Friday Rant - ‘Who let the Doge out?’, carping on the Diem and other cryptocurrency conundrums
- The week started by considering cryptocurrency's contribution to climate change, so let's end it by cashing in with a wider shakedown of the sector...
Cryptocurrencies, digital coins, and tokens are rarely out of the news these days, in part because of the rollercoaster fortunes of Bitcoin miners – encouraged by high-profile supporters such as Tesla/SpaceX supremo Elon Musk, currently the world’s wealthiest man
So who let the Doge out? Musk’s additional support for rival Dogecoin, which was originally set up as a spoof of sorts, has reinforced the popular notion of digital coins emerging as an alternative finance system for the internet age, one that may seek to encourage a better, more collective approach to managing the planet’s resources, perhaps.
But in the meantime, the likes of Musk are able to warp the fabric of these markets simply by talking about a digital coin, ramping up the value of their own digital reserves. Anyone wondering who may become the world’s first trillionaire should probably look no further than Musk.
However, these extreme fluctuations in the value of Bitcoin and other digital coins raise serious questions about their viability as money in the accepted sense – a trusted means of exchange with an acknowledged value – as they are largely driven by speculation and greed. The latter are hardly new concepts in traditional financial markets, of course.
At the time of writing, a single Bitcoin is valued at approximately $51,400, over twice its dollar value at the end of January 2021. Such extreme volatility makes it a risky punt as the basis of a new economic system, though it makes it highly attractive to speculators – especially those whose gravity can bend the market around them.
An alternative is digital coins that are pegged to a relatively stable commodity, such as gold, or linked to the value of a fiat currency (like the dollar, euro, or pound sterling) – so-called stablecoins. These could be seen as a hedge against investors failing at internet speed.
According to a new report published by analyst firm CBInsights, somewhere in the region of 200 stablecoins worldwide have so far been released or are in development – compared with the 180 traditional currencies that are currently recognised by the United Nations, the oldest of which is the pound.
That’s how much faster this new world is moving, when one considers that Bitcoin was launched as recently as 2009, whereas the first minted physical coins are thought to have appeared in Lydia (now part of Turkey) in about 600BC. The Chinese were using paper money 100 years earlier.
Two US dollar-backed stablecoins, the Paxos Standard (PAX) and Gemini Dollar (GUSD), have been approved and regulated by the New York State Department of Financial Services, for example. Alongside stablecoins, countless digital tokens are appearing that represent a raft of different commodities and concepts, such as trade in carbon offsets.
However, with so many new coins and tokens entering the system, it is hard to believe that financial markets are actually becoming more transparent, open, and accountable, as their proponents claim. Indeed, they may become so opaque, as transactions skip from coin to coin to coin, that it is almost impossible for auditors and financial authorities to track the movement of funds across the globe in a meaningful sense, however transparent each coin might theoretically be.
Despite that, financial services incumbents are certainly eyeing what they now see as an opportunity more than a threat. The CBInsights report says:
JPMorgan, for example, has piloted and launched its own stablecoin. Meanwhile, a recent survey of central banks found that two-thirds of respondents are actively researching the potential impact of stablecoins on financial stability.
Stablecoins could help to stabilise the entire crypto system, implies the report. Should the value of Bitcoin, say, begin to tank at some point, investors could swiftly convert their holdings into a stablecoin – more quickly than they could escape ruin in the traditional banking system, in fact.
This could avert the risk of massive, deepening losses, along with any need to convert their holdings into a fiat currency, such as the dollar. In this sense, therefore, we could begin to see crypto and digital currencies in a very different light: as a collective safety net of virtual resources that mitigate sudden, disastrous movements in financial markets and avoiding a crash by wading through digital treacle.
Attractive though it is, this concept of thousands of different digital tokens somehow returning financial markets to the tedious predictability of compound interest – to the once feted probity of the banking system before it was overrun by corporate-scale gamblers – stretches credulity. After all, this is also a world of extreme gamblers, hackers (some ethical), and crypto-jackers, as well as countless sincere and honest people.
Nevertheless, the likes of Bitcoin are designed to challenge the very notion of a fiat currency. The latter are currencies that, though they fluctuate in value relative to other fiat currencies, have an intrinsic value that is decreed by an acknowledged authority, such as a government and/or central bank.
Fiat currencies are supposed to engender trust – assuming that citizens trust their government or central bank, of course. For those that don’t, digital coins and cryptocurrencies represent a fast-emerging alternative system that exists away from the oversight of national or international authorities.
Some see these developments as a positive thing, and others as a threat to global financial stability and political/economic power (which is precisely the point for some).
It is, of course, conceivable that Musk himself is now so wealthy that he regards himself as a trusted authority, rather than as the maverick, Bond-style CEO with a fleet of rockets, electric cars and a secret base in a carved out volcano on Mars that the rest of us see. From this perspective, the underlying issue – and it is a serious one – is that the real alternative economy is now built on social influence, rather than on trading in other commodities, goods, or services.
This is the reason for the outbreak of extreme opinions – political and otherwise – on platforms such as Twitter and Facebook: extreme equals engagement/clicks, which equals power, which equals money, and therefore perceived importance. It’s a virtuous circle of sorts, in which outrage becomes a game of stocks and shares.
It seems there is private wealth to be made by trading in commodities such as hatred of minority groups, for example; a troubling state of affairs at best. That this phenomenon is destabilising society in the real world should be obvious to all in the wake of the Trump mob’s insurrectionists away-day jaunt to Washington last month.
That aside, the concept of a coin pegged to the value of a more stable asset is one that Facebook and others tilted at with the Libra project, which has been scaled back and renamed Diem, a coin that will be backed by currency reserves or equivalent assets in the US. The name – with echoes of per diem daily expenses – suggests it may be limited to small transactions. It is now overseen by the Diem Association.
So will we seize the Diem, or merely carp about it? With a claimed 2.7 billion monthly users - possibly even some in Australia! - Facebook clearly sees long-term potential in creating a digital dollar equivalent, linking people’s ability to buy and sell goods or services with Facebook’s platform whenever they are actively using it. This would be an advertiser’s dream, but a privacy nightmare.
Creating an international payment platform beneath Facebook’s apps and services, one that could facilitate cross-border trading, is an appealing idea to founder and CEO Mark Zuckerberg. It is doubtless attractive to money launderers, organised criminals, and terrorists too, given that authentication and transparency are not concepts associated with Facebook or most other social networks. Most are overrun with bots and fake accounts, not to mention those people trading in outrage for cash.
The core challenge for Zuckerberg is that Facebook is unlikely to be seen as a trusted authority for this reason, because…well, just because, even if that’s a message that isn’t getting the ‘likes’ at Facebook HQ. In fact, the more cynical among us might mischievously posit that removing citizens’ privacy could be argued to be part of Facebook’s core business, alongside providing a game-able misinformation platform for Fake News junkies, while censoring access to genuine news to hit back at sovereign democracies who dare to ask it to pay money for content, all in presumed pursuit of the supposed ‘greater good’ that Zuck keeps telling us is his very raison d’etre. Talk about playing both sides of the deal!
But there is potential in creating a digital payments platform within, or beneath, any social network – one that is likely to oblige or incentivise members to use it.
However, no government would be comfortable with allowing a private, advertising-driven network like Facebook to become the world’s de facto financial system, though it is clear that mega-wealthy individuals and corporate behemoths such as Facebook, Google, Apple, Amazon, Alibaba, Tencent, and others, now wield at least as much power as governments. (Let’s see how war with Australia plays out on that front!)
The other challenge to the concept of cryptocurrencies and digital tokens becoming a viable financial system lies in the underlying technologies: blockchain, distributed computing/ledger systems, and the processing power needed to crack the code of crypto coins (the process of mining them).
On the one hand, distributed systems seek to be intrinsically secure, trusted, transparent, tamper-proof, private, and decentralised. There is evidence that they are – which may, of course, be a disincentive to use them for anyone wealthy or clever enough to game financial markets. After all, if massive fraud and market rigging were not already attractive concepts to market influencers, then major banks would not have been guilty of them in recent years.
But on the other, these technologies also consume vast amounts of energy – as explored in my separate diginomica report.That was based on Cambridge University research showing that Bitcoin mining alone already uses more electricity than Argentina and several other countries. As a result (at present at least), the rise of Bitcoin, cryptocurrencies, stablecoins, and tokens, together with distributed ledgers and computing, would appear to represent a short- to medium-term carbon problem.
The big-picture opportunity perhaps lies with the first country to launch its own standalone digital currency in the face of competing corporate interests. For that to succeed would demand mass popular support – it’s a numbers game, which suggests that the impetus is likely to rest with China more than with the US.
If you’re not convinced of that, then it is worth bearing in mind that China already holds the balance of power in Bitcoin. As previously reported, Cambridge University found that roughly two-thirds of Bitcoin mining is based in China, with over 86% of all Bitcoin mining taking place outside of Western economies. (See for yourself here.)
Welcome to the brave new world, where we can all watch power and money move at internet speed – mostly in an easterly direction.