Of what use are cryptocurrencies? I have asked this question to some of my former finance faculty colleagues at the University of South Florida. All I have gotten back are quizzical looks, implying that they see no inherent value that they add to the economy. The standard answer I get from some laypeople is that it is a digital currency that works outside the control of the (in their view, the big and bad) government.
A lot of my finances are digital. My bank account is a digital currency. I use it to pay all of my bills online, without incurring any cost and my pension payments are deposited electronically into it. My credit cards are a digital line of credit, which I can use for all kinds of transactions with a small cost to me because the credit card purveyors charge a transaction fee to the seller, which is passed on to me in the form of a slightly higher price that I would pay for my purchases. Debit cards are a digital currency allowing payment from one’s bank account without incurring fees.
I use PayPal for transactions that have the added benefit of protecting my credit card and bank account from scammers who are looking to steal my identity. And you have Venmo and other digital transaction platforms throughout the world.
According to The Economist, Brazil has launched a payment system called Pix, that allows consumers and merchants to send and receive money via a QR code, without having to share details of their wallet, fintech provider or bank. It has been wildly successful. India’s Unified Payments Interface and other similar schemes, many of them in African countries, have also gained widespread popularity.
But that’s digital, not crypto. So why do some people believe in cryptocurrencies? Why invent a currency outside the purview of the government and the Federal Reserve Bank? It is a horrible idea. There needs to be a central control of the money supply to prevent and control speculative excesses. It is reminiscent of the shadow banking system collapsing during the 2008 financial crisis, which worsened the economic downturn.
The shadow banking system consisted of financial intermediaries that created credit across the financial system, outside the purview of regulatory oversight and did not have insurance protection offered by the FDIC. So, when the proverbial “poop” hit the economic fan, the lack of insurance protection exacerbated the downturn because there was a run on deposits in the shadow banking system, which could not be honored because liquidity dried up, as it usually does when a significant economic downturn is imminent. Essentially, investors could not withdraw their money, which further exacerbated the lack of confidence in the financial sector of the economy, making the downturn worse.
Economist Paul Krugman estimates that while the inflation rate is in the upper single digits for most citizens, it is well over 100 percent for people who have their money in cryptocurrencies because of their collapse in value.
Proponents of cryptocurrencies request patience, stating that they are a relatively new mode of payment going through growing pains. Really? Bitcoin, the most popular of them has been around since 2009. It refuses to grow up and act like a mature and responsible currency. Why can’t I pay for groceries at Publix or other stores with Bitcoin? Because the vendors do not have confidence that they will maintain their value.
Cryptocurrencies are valuable for those engaged in nefarious and illegal activities because they can hide their dealings from the law. So, is that a good reason to have a parallel currency? You know the answer.
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A recent article by some of my former Information Systems colleagues opined that “value-generators” in the crypto markets are working hard to capture the value of blockchain-based technologies and business models. To do what exactly, I ask, wondering what function cannot already be accomplished by existing mediums of exchange and modalities of transactions.
It has to facilitate transactions more efficiently and/or at lower cost, and/or create a superior system of checks and balances to lower risk. Possibly there are some situations where using cryptocurrencies makes economic sense, but right now I suspect they are far and few.
Proponents need to provide convincing examples of such activities in simple English and spare us the technical mumbo-jumbo. I know others who are asking the same question.
Murad Antia, now retired, taught finance at the Muma College of Business, University of South Florida.