Cryptocurrencies have seen a major boom since the start of the year. This is in spite of the spectacular collapse of FTX (including Sam Bankman-Fried) in November 2022 and the substantial "transparency issues" with the Binance platform, which had it banned in several countries. In early January this year, the U.S. Securities and Exchange Commission approved, for the first time, ETFs that invest directly in cryptocurrencies, primarily Bitcoin. The initial public offering were for 11 ETFs issued by major players such as BlackRock, Invesco, and Fidelity.
Still a dubious investment?
The approval is widely regarded as an indirect guarantee that U.S. authorities are no longer considering shutting down the convertibility of cryptocurrencies. This had been under consideration, especially since China banned cryptos in 2021. PBoC then cited that cryptocurrencies are "a threat to financial stability."
Prior to the approval, Congress held hearings on the subject in December. Testimonies ranged from Jamie Dimon's stance that "the only true reasons for crypto involve criminals, drugs, money laundering, and tax evasion. If I were the government, I would shut it down,". To professors who viewed it as harmless "casino gambling,". And finally to a tech sector (including Elon Musk) that considers it the future. Regardless, the U.S. authorities probably assessed that if they banned the exchange to and from a market that has grown to $1.7 trillion globally, financial stability would be at risk in an open, capitalist, and democratically based economy.
What is the deeper meaning of money?
But the hearing was also of interest as its underlying theme was the real value of and premise for money, i.e., a currency?
The British neoclassical economist William Stanley Jevons (1835-1882) summarized the purpose as:
- A medium of exchange for buying and selling
- A measure of value, indicating relative price and worth
- A store of value for savings
- A means of payment for taxes and debt
More prosaically, the Irish playwright and political activist George Bernard Shaw wrote that "Money is the means by which we make social living possible." He added that "Economy is the art of maximising life." This assertion is more recently supported by the Israeli historian and author Yuval Noah Harari. He believes that "While fire gave us power, gossip helped us cooperate, and contradictions created culture, money gave us something to trust."
What does the difference between money (exchange rate) express?
One could therefore argue that the convertibility of money expresses whether we trust each other. The exchange rate on the other hand expresses how much trust we have in the common fund, i.e. the issuer. Ultimately, the value of money is guaranteed by the state's ability to pay its debt. Thus, mutual trust requires a.o. a strong state, strong economic value creation, and/or a strong military.
However, for cryptocurrencies, there is no state guarantee for their convertibility. There is only the mutual trust between holders and buyers, who are unknown to each other. If Jamie Dimon is right, a crypto holder bases his/her trust on tax-evading pushers who have saved up $1.7 trillion. This figure corresponds to 2% of global GDP. Money that are only convertible as long as their value increases (casino speculation).
Have cryptocurrencies become mainstream?
Nevertheless, crypto prices react stronger to U.S. monetary policy than both debt and stocks. This is even though one would assume that drug dealers' core businesses are less sensitive to interest rates and money supply than those of professional investors.
The explanation is likely that the sector has now become so large that it mimics the sociological tendencies to cycles that surround the rest of society. It has become a society in itself and has found legitimate uses, especially in Asian countries. According to users (Vox), this is mainly because Bitcoin is more convenient to pay with in many countries. Central banks' CBDC projects are, in other words, far behind market demand.
Overall, it is a vast market that is beyond the control and tax base of the authorities. Therefore, Congress' approval risks opening a floodgate for tax evasion, money laundering, and evasion of international sanctions (SWIFT) for individuals and companies.
Congress was fully aware of this risk. Yet it still approved crypto ETFs. Was it short-term, was it a transitional solution until the Fed's own CBDC alternative is fully developed? Something else?