Cryptocurrencies are here to stay. Crypto 2.0 is on the horizon.
No question, 2022 has been a horrible year for crypto. Bitcoin, the largest cryptocurrency, has lost about three-quarters of its value from its 2021 peak, wiping out almost $980 billion (U.S.) worth of crypto.
It’s as if the economy of Saudi Arabia or the Netherlands simply disappeared.
The year has seen several collapses of leading crypto exchanges, with the implosion of Sam Bankman-Fried’s FTX crypto firms in November commanding the most attention.
And there is the underreported story of almost daily ransomware attacks on Canadian businesses and other institutions. After freezing their victims’ computer systems, ransom seekers demand payment in crypto to unlock the computers they have disabled.
But crypto is here to stay.
There are more than 300 million crypto users worldwide, roughly equal to the population of the U.S.
A common prediction for how big the total value of crypto will get is $10 trillion over the next 15 years, That’s almost eight times the peak value of bitcoin alone in November 2021.
In a $100 trillion world economy, that seems a reasonable number.
More than 60 countries including Canada are developing the capability to launch a state-backed cybercurrency, or central bank digital currency (CBDC).
A few countries have introduced CBDCs or are testing them in pilot projects.
Many leading North American banks now process crypto payments. Much earlier they began investing heavily in blockchain, the network of computers and protocols that process crypto transactions.
Even the most implacable critics of crypto (Warren Buffett has called it “rat poison squared”) credit crypto with inventing blockchain, giving the world a superior system for processing financial transactions that will probably become the global norm.
Blockchain is what experts mean when they say that crypto is the future of finance. They’re not talking about a future ubiquity of CBDCs or other cryptos. That could someday happen. But it’s a near certainty that a financial world that’s already largely digital will run on blockchain.
Janet Yellen, the U.S. treasury secretary, might best capture officialdom’s ambivalent regard for crypto.
She is for and against it.
A wary Yellen has said “To the extent (crypto) is used, I fear it’s often for illicit finance.” Yellen has also said that crypto is “an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”
Yellen is right, of course. Crypto is used in money laundering, human trafficking, illegal arms trading, terrorism finance, and tax evasion.
And the vast amount of electric power consumed in processing crypto transactions already equates with total power use in Argentina.
But Yellen has also said that digital currencies could “result in faster, safer, and cheaper payments, which I think are important goals.”
Crypto needs to grow up.
It is only 13 years since the open-source software for the first crypto, bitcoin, was released. Existing only online and to this day unregulated, crypto was a libertarian rebuke to central banks and government regulation.
As such, it quickly became a playground for dangerous mischief. And because almost any nerd can create a crypto, today there are by some estimates as many as 9,000 crypto currencies in use.
That accounts for crypto’s notorious volatility, which makes it wholly unsuitable as a currency. Bitcoin has gained or lost more than 50 per cent of its value five times in the past three years.
Crypto users should welcome the first-ever cyber-finance regulations now in the works in the U.S. and most other major economies.
The authorities want to yoke cryptos more strongly to blockchain.
Blockchains are practically un-hackable, because the crypto transactions they process are recorded by each of the chain’s many computers operated by different parties. That is why astute cyber users assess cybercurrencies and exchanges according to how robust their blockchains are.
Regulated use of, say, two dozen strong cryptos worldwide would help create stability for crypto. So would requiring high standards of any proposed new crypto.
And a payment protocol more thoroughly incorporated into blockchain would speed transactions, slash fees for converting cryptos into other cryptos or traditional currencies, and sharply cut crypto’s use of energy.
It’s no small irony that crypto use, initially premised on evading government oversight, is vulnerable to arbitrary government actions.
China and South Korea are among the countries that have occasionally banned certain types of crypto trading. And there are calls in the U.S. Congress today to have all cybercurrencies banned. Meanwhile, victims of FTX’s alleged fraud complain that the U.S. government didn’t protect them.
Bringing cryptocurrencies in from the cold would better secure the holdings of cyber users, enable faster and cheaper crypto use, make life tougher for criminals, and help fight climate crisis by curbing crypto processing’s waste of energy.
The trade-off for crypto users is that government will have a larger role in their financial affairs.
It’s a small price to pay.
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