The Nation, May 27, 2021
Does Bitcoin’s Recent Crash Spell the Beginning of the End for
Cryptocurrencies?
China’s warnings on the use of digital currencies suggest that the
long-awaited official-sector crackdown has begun—and it’s a good thing too.
By Marshall Auerback
Are cryptocurrencies on their last legs? The leader of the pack,
Bitcoin, has lost almost half its value since reaching an all-time high
in mid-April, and others have also collapsed in the wake of theChinese
government’s decision
<https://www.wsj.com/articles/chinas-latest-crackdown-on-bitcoin-other-cryptocurrencies-shakes-market-11621853002>to
crack down on all cryptocurrency-related transactions. The Securities
and Exchange Commissionhas also signaled tougher oversight
<https://www.bloomberg.com/news/articles/2021-05-26/wall-street-s-new-cop-signals-more-scrutiny-for-crypto-and-spacs>.
Despite the market gyrations, crypto’s champions continue to see these
currencies as an ideal market-generated solution as questions arise
about the future viability of paper currencies in a global economy
characterized by sky-high indebtedness and bloated government/central
bank balance sheets. Enthusiasts behind Bitcoin, Ethereum, Tether,
Dogecoin, anda host of other cryptocurrencies
<https://coinmarketcap.com/all/views/all/>, seem to think that the
wonders of 21st century financial technology (aka “fintech”) will enable
these digital creations to stand as alternative stores of value outside
the control of our central banks, whose actions (theyhave claimed
<https://www.econstor.eu/bitstream/10419/147472/1/868008559.pdf>since
the days of Austrian economist Friedrich von Hayek) regularly debase
traditional paper currencies.
An appealing narrative to be sure, but does it stack up to reality?
Ironically, cryptocurrencies share many of the features that its
libertarian adherents decry in so-called government-created currencies.
Like our traditional currencies—the dollar, yen, pound, or euro—created
by government “fiat,” cryptocurrencies are backed by nothing.
Participants effectively exchange a legal tender dollar or some other
real asset for a digitally created token, which has no intrinsic value
or yield (and the supply of which is artificially controlled by a
complex computer algorithm). Furthermore, the creation of these
currencies has an environmental cost (some more than others); they trade
outside of a regulated financial system, making them ripe for fraud
(e.g., hacking investors’ crypto wallets to steal their currency,
setting up fake wallets to bilk counterparties, or setting up phony
crypto exchanges to steal customers’ money), money laundering, and tax
avoidance. (TheIRS announced
<https://news.bloombergtax.com/daily-tax-report/the-irs-is-aggressively-pursuing-taxes-on-cryptocurrency-transactions-part-1>last
week its intention to pursue crypto-related taxes aggressively).
Even as a medium of exchange, the use of cryptocurrencies is
unpredictable. As of a couple of weeks ago, you can no longer use
Bitcoin Bitcointo buy a Tesla
<https://www.nbcnews.com/tech/tech-news/elon-musk-backtracks-says-tesla-wont-accept-bitcoin-rcna918>,
less than two months after Elon Musk helped to further fuel a renewed
speculative frenzy in the market whenhe announced
<https://twitter.com/elonmusk/status/1374617643446063105>that his
company would begin accepting Bitcoin as payment. The resultant plunge
points to a problem of using these digital tokens as an alternative
store of value (unless, of course, you’re a criminal with limited
options). It also highlights another issue raised by/Naked Capitalism/’s
Yves Smith
<https://www.nakedcapitalism.com/2021/05/crypto-crackdown-only-the-beginning.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29>:
“The cost and time involved in validating Bitcoin transactions makes it
unusable in retail transactions.”
Musk’s change of heart comes as the (literally) dirty little secret
about cryptocurrencies is becoming more widely appreciated: “Mining” for
cryptocurrency is even worse than traditional mining.According to the
Pennsylvania branch of the Sierra Club
<https://www.sierraclub.org/pennsylvania/blog/2021/03/environmental-impacts-cryptocurrency>,
“Bitcoin alone produces 36.95 megatons of carbon dioxide (CO2) annually
(comparable to New Zealand) and it is estimated that in 30 years Bitcoin
could alone increase global temperatures 2 degrees Celsius.”
TO THE MOON
The Nation
<https://www.thenation.com/article/economy/coinbase-cryptocurrency-dogecoin-nft/>
HAPPY DOGE DAY! BUT HOLD ON TO YOUR (DIGITAL) WALLET.
<https://www.thenation.com/article/economy/coinbase-cryptocurrency-dogecoin-nft/>
Ryan Broderick
Left unchecked, mining for crypto is bound to grow (and as a result
cause more environmental harm) as its use is expanded. There are many
pejoratives one can ascribe to so-called easy money–peddling central
bankers, but “environmental vandal” is usually not one of them.
As for the technology behind crypto, central banks are increasingly
appropriating digital technology for their own “paper” currencies. As
they do, they are increasingly trying to regulate the use of
cryptocurrencies. The People’s Bank of China, for example,just announced
tighter restrictions
<https://fortune.com/2021/05/21/china-ban-bitcoin-price-bubble-crypto/amp/?__twitter_impression=true>to
ban financial institutions and payment companies from providing services
related to cryptocurrencies, marking a fresh crackdown on digital money.
Other countries—such as Algeria, Bolivia, Morocco, Nepal, Pakistan, and
Vietnam—have already banned cryptocurrencies
<https://www.loc.gov/law/help/cryptocurrency/world-survey.php>on the
grounds that they enable criminals and terrorist organizations to move
value around the world out of sight of national governments and law
enforcement. At the same time, United States Federal Reserve Chairman
Jerome Powell hasalso announced consideration
<https://www.ft.com/content/ca4875dc-b7ed-463c-aa3f-941694d5f284?accessToken=zwAAAXmRJElokdPKSHXct-1GPNOqP5QWlNXyhA.MEUCIB0sWFmYWcrh0z3k2I13pKn5bmmGyk84YaeoLmu8Ps0_AiEAiaUfQZXGRURne_VkAwLTODfwnF54Tr8lueEjkoIHe6c&sharetype=gift?token=ec2d2bbb-2dd0-49a1-88fb-76e9e9bdf158>of
a possible digital version of the dollar that would be controlled by the
US central bank (suggesting that it wants to appropriate the technology
but maintain control of currencies).
From the perspective of non–fintech experts, a crucial and valuable
difference is that central bank–issued currencies will come with the
added advantage that they would be issued and regulated by the competent
monetary authority of the issuing country. Central bank–created digital
currencies would simply constitute a digital version of the very same
currencies that our populations have learned to trust. Think of e-mail
versus physical postal mail. The transactions would be instantaneous,
but still safe because the electronic debits and credits would still be
controlled and monitored by the central banks.
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Will a further collapse in the value of cryptocurrencies crash the
financial system as, say, mortgage-backed securities did in 2008? Not
necessarily.
As the economist/venture capitalist William Janewayhas persuasively
argued <https://www.billjaneway.com/two-innovation-economies>, financial
bubbles are always with us. Sometimes, they leave a legacy of productive
assets (eg., railways in the 19th century, or broadband and the vast
expansion of the Internet in the wake of the dotcom bubble of the
1990s). At other times, such as 2008, “bubble extremes can transcend the
capital markets and suck in the institutions, [such as banks], that
accept deposits and provide the credit that fuels the ordinary workings
of the market economy.” To judge from the comparative resilience of the
financial markets in the wake of significant recent falls of many
leading cryptocurrencies, the latter do not yet appear to have infected
the broader credit system. But left alone, they could well do so, which
is why we should applaudmoves by our monetary authorities and regulators
<https://www.bloomberg.com/news/articles/2021-05-26/wall-street-s-new-cop-signals-more-scrutiny-for-crypto-and-spacs>to
bring them to heel.
On the plus side, cryptocurrencies may well have accelerated the central
banks’ expansion into digital currencies. That specific innovation could
be very good for our economy, as our transactions become increasingly
virtual and electronic. But by proactively appropriating the digital
technology, while simultaneously clamping down relatively quickly on
privately created, unregulated cryptocurrencies, financial regulators
are likely to prevent said instruments from infecting our credit system,
thereby mitigating vast collateral damage as a result.
In our increasingly technologically dominated economy, innovation is
often seen as an end in itself. But increasing financial innovation (as
we saw in 2008) should never be viewed that way, especially when it
comes to cryptocurrencies. Instead, the embrace of digital currencies
should be viewed as the handmaiden of a financial system that is geared
toward supporting rather than subverting the real economy. Elon Musk,
among other crypto proponents, does not object to the idea of a
privately created cryptocurrency; he just wants it to be less
environmentally toxic. That’s not enough; it is doubtful that any
sovereign country that issues its own currency would, or should,
willingly sacrifice its currency monopoly; to do so would be a recipe
for monetary chaos and systemic instability. Libertarians love to talk
about “freedom,” but absent a supportive framework, freedom can quickly
dissolve into anarchy. The sooner we get rid of something that has
become a charter for fraud, tax avoidance, and illegal monetary
transactions, the better.
Marshall Auerback
<https://www.thenation.com/authors/marshall-auerback/>Marshall Auerback
is a market commentator, a research associate for the Levy Institute at
Bard College, and a regular contributor to the Independent Media Institute.
he
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