Across cryptocurrency forums and blogs, the word of the month is “capitulation”. With bitcoin below $5,000 for the first time since October 2017, leading figures in the community have turned on each other in a spiral of finger pointing, while crypto-enthusiasts are at war with detractors who see this as a victory for fiat currencies. While this may not be the end for bitcoin and company, the crash underlines the question of whether it is worth trying to bring cryptocurrencies into the mainstream at all.
There are plenty of reasons to view cryptocurrencies with concern, including immense volatility (bitcoin has lost 30 per cent of its value over the week), fraud and manipulation, the fact that a number of initial coin offerings have turned out to be scams, and their use by money launderers and terrorists. But, as is endemic in the technology industry, regulation has struggled to keep pace. Proposed “self-regulation” has, unsurprisingly, been lacking: the Winklevoss twins’ Virtual Commodity Association, formed in August to provide “an industry-sponsored, self-regulatory organisation”, has been quiet even as crypto has collapsed.
Authorities have been more proactive. The UK’s Financial Conduct Authority is mooting a ban on cryptocurrency derivatives, while a UK Commons select committee has decried crypto-asset markets as the “ Wild West”, and called for regulation. Hong Kong’s Securities and Futures Commission this month said it was examining plans to regulate cryptocurrency exchanges. In September, a report from the New York attorney-general’s office called out the industry for conflicts of interest and insufficient protection from market manipulation.
But bringing the virtual currency world in line is a thankless task, given cryptocurrencies’ decentralised nature. The Financial Action Task Force, a global anti-money laundering body, concluded that “components of a virtual currency system may be located in jurisdictions that do not have adequate [anti-money laundering] controls”. Elsewhere, cryptohavens are emerging to circumvent bans: Ledger, a crypto hardware maker, launched regional operations in Hong Kong to meet Chinese demand for offshore crypto assets, skirting a law against ownership of such assets in the mainland.
Cryptocurrencies have provided valuable lessons, however. They have shown dissatisfaction with current payment systems, and pushed banks and governments to conclude that money must become more digital. The IMF has suggested Central Bank Digital Currencies, a digital-only form of fiat money which would seek to combine the ease of use of cash with a central bank ledger system to verify transactions. Implementing CBDCs requires significant testing: an IMF paper acknowledged they may be popular mainly in countries with less secure banking, and worried that adoption could cause digital bank runs. But CBDCs might one day offer consumers a faster, cheaper and safer alternative to physical cash and credit cards.
Blockchain technologies might have other uses, though the case remains unproven. The Interbank Information Network, launched in October of last year, is trialling blockchain for difficult transactions between more than 75 banks. Walmart is experimenting with blockchain to track some products.
Crypto may not be dead, but bitcoin’s dreams of being the future of money should be. Its inherent contradictions, between being a medium of exchange or a speculative asset, are too great. But the debate it has spawned about the potential for digital currencies is a valuable one.