By Tyler Cowen
Crypto markets still have many puzzles, but they are beginning to reveal their secrets. The last few months of chaos show what bitcoin and other crypto assets are good for: they are advanced tools of globalisation, luxury goods for complex, well-functioning markets — not protections against the depredations of hostile governments.
One common story, especially popular in libertarian circles, has been that when inflation runs rampant and governments confiscate private wealth, crypto will be a vital refuge. It increasingly appears that this story is wrong.
In February, Canadian Prime Minister Justin Trudeau froze the bank accounts of many of the truckers that descended on Ottawa. That action was soon reversed, but the message was clear: the wealth of political opponents is vulnerable. Furthermore, payment providers halted the flow of donated funds to the truckers. You might expect that crypto would have been used as an alternative, but it didn’t happen.
The future of crypto assets lies in joining the financial and regulatory establishment
Since that time, the rate of price inflation in the US rose to 7.9%, much higher than was generally anticipated a year ago. Given the turmoil in oil and grain markets, European inflation rates also seem poised to rise. Yet both bitcoin and ether prices are down radically since November and more since the start of March.
Russia’s attack on Ukraine likely has increased the chance of a wider war, perhaps including nuclear weapons. Yet this too has not operated to the advantage of crypto.
Wealth confiscations have been applied to various Russian oligarchs, most of all in Europe, and those policies seem to be popular. Yet one recent crypto price hike instead seems to be the result of a relatively tolerant executive order from US President Joe Biden on crypto regulation.
So, rather than thinking about crypto as the last resort for totalitarian, doomsday or Mad Max scenarios, I suggest a more prosaic truth: the future of crypto assets lies in joining the financial and regulatory establishment, not rebelling against it. If most of the world is going to hell that is bearish for crypto. Crypto will work best in conjunction with other financial networks, not as substitutes for them.
Think of some of the possible legitimate use cases for crypto. Perhaps entrepreneurs will build a significant online metaverse, spanning national boundaries and allowing for fruitful interactions, including commercial ones. For many transactions, especially micropayments, crypto transfers might make more sense than trying to process all the trades through current dollar networks. There is at least the promise that crypto will be faster, more reliable and more secure.
In this scenario, crypto is worth the most when global trading networks, and Internet connections, are stable. Right now they are moving in the opposite direction, and as a result the price of crypto is falling. The reality is that the crypto world has been a globalised product from the very beginning.
Or consider DeFi, or decentralised finance. The real potential for DeFi is to lend across great distances, for instance sending funds to the most talented entrepreneurs in Africa or Southeast Asia, or for that matter Russia and Ukraine. As with the metaverse, that too is unrealised potential, but it has been and remains a possibility. Or imagine any of dozens of other productive uses for crypto, perhaps currently under-publicised or unimagined, just as NFTs were not “a thing” until quite recently. Like loans, these uses will only see their best and maximum development in a stable and globalised world economy.
Someday, perhaps — though that day seems far off now — crypto may well become just another boring financial instrument. It is heartening to see many individuals making charitable crypto donations to the resistance in Ukraine. But the real future for crypto is in sustainable commerce, not onetime transfers. I also cannot help but notice that crypto innovator Vitalik Buterin hails from Ukraine. A stable Ukraine, or for that matter Russia, is more likely to yield such value-enhancing entrepreneurs.
To be clear, this is not a sceptical argument against crypto. If crypto is good for many different purposes, and not just for one doomsday scenario, its value should expand with a healthier and more stable global economy. That is exactly what the current slump in crypto market prices is signalling.
It’s also important to put the apocalyptic scenarios for crypto aside. Probably nothing will work well or have high value in such worlds.
Someday, perhaps — though that day seems far off now — crypto may well become just another boring financial instrument. If and when that day comes, it will be worth remembering that, when it comes to economic affairs, boring can be exactly what you are looking for.
Tyler Cowen is an American economist, columnist and blogger. He is a professor at George Mason University.