-dominant-international-currency/">around 40%</a> of international payments and <a href="https://www.reuters.com/article/us-forex-reserves/us-dollar-share-of-global-currency-reserves-fell-in-the-fourth-quarter-of-2018-idUSKCN1RA1WH">60%</a> of the world’s total foreign exchange reserves are in US dollars. The euro takes a more minor but still considerable proportion: over 30% of international payments and 20% of reserves. All other currencies are trivial by comparison. </p>
<h2>US on top</h2>
<p>American financial dominance means that the Federal Reserve almost acts as the central bank of the world, since whatever its monetary policy committee decides to do with dollar interest rates has huge consequences everywhere. Together with the dollar’s dominance of the <a href="https://www.investopedia.com/articles/personal-finance/050515/how-swift-system-works.asp">SWIFT international payment system</a>, this was pivotal in maintaining the international monetary order for years by reducing transaction costs and speeding up globalisation. </p>
<p>In recent years, however, the picture has changed. With heightened tensions between the world’s major powers, many commentators <a href="https://www.economist.com/leaders/2015/10/03/dominant-and-dangerous">increasingly accuse</a> the Americans of playing the system to their own economy’s advantage without proper regard for the consequences further afield. There are also serious concerns about the US using international payments as a political tool, for instance by leaning on SWIFT to exclude Iranian banks over the uranium enrichment row – despite objections <a href="https://www.aljazeera.com/news/2018/11/swift-matters-iran-spat-181105172906627.html">even from</a> the EU. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/306374/original/file-20191211-95173-fgksdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/306374/original/file-20191211-95173-fgksdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/306374/original/file-20191211-95173-fgksdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=393&fit=crop&dpr=1 600w, https://images.theconversation.com/files/306374/original/file-20191211-95173-fgksdi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=393&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/306374/original/file-20191211-95173-fgksdi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=393&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/306374/original/file-20191211-95173-fgksdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=494&fit=crop&dpr=1 754w, https://images.theconversation.com/files/306374/original/file-20191211-95173-fgksdi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=494&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/306374/original/file-20191211-95173-fgksdi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=494&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Sam’s back yard.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/world-map-made-dollar-bills-isolated-286896983">DmyTo</a></span>
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<p>Arguably, dollar dominance is now <em>hindering</em> the deepening of globalisation. Many countries are making moves that are changing this situation, however. The UK, France and Germany have <a href="https://www.voanews.com/middle-east/voa-news-iran/more-european-nations-join-effort-bypass-us-sanctions-iran">set up INSTEX</a> as an alternative means of trading with Iran, for instance, and six other EU countries have recently joined. </p>
<p>There has been a <a href="https://www.cfr.org/international-finance/central-bank-currency-swaps-since-financial-crisis/p36419#!/">massive rise</a> in the number of bilateral agreements between central banks that allow two countries to swap currencies directly, a large number involving China. Meanwhile, a number of countries, <a href="https://capitalgoldexchange.com/why-are-countries-pulling-their-gold-out-of-america/">including</a> Germany and the Netherlands, have been <a href="http://www.goldtelegraph.com/countries-around-the-world-are-bringing-gold-home/">repatriating their</a> gold reserves from vaults in the US where they had long been stored. </p>
<p>Yet by comparison, major sovereign digital currencies based on blockchain technology would be revolutionary. <a href="https://theconversation.com/five-hurdles-blockchain-faces-to-revolutionise-banking-124536">Blockchains</a> are encrypted ledgers for storing information that are decentralised rather than being under any country’s or company’s control. When applied to international payments, this offers <a href="https://theconversation.com/blockchains-first-revolutionary-product-could-be-online-id-128028">the prospect</a> of much more transparent and cheaper transactions than SWIFT. </p>
<p>It could cut the payments time lag from a couple of days to one second, and the cost from 0.01% to almost nothing. It will have the capacity to handle far higher volumes of payments, partly since they won’t require bank accounts or <a href="https://www.bitrates.com/news/p/offline-transactions-could-be-the-missing-link-between-crypto-and-adoption">even internet access</a>. </p>
<p>Cryptocurrencies like Bitcoin and XRP have been a good experiment <a href="https://medium.com/datadriveninvestor/advantages-of-money-transfer-using-cryptocurrency-9e1f32da4fbe">in using</a> blockchains for international payments. Yet when countries issue equivalents of their own, these will have even more advantages. They will be backed by states, and completely decentralised cryptocurrencies like Bitcoin will not be able to compete with this. </p>
<h2>What the future looks like</h2>
<p>While technological change has been incredibly fast in the information era, the system of international payments has lagged behind. But once sovereign digital currencies start taking off, this will suddenly change. Just like smartphones quickly eliminated most old cell phones, no countries will be able to reject blockchain payments for long. </p>
<p>So while, for example, the US Treasury Secretary Steve Mnuchin <a href="https://www.bloomberg.com/news/articles/2019-12-05/mnuchin-powell-see-no-need-for-fed-to-issue-digital-currency">recently said</a> that his country does not see itself launching a digital dollar in the next five years, there will be a moment when the political centre of gravity will shift and everyone will join the revolution. After the <a href="https://theconversation.com/5g-what-will-it-offer-and-why-does-it-matter-109010">5G network</a> and the <a href="https://www.digiteum.com/internet-of-things-banking-finances">Internet of Things</a> really mushroom in the next couple of years, it will be possible to replace the existing system even faster. </p>
<p>This will be the beginning of a new international monetary era. Instead of passively accepting US dollars as settlement currency in international trade, buyers and sellers will be able to choose freely from a variety of currencies. We are also likely to see a series of new powerful regional currencies, along with opportunities for the currencies of small countries with high credibility and advanced financial industries. Countries and their central banks will be competing freely with one another in this market, knowing that if they implement policies that devalue their currency, international traders will just choose rival currencies instead. </p>
<p>Beyond that, countries will form cryptocurrency unions to regulate currencies and platforms, standardise technology and maintain the stability of the system. New clearing systems will emerge, along with <a href="https://dailyhodl.com/2019/12/10/head-of-digital-banking-at-santander-says-ethereum-powers-full-lifecycle-of-worlds-first-blockchain-bond/">new financial products</a>. In short, it will be a whole new user-centred financial ecosystem. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/306375/original/file-20191211-95125-o4cg8t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/306375/original/file-20191211-95125-o4cg8t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/306375/original/file-20191211-95125-o4cg8t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/306375/original/file-20191211-95125-o4cg8t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/306375/original/file-20191211-95125-o4cg8t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/306375/original/file-20191211-95125-o4cg8t.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/306375/original/file-20191211-95125-o4cg8t.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/306375/original/file-20191211-95125-o4cg8t.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Fast future.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/top-view-woman-watching-video-internet-644188654">GaudiLab</a></span>
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</figure>
<p>Whenever there are innovations in payment methods, there always follows a surge in demand. China’s Alipay and WeChat Pay <a href="https://www.zdnet.com/article/wechat-pay-follows-alipay-in-allowing-foreign-visitors-to-make-payments-in-china/">are good examples</a>. More recently we are seeing similar explosive demand for the likes of <a href="https://www.businessinsider.com/apple-pay-transaction-volume-and-revenue-doubled-2019-11?r=US&IR=T">Apple Pay</a> and <a href="https://uxdesign.cc/just-walk-out-amazon-go-the-most-convincing-future-of-retail-469b5794d65c?gi=491d10a7b3ba">Amazon Go</a>. </p>
<p>Yet these are primarily domestic stories. Sovereign digital currencies should produce a surge in international trade and cooperation. There will be new economic growth as more small players join the global market and consumers enjoy a wider range of goods and services at lower costs. </p>
<p>This may seem threatening to those who benefit from the existing system, but it will be more than outweighed by capitalising on what comes next. The question for different countries is whether they embrace change or try and defend the status quo. As Facebook’s Mark Zuckerberg <a href="https://www.cnbc.com/2019/10/22/facebook-ceo-mark-zuckerbergs-prepared-remarks-before-congress.html">told</a> American lawmakers in response to China’s DCEP plan, “while we debate these issues, the rest of the world isn’t waiting”. The sooner countries shift, the better placed they are likely to be for what lies ahead.</p><img src="https://counter.theconversation.com/content/128678/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Liang Zhao receives a PhD scholarship from Handelsbanken. </span></em></p>Stand by for cryptocurrencies 2.0.Liang Zhao, Doctoral Researcher, Lund UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1274632019-11-21T13:47:23Z2019-11-21T13:47:23ZMore than 1,000 cryptocurrencies have already failed – here’s what will affect successes in future<figure><img src="https://images.theconversation.com/files/302732/original/file-20191120-524-1njq9ry.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Gaining currency?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/huge-stack-physical-cryptocurrencies-bitcoin-on-687427129?src=d81a1d12-8cfa-41f2-803f-c39ea41e3b1d-1-38">Wit Olszewski</a></span></figcaption></figure><p>Many cryptocurrencies have been launched in the past few years, often to great fanfare and celebration, only to fade and fail as the public and investors shun them. <a href="https://www.coinopsy.com/dead-coins/">According to</a> Coinopsy, which tracks such failures, there are some 1,085 dead coins at the time of writing. That’s a substantial number, <a href="https://capital.com/types-of-cryptocurrencies">even next to</a> the approximately 3,000 still in existence, and senior industry figures <a href="https://dashnews.org/ripple-ceo-says-99-of-cryptocurrencies-will-fail-and-go-to-zero/">expect</a> many of those to fail, too. </p>
<p>Why do so many of these projects unravel? You expect many initiatives to come and go in a fledgling market, of course – the 1990s <a href="https://time.com/3741681/2000-dotcom-stock-bust/">dotcom bubble</a> is the perfect example. But at the same time, cryptocurrency developers have traditionally spent too little time designing the business-use case for their coins and tokens, then only realising after the launch that their idea is yesterday’s news. </p>
<p>Time and again, we see launches that copy a previously successful coin – “coin x is the new Bitcoin”, for example. Yet the market already has Bitcoin, and it continues to be in demand – as evidenced by the 18 millionth Bitcoin <a href="https://beincrypto.com/bitcoins-18-millionth-coin-took-3935-days-to-mine/">being mined</a> only last month. We tend to overlook this problem with developers, even while we rightly criticise regulators for not being able to keep up with the fast evolution of the crypto market – despite efforts such as <a href="https://www.howeycoins.com/index.html">Howey Coin</a> by US regulator the SEC, which was a fake new coin offering <a href="https://www.theverge.com/tldr/2018/5/16/17361750/sec-cryptocurrency-ico-investors">designed</a> to teach investors about the risks of putting money into crypto.</p>
<p>No doubt these kinds of developer errors will continue. Here are several other themes that we think will have a bearing on future crypto failures:</p>
<h2>1. Big Finance has arrived</h2>
<p>Eleven years ago, the pseudonymous Satoshi Nakamoto quietly revolutionised money with the release of his or her now famous <a href="https://bitcoin.org/bitcoin.pdf">white paper</a> that outlined Bitcoin. In the early years after this vision took off, many of those who launched altcoins and tokens were small teams of developers and leftfield entrepreneurs. They had a clear mission to bring the world of traditional finance and central banks to its knees with decentralised units of exchange that were beyond anyone’s control. </p>
<p>A few years on, these bank killers have largely been assimilated by the big financial institutions they once sought to challenge. Wall Street is <a href="https://www.ft.com/content/eb3fce1c-0a80-11ea-b2d6-9bf4d1957a67">steadily</a> taking <a href="https://beincrypto.com/bakkt-is-wall-streets-attack-on-bitcoin-claims-youtuber/">charge</a> of the crypto action, professionalising trading with the likes of derivatives and futures products. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/302733/original/file-20191120-502-1c8krqu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/302733/original/file-20191120-502-1c8krqu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/302733/original/file-20191120-502-1c8krqu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/302733/original/file-20191120-502-1c8krqu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/302733/original/file-20191120-502-1c8krqu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/302733/original/file-20191120-502-1c8krqu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/302733/original/file-20191120-502-1c8krqu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/302733/original/file-20191120-502-1c8krqu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">‘Did someone say money?’</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/modern-office-building-big-city-1452017165?src=f10b1d37-3cc1-4605-b5a8-b70a4cef5b28-1-14">Gyn9037</a></span>
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<p>We may now be entering a phase where only large institutions will be able to generate profit from cryptocurrency design. It seems increasingly likely that the next revolutionary white paper will be generated by a global multi-billion-dollar firm – an ironic full turn of events, to say the least. </p>
<p>Many other cryptocurrencies from more humble beginnings will fail in future, simply because they don’t have the resources to compete with these huge institutions. They will be driven by sunk costs and the crypto dream to dominate the future of money, but in many cases it won’t be enough. </p>
<h2>2. The future is stable</h2>
<p>For a cryptocurrency to be successful, two things need to happen: there has to be a reason why people want to use it, and they have to trust it. People will generally trust a coin or token thanks to the underpinning <a href="https://theconversation.com/the-big-business-revolution-why-the-future-is-blockchain-78409">blockchain technology</a>, the decentralised cryptographic ledger systems on which this industry is built. </p>
<p>This means that the basis upon which the market judges if a new launch will stand or fall is mainly its use case. There are now altcoins in existence offering everything from new ways to <a href="https://blockgeeks.com/guides/what-is-basic-attention-token/">fund web advertising</a> to units of exchange in the <a href="https://enjin.io/">gaming world</a>. But more generally, in a world in which it is no longer enough to simply claim to have launched a better Bitcoin, the market’s attention has pivoted towards <a href="https://theconversation.com/bitcoins-successor-more-consistent-values-might-make-stablecoins-a-safer-cryptocurrency-option-107372">stablecoins</a>. </p>
<p>Stablecoins are cryptocurrencies that are designed to avoid the wild volatility of cousins like Bitcoin by being pegged or backed by assets like traditional currencies or precious metals. They are designed to encourage people to use cryptocurrency for everyday buying and selling, while also offering a stable store of value for traders on the many crypto exchanges that don’t deal in traditional currencies. </p>
<p>Examples include <a href="https://www.centre.io/usdc">USD Coin</a> and <a href="https://tether.to/">Tether</a>, both of which are equivalent to US$1. The fact that it takes considerable financial resources and infrastructure to make such coins operational is again likely to favour large institutions – witness Facebook’s <a href="https://theconversation.com/facebooks-libra-cryptocurrency-can-still-take-off-and-revolutionise-money-125504">attempt</a> to launch the Libra stablecoin, for instance. </p>
<h2>3. Losses more foul than fair</h2>
<p>Many investors have lost money through scams in the crypto world. One recent notorious example is the alleged <a href="https://www.zdnet.com/article/cryptocurrency-executives-charged-with-running-11-million-ponzi-scheme/">OneCoin ponzi scam</a>, in which investors were promised guaranteed 300% returns for investing Bitcoin or US dollars with a Nevada-based outfit. </p>
<p>The money was supposed to be ploughed into foreign exchange options and altcoins, but was allegedly instead used to pay off other investors in the scheme. Fortune magazine <a href="https://fortune.com/2019/11/06/is-onecoin-the-biggest-financial-fraud-in-history/">recently speculated</a> that OneCoin may have generated losses in excess of the US$19.4 billion (£15 billion) racked up by <a href="https://www.bloomberg.com/graphics/2018-recovering-madoff-money/">Bernie Maddoff’s ponzi victims</a> in 2008. </p>
<p>Somewhat different was <a href="https://cointelegraph.com/news/bitconnect-ponzi-scheme-no-sympathy-from-crypto-community">Bitconnect</a>, an exchange in which investors could swap Bitcoin for Bitconnect coins, which would be lent out with claimed returns of up to 120% per year. After longstanding ponzi accusations, the US authorities stepped in last year and the exchange <a href="https://www.coindesk.com/bitconnect-investors-left-lurch-tokens-price-drops-90">abruptly closed</a>. Bitconnect coins plunged 96% in value, creating huge losses, though they still exist and trade today. </p>
<p>An alternative problem is hackers raiding exchanges. The most infamous example is the <a href="https://www.ledger.com/hack-flasback-the-mt-gox-hack-the-most-iconic-exchange-hack/">Mt Gox attack</a> of 2014, in which over 850,000 bitcoins were stolen and never recovered. More recently the Binance exchange, one of the world’s largest, <a href="https://thenextweb.com/hardfork/2019/07/08/binance-hack-8-million-bitcoin-cryptocurrency-stolen-transfer/">has been</a> hacked several times, costing investors tens of millions of dollars. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/302735/original/file-20191120-547-114ykd0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/302735/original/file-20191120-547-114ykd0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/302735/original/file-20191120-547-114ykd0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/302735/original/file-20191120-547-114ykd0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/302735/original/file-20191120-547-114ykd0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/302735/original/file-20191120-547-114ykd0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/302735/original/file-20191120-547-114ykd0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/302735/original/file-20191120-547-114ykd0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Binance: a hacker target.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/kyrenia-cyprus-june-21-2019-binance-1431551333?src=9b68b7b1-f273-4f08-aba6-aecfc02a2543-1-17">grey82</a></span>
</figcaption>
</figure>
<p>One other <a href="https://markets.businessinsider.com/currencies/news/crypto-ceo-died-with-passwords-to-137-million-but-the-money-is-gone-2019-3-1028009684">alarming case</a> was that of Gerald Cotten, the 30-year-old founder of Canadian cryptocurrency exchange Quadriga, who died a year ago. Because nobody had access to his passwords, the investments of 115,000 customers worth US$137m were unrecoverable. When a court-appointed auditor was eventually able to access his account, it turned out the assets had all been sold months before Cotten died. </p>
<p>We fully expect these sorts of problems to continue – and this shouldn’t be surprising. We are talking about a toxic combination of anonymous technology that is largely unregulated, poorly understood, and cheap and easy to move around the world – and many people willing to kiss frogs in their search for a lucrative prince.</p><img src="https://counter.theconversation.com/content/127463/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gavin Brown is a non-executive director and co-founder of Winterbar Associates Limited, a start-up digital assets fund which has yet to launch. It would not benefit directly from this article but does have an interest in digital asset investments such as Bitcoin which leverage blockchain technology. </span></em></p><p class="fine-print"><em><span>Whilst Richard Whittle has received no direct funding for this article, the background research was conducted as part of his ESRC-funded PhD. </span></em></p>With Wall Street slowly taking charge of crypto, the days of radical outsiders launching successful altcoins may be numbered.Gavin Brown, Senior Lecturer, Finance, Manchester Metropolitan UniversityRichard Whittle, Research Fellow in Economics, Manchester Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.