It has been a rollercoaster week for alternative finance and the digital economy - in a year of rollercoaster weeks. The first national acceptance of Bitcoin as legal tender has taken place, while an internet outage took some payment services offline.
Meanwhile, a US survey has revealed that many people believe cryptocurrencies will replace the dollar within a decade. So, what's going on?
First, the Republic of El Salvador in Central America has become the first country in the world to adopt cryptocurrency prime mover Bitcoin as legal tender.
One impetus for the move was President Nayib Bukele's determination to sanction use of the token so that Salvadorans living abroad can more easily send money home to their families - a key trend in the local economy and a significant contributor to its GDP.
Earlier this year, financial inclusion, swifter money transfer, and services for the unbanked were among reasons cited by the Bank of England and the Treasury for launching a national stablecoin in Britain - a digital pound or ‘BritCoin' - in the future. A working group on the digital pound was established in the Spring.
In the UK, roughly two percent of the population is unbanked, by some estimates, whereas in El Salvador the figure may be as high as 70%, according to figures presented by the Evening Standard.
In El Salvador, Bitcoin adoption alongside the US dollar will go live in September, forcing companies and even local tax authorities to accept payment in the token if offered. Those organizations now have just a three-month window to prepare their systems. We wish them luck.
Most digital currencies are decentralized: outside the auspices of national banks or financial authorities and based on distributed ledger/blockchain systems. For Salvadorans, this looks like an attractive option.
However, research from Cambridge University's Centre for Alternative Finance has revealed that, despite China recently announcing a crackdown on crypto, nearly two-thirds of all Bitcoin mining (65 percent) takes place in that country. Roughly 85% of BTC mining occurs in Asia and Eastern Europe, so while the technology is certainly distributed, a massive center of gravity exists in crypto's supposedly decentralized, geopolitics-free world. And it isn't in the West.
As previously reported, China recently launched limited quantities of the digital yuan, its proposed national stablecoin - the likely reason for announcing a crackdown on Bitcoin and rival tokens. Some analysts fear this could give Beijing control over international currency markets once adoption becomes widespread, by forcing other countries to use the digital yuan to trade with China.
The US, Europe, and the UK may be anything up to five years behind in rolling out their own central bank digital currencies (CBDCs), according to a source within the BofE/Treasury working group.
Yet the implications of any country adopting a decentralized crypto token, such as Bitcoin, trouble economists even more. Some believe it would destabilize world financial systems; indeed, many alt-finance proponents hope that it does. For them, that's the point.
Can stability be achieved?
This week, a survey of 1,000 Americans by financial website CreditDonkey claimed that nearly three-quarters of respondents (73%) expect cryptocurrencies, such as Bitcoin, to replace the dollar, with one in five expecting it to happen in the next 10 years.
However, writing in the FT this week, Roger Svensson, Associate Professor at independent foundation the Research Institute of Industrial Economics, observed that an international currency must satisfy at least four basic requirements to be viable. He wrote:
It must have a long-term stable value; there must be sufficient volume to meet the needs of international trade in goods, services and financial assets; transaction costs must be low, with small differences between bid and ask prices, and high liquidity; and there must be a stable issuer who guarantees the currency.
It is hard to argue with that list. Historically, all dominant international currencies have met these requirements, but Bitcoin meets none of them, he explained. Certainly, it is volatile: at the time of writing, one Bitcoin is worth approximately $36,000, whereas on 13 April, it hit a high of $63,500.
Such extreme fluctuations underscore the ‘million-dollar pizza' problem: why use a coin to buy a pizza today if the same amount might buy a car tomorrow? This mitigates against Bitcoin's viability as money and reinforces the attraction for speculators. (This problem affects any cryptocurrency that is in the sights of speculators.)
On crypto's ‘Black Wednesday' last month, Bitcoin lost roughly one-third of its value in hours, partly on news that Tesla would no longer be accepting it, and China's more restrictive policy. The tweets of Tesla supremo and space doge Elon Musk proved that the crypto world is extremely susceptible to mega-wealthy individuals' ability to influence the market.
With a country such as El Salvador turning to Bitcoin because of endemic poverty and lack of access to traditional finance, the whims of multibillionaires could now crush the fortunes of millions of people overnight.
But equally, they could make them wealthy, or perhaps create a generation of high-risk currency speculators - millions of Salvadorans sat at home with mining rigs, hoping to get rich. Some may be unaware of the cost-per-watt of mining, or the environmental impact if local pools use energy from fossil sources.
A pyramid scheme
Zoom out from this picture, and it is hard to see how any of this solves the problems caused by the 2008-09 crash in traditional finance, other than by giving millions of people the potential to succeed or fail much faster.
Moves to help people send the money from their labours to their families are surely a good thing. But is encouraging some of the world's poorest, most financially disconnected citizens to gamble with those earnings a wise decision? Only if they win. In this sense, millions of poor Salvadorans are the canary in the coal mine of alternative finance.
As ever, those with nothing could get something, yet carry all of the risk for men who are rich enough to have spaceships. (No doubt low-paid workers in Amazon warehouses will cheer as Jeff Bezos steps into his rocket. But how many will secretly hope it explodes?)
All money has the character of a "network product", wrote Svensson in the FT. The irony is that while Bitcoin is networked in digital terms, the reality is closer to a pyramid scheme, he observed. Far from eradicating the ‘greater fool' problem of traditional finance, therefore, Bitcoin appears to be accentuating it.
The supposed ‘people's financial system' is currently the plaything of billionaires - ah, the ever-present scent of Musk. More, the anonymity of Bitcoin wallet holders makes the coin popular with money launderers, at a time when traditional finance is (supposedly) clamping down on organised crime.
However, Hester Peirce, one of five commissioners at the Securities and Exchange Commission (SEC), shared her fears this week about US attempts to regulate the crypto market. She said:
I am concerned that the initial reaction of a regulator is always to say, ‘I want to grab hold of this and make it like the markets I already regulate'. I am not sure that's going to be great for innovation.
Fair point. Yet according to CreditDonkey, over half of the US citizens it surveyed (53%) want stronger crypto regulation, with the figure rising significantly among wealthier investors. Fewer than one in five overall oppose it.
In other words, the richer someone becomes from crypto speculation, the more they want regulations that Bitcoin is designed to avoid, so they can protect their gains. Indeed, the survey revealed that there are strong trends among investors, especially the young, towards making crypto more like traditional finance.
They just want a stake in the world of money, and who can blame them? But the irony growth is exponential.
There were other upheavals in digital finance this week. On 8 June, an internet outage took thousands of websites offline, including some financial services. Among the affected brands were payments platform Stripe, with some PayPal users also reporting problems.
Silicon Valley-based infrastructure provider Fastly announced that a lurking configuration error in its systems, triggered unknowingly by a customer, had caused the outage. As millions of people flock to online banking, payment, and money management services, the lack of resilience in critical aspects of the internet infrastructure is clear.
However, Fastly shares rose double digits on the day, with investors seemingly impressed by its ability to restore services in a couple of hours - or hoping to make a quick buck from a dip, perhaps. By contrast, Bitcoin's value did not experience a similar uptick, despite the news from El Salvador and the US sentiment findings.
Aw, sorry bro.