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Has cryptocurrencies' charm changed our perspective on money?03 May 2021

Despite cryptocurrencies' rising visibility, when it comes to trust they seem inferior to government-backed notes in pocket

Of humanity’s many inventions, money is perhaps the most widespread and most beneficial of them all.

The story of money is almost like the story of human history itself.

Throughout the ages, in different times and cultures, many things have served as substitutes for money, including tobacco, seashells, stones, precious and worthless metals, leather, and even cigarettes.

For Roman legionnaires, we might use the English idiom that they were “worth their salt,” as this is one way they in fact received their wages.

But having largely left these substitutes behind, now we rather have government-backed notes and coins in circulation, a setup which seems more trustworthy.

People buy and pay for things using money because they trust in its value and they know where it comes from -- namely a single, trusted central bank.

Moreover, hard currency can be employed as a way to store value and a unit of exchange.

 

Cryptocurrency or cryptoassets?

Nowadays, amid the rising popularity of cryptocurrencies, officials and the public alike in many countries are trying to figure out how exactly the cryptocurrencies work.

Some economists are also discussing whether we actually should call them "currencies" or "assets."

Breaking down the word cryptocurrency, "crypto” means “hidden” or “secret,” mirroring the secure technology employed to record who owns what, and for performing transactions between users.

The second part of the word, “currency,” tells us what cryptocurrencies are modeled on in the first place: a kind of electronic cash.

Bitcoin, Ripple, and Litecoin are among the best-known cryptocurrencies, but they differ from the money we carry around in our pockets.

Most people do not use cryptocurrencies to buy things, for example -- not bills, not taxes, not books or flowers, or potatoes and onions.

And these cryptocurrencies only exist electronically and employ a peer-to-peer system, not a tangible, physical one.

No central bank or government can control them. But does that sound risky?

 

High-profile money

According to Jon Danielsson, the director of the Systemic Risk Centre at the London School of Economics, cryptocurrencies are mainly held for speculative reasons.

"I don't really think most people have changed the way they look at money, if you were to ask your mother,” he told Anadolu Agency, using a common-sense benchmark.

“Cryptocurrencies are of course are something new, but it's just a small, tiny minority of people who know what they are."

For this reason, he argued, they do not pose much of a threat to financial stability, at least not for the time being.

For the vast majority of people who discuss it online, or buy or sell cryptocurrencies, it is all about short-term speculation, he underlined.

"They see the price going up, and they are hoping the price will continue going up by discussing it in the media and discussing in the blog pages, YouTube, and everywhere you can go,” he observed.

“You hope to create a hype that will encourage people to continue buying it. I think that is really what's behind most of the visibility today."

There are three types of people who are excited about cryptocurrencies, he said, and the largest of these groups are speculators, someone who has seen the prices going up and want to be part of a party by enjoying the benefits of rising prices.

"The second group of people are what you call a techno libertarian, which is someone who doesn't trust the government or the central bank,” he said.

For that group, having cryptocurrency is essentially a political mission, he stressed.

As for the final group of people, he added, they are looking for technological advances, as they see the financial system as inefficient, and they hope that by using high tech they can make things that are costly or difficult work better.

Lowdown on crackdowns

When we see states react to cryptocurrencies, in most places the reason for governments’ concern is that they like to control payment systems.

A payment system is how you send money from one person or one company to another, or how you send money to people in your own country and abroad.

"So what is behind the government's reaction to cryptocurrencies in most places is a desire to keep this money flow under government control," according to Danielsson.

"You see this certainly in China, India, the UK, Turkey, and Europe -- it’s always the same desire," he stressed, adding that governments like to control the payment system, and they certainly do not want foreign private firms to play this role.

Therefore, every major central bank in the world has been establishing its own central bank digital currencies, he said.

"One has to draw a very strict line between the private cryptocurrencies, like Bitcoin and all the others, and a government-owned digital currency."

Citing the historical example of PayPal, he said: "Twenty years ago … PayPal came out of nowhere, and changed the way to send money across borders, and the central banks of the governments reacted too late to PayPal, it was already established before they figured out before this was a threat."

In contrast, however, Danielsson does not see cryptocurrencies as posing any threat to most countries, since only a tiny number of people use them or are likely to.

He added that with digital currencies from central banks coming in, “I don't see the threat as coming."

Nevertheless, he warns, if cryptocurrencies find wider economic use, then that could sow financial instability and inequality.

Skeptics have also raised questions about investor protection and cryptocurrencies’ environmental impact.

"When you create new bitcoins and other cryptocurrencies, you are using an increasing amount of power, electricity,” Danielsson explained.

“Some estimates say that the amount of electricity being used to make cryptocurrencies is about the same as Switzerland uses as a country."

Bitcoin and other cryptocurrencies seem certain to attract even great debate in the future, with more and more people trying to work out whether or not they are a superior form of money and making investments.

But as with everything, what matters is trustworthiness, meaning people's assumption that the money will maintain its value over time.

But in the case of cryptocurrencies, vast swings in their value have, if anything, so far shown the opposite.

AA

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