Ponzi scheme! South Sea Bubble! Tulip mania! The dotcom bubble! These are some of the dramatic comparisons being made with the rise of cryptocurrencies and the blockchain. But Kevin Phillips has a different view.
There are many reasons why companies like, famously, Kodak and Blockbuster, went bust thanks to being overtaken by their competitors’ innovation. Arrogance, ignorance, being slow to adapt, and analysis paralysis are just some. But I wonder how many also displayed an element of the Shirky Principle? This is named after the digital commentator and writer, Clay Shirky, who said: “Institutions will try to preserve the problem to which they are the solution.”
I’d argue that this principle is driving much of the moral panic around cryptocurrencies from governments, regulators and the financial services industry. To be sure, banks around the world are looking at how they can apply blockchain technology, which underpins cryptocurrencies, internally – but this is a very different beast to the free-range, decentralised blockchain applications driving cryptocurrencies outside of the banking fraternity.
For one thing, the concept of a cryptocurrency casts a spotlight on just how fragile the notion of money really is. The traditional fiat money system, used around the world today, really is a legal fiction. The word “fiat” is Latin for “let it be done” and that is exactly what happens: governments and central banking authorities assign value to an essentially valueless item. It all works because a network of ledgers controlled by banks around the world keeps track of transactions.
But, putting things that way, this sort of sounds quite a lot like cryptocurrencies as well. So why the panic? Well, instead of a central authority, i.e. a bank, holding all the power and validating and recording transactions, any group of people can do this anywhere in the world. And this means that transactions can take place faster, and more cost-effectively.
Good news for anyone transacting, which is a whole lot of us. But not really that great news for banks, who, up until now, enjoyed the opportunity to triple dip every time, for instance my business transfers money around the world. Currently, banks get paid once by me, and then win again on the exchange rate (you always get the worst available), and a third time by when the money vanishes from one account before re-appearing in another several days later… (Where is my interest on that money?)
Of course, consumers need to be protected from fraud, and criminal activity needs to be stopped, as with any monetary system. But as the cryptocurrency space gets regulated and brought into the mainstream, we’d do well to avoid getting sucked into a moral panic manufactured by those that have the most to lose.
Food for thought
We don’t think twice about what happens behind the scenes for transactions to take place: whether we are tapping a credit card, snapping a QR code, approving a bank transfer, or shopping online. We don’t bat an eyelid when we’re halfway around the world, put our card into an ATM, have the correct amount of foreign exchange emerge into our hands, and have our bank accounts debited with the right amount, plus a few charges, obviously. All instantly. Think about it… what is the difference with a cryptocurrency?
As published in ASA Magazine – March 2019