cryptocurrencies are here to stay. so, what happens now?
According to those who track these things, there are 13,506 types of crypto coins in existence today. That’s awfully close to being twice the number of languages on Earth, and some 75 times more than the number of actual currencies in circulation. But despite these impressive numbers, global cash flow is still measured by established currencies issued by central banks, which is exactly what Bitcoin and its competitors have been trying to dismantle for more than a decade now with little success, despite attracting countless headlines and investors who either believe in the hearts of hearts that blockchains and digital wallets are the future of money, or think they’ll get rich quick by betting on the right coin.
Hold on though, you might ask, why can’t I spend crypto like any other currency? Well, while a major benefit of Ethereum or Bitcoin is that they’re not issued by a central bank, that distributed peer to peer nature means only those who believe they have value want to accept them, and most places you’d spend money won’t deal with them until there’s proper regulation and existing point of sale terminals accept crypto as a form of payment. Until that exists, crypto simply isn’t liquid. For example, if you own a house, it’s certainly worth something. But until you sell it, that value isn’t set in stone. Try paying for your gas or groceries with a 0.001% stake in your home and you’ll be heading back empty handed.
This means cryptocurrencies are relegated to be speculative tokens, and the wild fluctuations make it extremely difficult to part with them even if you do find someone who actually accepts these coins. Who wants to spend ten bitcoins today at $630,760.70 as of this writing to buy a house if the same coins could be worth $800,000 or more in two months and buy a bigger and nicer house with you doing nothing but sitting and waiting? So while traditional currencies are measured by velocity which fuels economic growth, cryptocurrencies are measured by market capitalization, like company stocks. On top of that, the crypto space is lousy with scams, fraud, and flash-in-the-pan trends poorly understood by many investors.
On top of all that, there are also the soaring costs of maintaining blockchains which take up more and more space with every block of transactions, and the astounding energy costs of mining which now consumes more electricity than all of Argentina, overwhelming the grids on which entire nations rely, and threatens to become the number one use of electrical power worldwide, much of it from less than renewable sources, and accelerating our already rapidly worsening ecological disasters. Aside from the fact that having a fixed number of Bitcoins is basically just an implementation of the gold standard for ideological satisfaction, the “mining” doesn’t make sense for a modern, digital economy where money is meant to be spent.
But all that said, crypto is not a lost cause and there are innovations that could be adopted to power regular currencies or turn some heavyweight ones into de-facto denominations for big, complex, international exchanges. Distributed ledgers that work by consensus and double check every transaction before committing it is a great idea that vastly reduces the amount of effort required to verify transactions, turning a wire that might take as long as a week to fully process into an almost instant payment. With contactless payments becoming the norm and printed cash being not just expensive but a liability for counterfeiting, digital wallets stored and backed up by banks make more sense than ever.
Likewise, having every transaction worldwide recorded and tied to concrete accounts when combined with modern full disclosure rules means that detecting money laundering and tax dodging would be much easier, so much so that the entire process could be automated. Weird deposits made to some offshore account controlled by a shady entity? Blocked. Irregular small deposits to numerous locations from a number of wallets? Flagged and automatically reported to the authorities. Instead of relying on banks to make the right choice when they process odd transactions — which they often don’t — and wait for regulatory action, the blockchain itself can be empowered to take immediate steps to catch financial crimes.
For all that to be possible, however, three important things need to happen. First, governments need to standardize cryptocurrency regulation and start treating crypto coins the same way they treat legal tender, picking which coins they’d be willing to authorize based on their underlying mechanisms or adopting blockchains for existing notes. Secondly, banks need to start hosting blockchain nodes and start processing crypto transactions. And finally, the wild fluctuations of crypto coins used as cash need to settle down to something on par with existing currencies, so buying a cup of coffee or putting a down payment for a car doesn’t come with dread that you may have lost a fortune by not waiting or missing an upswing.
This plan for the domestication of crypto would probably make current crypto investors seethe with rage because it would make speculation on well established currencies extremely capital intensive and difficult, and for them, speculation on volatility is the biggest reason for putting money into the crypto space. But this also makes crypto a dangerous investment for anyone who can’t afford to lose the money they put up, and prevents it from wide adoption. If we ever want crypto to become more than expensive tokens, we have to follow the historic roadmap of the Wild West: a decade or two of lawless experimentation and adventure followed by rules, laws, and subsequent predictable stability.