Cryptocurrencies have failed to deliver on their original promise to radically transform equity futures and create a freer marketplace. Boards need to ensure organisations are prepared for unforeseen exposure to economic, technological and security concerns.
Bitcoin, the first cryptocurrency, emerged 15 years ago on the back of the global financial crisis and rapidly established itself as a central pillar of the new digital technology movement.
Indeed, the founders and backers of numerous cryptocurrencies proudly announced their intent to provide an alternative medium of exchange, using innovative, techno-based decentralised organisations to fuel dreams of revolutionary change.
These ideals were further championed as techno countercultural movements, seeking non-hierarchical and self-organised models of society that could positively disrupt traditional market capitalist corporations.
Enthusiasts viewed these technologies as powerful tools to challenge conventional governance models.
However, in February 2023, the UK Treasury set out proposals to regulate the crypto industry, including new rules to govern the issuance, trading and lending of crypto tokens—digital representations of assets—in an effort to safeguard customer funds.
Crypto exchanges would be required to comply with rules governing traditional financial services, including having to ringfence customers’ money in case of insolvency, and ensure due diligence and monitoring of assets listed on their platform.
The government’s measures followed a period of turmoil across the sector, with a number of lenders and exchanges, including FTX and Voyager Digital, running into trouble, seeing the price of crypto spiral, along with investor confidence.
The reality of cryptocurrency today is that its adoption has been primarily driven by speculative investment and the desire to make a quick buck, rather than any idealistic visions set forth by its early developers.
In fact, the price of cryptos is unrelated to more normal economic measures, such as yield curves, or consumer or investment data relating to particular asset classes. Price is largely determined by speculation and the entire system has become little more than an exercise in random guesswork.
Crypto users have been compared to gambling addicts, owing to their ‘variable ratio reinforcement patterns’. Psychologists have determined that gambling is like a drug, in that its proponents feel they are always a step ahead of the game. This all smacks of the illusion of beating the casino at its own game, but worse.
WhatsApp groups can—and do—fuel rumours that determine whether a price will skyrocket up or down and so crypto retail investors are, in fact, simply gambling with their money.
Alternative coins emerging
Despite early founders’ expectations not being met, Bitcoin has paved the way for the emergence of a group of cryptocurrencies known as alternative coins, or altcoins. Notable examples of this include Litecoin, which aims to speed up transaction processing, and Ripple, designed for smoother interbank transactions.
There is little doubt that Bitcoin and other cryptocurrencies have induced changes in social habits and, regardless of their speculative nature, these new currencies are being progressively co-opted by mainstream financial, technological and governmental institutions worldwide.
The most notable among these is the emergence of central bank digital currencies (CBDCs). These cryptocurrencies, backed by an increasing number of central banks, now represent the coinage of a group of select countries, such as the digital yuan in China and the e-Krona in Sweden. However, to date, only the Bahamas, Jamaica, and Nigeria claim to possess fully functional CBDCs.
CBDCs are governments’ efforts to integrate blockchain into their mainstream financial systems and also represent the incorporation of Bitcoin and associated technologies by the very institutions they were meant to challenge.
This poses an intriguing inflection point in the decentralisation narrative of distributed ledger technologies (DLTs). Ethereum https://ethereum.org/en/ revolutionised the landscape of DLTs by introducing smart contracts.
Smart contracts enable sophisticated decentralised applications (daps), to expand the potential use of blockchain technology beyond rudimentary transactions.
The development of DLTs has also given rise to decentralised autonomous organisations (DAOs), which challenge traditional corporate structures and governance models.
In addition, cryptocurrencies have spurred the development of inventive projects utilising blockchain technology, including decentralised finance platforms (DeFi), which aim to create open, transparent, and accessible financial ecosystems.
The impacts on global finance
In effect, DeFis represent a digital transformation of developed financial systems drawing on blockchain technology. Leveraging Ethereum’s smart contract technology, DeFi envisions an open, free, and fundamentally decentralised financial system.
DeFi applications offer services typically provided by traditional financial institutions, such as lending, borrowing, derivatives, decentralised exchanges and insurance—all without the need for a central authority or intermediary.
The DeFi ecosystem is beginning to reshape the financial landscape. Uniswap is a decentralised exchange enabling direct transactions, while MakerDAO, a decentralised credit platform, issues the stablecoin Dai, which is anchored to the US dollar. Compound is a platform that facilitates cryptocurrency lending and borrowing.
CBDCs promise enhanced payment settlement efficiency, improved access to financial services for underserved populations, and increased financial stability and resilience.
Yet, this is a promise unlikely to be fulfilled.
The introduction of CBDCs raises significant concerns about a potential reduction in the use of intermediaries between cryptocurrencies and users, versus deposit-collecting institutions such as banks.
The impact on financial system stability, efficiency, and the role of banks as intermediaries is likely to be considerable.
CBDCs are already affecting monetary policy through the enhancement of central banks’ ability to regulate money supply and interest rates.
By so doing, concerns arise about data privacy and the governance of safeguarding individuals’ interests. Central banks will collect and store large amounts of personal and financial data unhindered and without permission.
Is the future of crypto fixed?
Boards need to ask these key questions:
• What are the realistic uses of cryptocurrencies for the organisation?
• Is there an effective system in place to model, manage and balance the costs of risks and opportunities?
• How might extreme changes in valuations or volumes impact the strategy?
• What are the legal guidelines and how will the organisation respond to new regulatory considerations?
• Has management given proper consideration to the global nature of cryptocurrencies?
• Is the organisation prepared to react to unexpected cryptocurrencies exposure?
There is nothing certain about the future of cryptocurrency in the current environment, but be aware, all of the aforementioned issues are emerging now.
Commercial banks will ultimately no longer issue paper currency. In Sweden, transactions are almost entirely digital. Australia plans to become cashless by the end of 2024. India and Brazil intend to launch CBDCs in 2024, followed shortly thereafter by the UAE, Saudi Arabia, Iran, Vietnam, Norway and the US among others.
Finally, in February, the UK issued a consultation document on proposals for a digital pound and global approach to central bank digital currency.
Building on this current passage of events allows for some interesting predictions about the future of our society and government control.
Imagine for a moment how a crisis of some kind could result in action by government to take direct control of the entire financial system.
This crisis event could be connected to damaging developments in the Ukraine-Russia war, other military occurrences in the South China Sea, a significant acceleration in the cost-of-living crisis, or further cataclysmic outcomes arising from climate change.
A war on cash and financial controls
Political leaders may justify their actions as being necessary for the ‘security of the nation,’ while emphasising the urgency for greater control over the country’s finances. This case could be reinforced by highlighting the unpredictability of crypto and its threat to society as we know it.
Worst of all, the moment cash is no longer available, every transaction will be monitored instantaneously by government without any independent oversight. Knowing what citizens spend their money on will allow commercial and political interests to lobby in their own favour.
In addition, those who purchase ‘environmentally unfriendly’ products, such as meat, or who exhibit a poor carbon neutral score, may well be penalised in terms of ‘citizen conduct’. This practice is already in place in China, with some people restricted from travelling.
The very real danger here is that instead of building upon advanced technologies that enable society, we are facing the potential opposite. Whether through an actual or invented crisis, the state’s control over its citizens will be absolute.
This is not just about advances in technology allowing for domination over people’s lives, but also the global financial crisis of 2008, which raised the question: ‘what should be done with failing banks?’
The ‘bail in’ process of rescuing failing financial institutions by the state’s central bank focuses on the investor taking responsibility for addressing financial crises, but not state institutions. Those with deposit accounts pay a price for commercial bank mismanagement and their savings are forfeited to ensure the viability of their own bank and the nation.
Crypto technologies have, in effect, allowed government to take deep control over the citizen in order to facilitate a switch from a savings economy to a spending nation state.
The level of debt in the West is now so high that the future of the state is already in doubt and if nothing is done investor confidence will be progressively undermined.
The government financial takeover is happening
A cursory review of websites for the US Federal Reserve System, the Bank of England and the European Central Bank all indicate that the idea of government financial takeover is not as far-fetched as it might seem. In fact, it is an openly declared policy.
In the UK, each citizen with bank deposits is allowed to keep £85,000 in the event of a system collapse. The rest is taken by the state.
In order to ensure continued spending, the next step is likely to be that the government will place a time limit on how long any individual can maintain a positive digital wallet or bank account balance.
If their digital points—money—are not spent within a declared period of time, then savings will be subsumed by government in a similar manner to air miles—spend your air miles within a declared period or they go back to the airline.
Sweden and Australia will be cases in point: centralised digital control of their financial systems and all of its consequences will be evident within the next four years.
For those left feeling concerned about this shaky financial future, the best advice is to invest your money.
In forcing the holder of CBDCs into these two choices, governments are hypocritically going against their own ‘know your client’ (KYC) laws and regulations.
Holding cash is the most neutral or defensive investment strategy that can be taken and those with large cash holdings are by nature risk-averse investors.
By having their cash converted into CBDCs, citizens are forced to either spend or invest, while the government does not take into account that any investment in products is seen as a higher risk by those who normally sit on their cash.
In the UK, the FCA has strict guidelines that direct firms to hold KYC information and provide advice to their clients concerning any investment plans.
In the case of CBDCs, government is not officially advising investment. However, its de facto position is that doing so is the only alternative to spending ahead of the expiry of CBDCs.
A push on high-risk decision-making
In effect, government will likely use CBDCs with expiry dates as an alternative to traditional quantitative easing. Depositors will then be pushed into making decisions they would normally consider high-risk, without the legal obligation normally required of firms who recommend investment.
Private investment firms will be held to a higher ethical standard than government itself.
It is becoming clear that by embracing transformative technologies, dominant institutions and the government will reshape certain principles to align with their own interests.
The outcome depends on trust in government and central banks, which is currently in short supply.
The operational gains crypto facilitates, such as an ease in transactions and a reduction in counterfeiting, will be of little value when facing a government that is completely in control of your money.
This is not an issue of technology taking over. It is about the unwillingness to address deficiencies and corruption in government that ultimately leave the citizen vulnerable.
It is impossible to hold technology back. However, it is within our grasp to demand enhanced transparency and the safeguarding of our rights and properties.
The realities of technology adoption have been ignored for far too long. Until appropriate safeguards are put in place—particularly regarding the integrity of an individual’s own bank account—each citizen should emphatically resist the physical removal of cash from the economic system. Cash provides freedom, independence and is the last point of protection for the average consumer’s assets.