A safe haven?
CCs developed in the wake of the GFC, as CBs resorted to quantitative easing (QE) policies. They are beyond the control of CBs and thus appeal to investors who are concerned about the long-term inflationary consequences of QE policies and rising debt. Distrust of centralised institutions is a powerful engine of development.
It is a medium that can compete with gold in some of its functions. In this instance, the diversification of assets held in gold could give CCs very significant upside potential. For bitcoin, some estimate that its price could double or even triple from current levels (to a target price of between USD 100k and USD 150k).
For investors, gold offers a hedge against extreme risk and inflation. Given its low correlation to other asset classes, holding a portion of assets in gold is generally considered to diversify a portfolio (this portion is estimated between 5 and 15%). Gold has these properties because of its symbolic status acquired over centuries (linked to its rarity). Gold also played a key role in the international monetary system in the 20th century, to the extent that it’s still held in the vaults of central banks.
CCs, on the other hand, have not proven themselves. They soared during the Covid-19 economic crisis but haven’t been through an episode of financial stress. Their correlation with other asset classes is unknown. Giving them the same status as gold, ex ante, when estimating their upside potential is questionable.
However, it cannot be ruled out that CCs will end up playing the role of "digital gold", especially for younger generations. CCs are more divisible and their storage is no riskier. Their volatility is not necessarily an obstacle, as gold itself is more volatile than most major currencies. But this reference to digital gold is, at best, conjecture that needs to be verified and, at worst, an illusion.
CC is a medium that can compete with gold in some of its functions. In this instance, the diversification of assets held in gold could give CCs very significant upside potential.
A vehicle for decentralised finance?
It is clear that blockchains are a major technological innovation that are transforming the supply of financial services and products. Indeed, crypto-assets were originally designed to lower transaction costs and expand access to financial services. The Bank for International Settlements (BIS) estimates that 1.7 billion people worldwide are unbanked or underserved when it comes to financial services.
A fully decentralised and disintermediated CC system could address this by enabling the development of global payment systems that are faster, cheaper and more inclusive than current payment systems.
The advantages put forward by the promoters of CCs are of various kinds: facilitating transactions and asset transfers on a decentralised and secure network, while guaranteeing the confidentiality of transactions; reducing transaction/transfer costs compared to the traditional financial system; allowing free access for anyone with internet access; limiting knowledge of a transaction (or transfer) to the parties involved; giving full ownership of the assets to the owner, guaranteed by a tamper-proof key system of which he is the sole holder; finally, security based on an unbreakable encryption system2 .
A fully decentralised and disintermediated CC system could enable the development of global payment systems that are faster, cheaper and more inclusive than current payment systems.
The nature of the disadvantages can be better understood when the advantages are stated:
- For the authorities, the lack of regulation and anonymity facilitates cybercrime in all its forms (black market, money laundering and tax evasion).
- For users, decentralisation entails new risks: loss of data; inaccessibility of data if a server is physically damaged; being subject to cyber-attacks or permanently disconnected from Internet (a risk in non-democratic countries or countries at war); non-convertibility (absence of an equal exchange rate)3; irreversibility of transactions4; volatility. Not to mention the risk of hacking.
Furthermore, the environmental impact is very negative. The exploitation of CCs is indeed very energy-intensive. It is estimated that mining bitcoins consumes more electricity than the entire Belgian economy. The solution of using low-carbon energy sources, which are sometimes put forward, are still far from being operational. However, less energy-intensive protocols may be found in the future.
But the main obstacle for the authorities is the risk of financial instability. The proliferation of CCs is indeed reminiscent of the "free banking" experience in the US in the 19th century: banking and financial crises were rife for a century until the creation of the Federal Reserve in 1913 (see Box 2).
CBs obviously have no intention of abandoning their role as lender of last resort: history has shown that only they can maintain financial stability and prevent deflationary crises. They will not let "CC means of payment" multiply without supervision.
However, properly regulated crypto-assets could coexist with the digital currencies CBs intend to issue in the coming decade. What remains to be done is to find the right link between these crypto-assets, which support more inclusive decentralised finance, and national CBs, which are the only ones capable of guaranteeing financial stability.
The exploitation of CCs is very energy-intensive. It is estimated that mining bitcoins consumes more electricity than the entire Belgian economy.