The father of crypto-X is the continuing failure of governments and central banks to protect the value of investors’ capital
The total market value of all crypto-assets today is around $3 trillion; given that Bitcoin, the first ‘cryptocurrency’, was launched as recently as 2009, the growth in value has been extraordinary. The mother of this strange new animal is blockchain technology, which was conceptualised by an anonymous group in 2008 (based on cryptographic research that goes as far back as 1982).
While the technology continues to evolve rapidly, blockchain is basically a network that timestamps documents (and data and information) in such a way to make them impossible to tamper with. Thus, it provides a secure, anonymous set of transaction rails which can increase efficiency in a wide (and growing) array of areas, like trade finance, remittances, etc.
While there are many aspirants to paternity, including the universe of global criminals and money laundering, in my view, the father of crypto-X is the continuing failure of governments and central banks to protect the value of investors’ capital, witnessed by the fact that over $12 trillion of global government bonds carry negative interest rates today.
In days of yore (as recently as the 1980s), capital could best be caricatured as an elegant, elderly gent in a grey suit of impeccable integrity, sipping brandy at the club. You never touched capital unless there was—heaven forbid—a crisis. From the 1990s onwards, however, capital began to change—dotcoms, as they were called, started talking proudly about the rate at which they could burn capital. While a very small number did come up trumps, but the conceptual shift was too much for our elegant gent, who fell out of his chair and turned to pink shirts, suspenders and much unspeakable conduct (both in and out of the office).
By 2000, when a lot of capital had been burned, the market fell out of bed and the US Fed rode to the rescue cutting interest rates sharply, driving the risk-free return on capital lower. This decline in the real value of capital has continued over the past 20 years, as the US government remains beholden to the rapacious financial sector, which demands both nearly free money and bailouts when things go wrong, which the Fed and the government happily provide. Despite some efforts at restraining this beast after the 2008 crisis—the Dodd-Frank Bill, since emasculated—it is noteworthy that large US banks today are even more exposed to derivatives than they were before the crisis.
Thus, unless there is a sea change in financial markets to where, say, bank deposits in the US earn a reasonable positive real return (and people believe that this is sustainable), it would seem that the crypto-X party is just going to get hotter, as more and more people—self included—look for ways in which to allocate some part of their savings to crypto.
Today, the market is nuts—huge appreciation, wild volatility and multiple frauds. Regulators globally, acknowledging that crypto-X are here to stay, are seized of this and are engaged in figuring out how best to manage/regulate this.
The first step to regulation is to determine what it is and to see if some set of current regulations (and regulators) are appropriate. While the word cryptocurrency is widely used, it is not a currency in the classical sense since it isn’t issued by any authority. It isn’t a commodity since there is no natural demand for it from the real economy; and it isn’t a security since there are no cash flows associated with it.
What it is, to my mind, is simply an asset you can buy if you believe there will be more people who will buy it in the future—in other words, it’s a gamble, and, as such, should be regulated by something like the US States Gaming Commissions; except for the fact that (at least as per my belief) the value of a crypto-asset rises as the stock of government bonds that carry negative interest rates increases. It could conceivably also gain in value as inflation rises pushing more and more investments to negative real yields, which explains why some people see it as analogous to gold. This suggests that crypto-X is affected by global macro-fundamentals and, hence, should be regulated like a quasi-security by the SEC (or SEBI in India).
RBI, like other global central banks, is working on creating a central bank digital currency (CBDC), which would reduce citizens’ dependence on cash. This would substantially improve financial inclusion by pumping up the ongoing financial digitisation process, which is all to the good. It would also save the central bank money on printing and holding cash. There would obviously be issues for monetary policy and the regulators are working to iron those out. To my mind, however, CBDCs are not really crypto-assets in terms of the paradigm shift these represent.
People have often asked me about crypto and I always said that you should never invest in anything you don’t understand. But now that I’m beginning to get a sense of it; I’m just waiting for the market to become sane.
CEO, Mecklai Financial