Some states formalize cryptocurrency transactions, while others are working on digitizing their national currency. Does this enthusiasm herald a radical transformation of the monetary system? Decoded.
There is a lot going on on the crypto planet. So much so that the madness is now affecting some states. While Venezuela follows in El Salvador’s footsteps by formalizing bitcoin transactions, China and the United States are working on a digital version of their national currency. Which fuels the rumors of a digitized economic war for control of international trade. Last July, the European Central Bank also announced the launch of a consultation to assess the relevance of a digital euro. Will Cryptos ever make a takeover bid for the printing press? Some answers with Amaury Betton, passionate about financial innovation and founder of Open Letters, a newsletter about the future of the economy, finance and investing.
What is the interest for El Salvador and Venezuela to formalize bitcoin transactions?
AMAURY BETTON: The countries that are tempted to adopt cryptocurrencies are usually those that do not have a national currency, or those in which the national currency is depreciating sharply. El Salvador falls into the first category. Since 2000, this country has only used the dollar and has only suffered from low inflation. But the pandemic seriously affected the Salvadoran economy and caused a recession. Recently, bitcoin has become the second local currency, along with the dollar. This adoption of benchmark crypto as a national currency serves two main goals. The first is to strengthen financial inclusion, since a large part of the population is unbanked. The second is to facilitate cross-border payments, especially for transfers made by the diaspora living abroad and on which the country is highly dependent.
In Venezuela, the adoption of crypto assets is being considered to protect against currency depreciation resulting in devastating hyperinflation. The argument is simple: a private currency would be a better means of payment than a state currency. But this is only an interim solution that masks the true economic difficulties of the country. Because, in my opinion, cryptocurrencies are highly unlikely to take hold in countries where the currency is strong and exchange rates stable.
What to think of the withdrawal movement towards cryptocurrencies that we see in Lebanon, in a bloodless economy?
AB: Lebanon experienced a severe banking crisis that later turned into an economic crisis of considerable magnitude. The currency was totally devalued, causing very high inflation. Somehow, Bitcoin fills the void left by totally discredited local financial institutions. It is the same pattern as with Venezuela. But again, Bitcoin will not magically correct the country’s endemic problems of elite corruption and disintegration of the state. Therefore, the rise of crypto assets in Lebanon is only related to this economic collapse.
What are the risks of embarking on such a venture, particularly in terms of sovereignty?
AB: Countries that want to adopt private crypto assets should carefully consider the balance between the potential benefits and the very real risks of such a decision. There are legal risks: Third countries may reject crypto assets as a means of payment or refuse to convert them into “recognized” currencies. There is also a strong ecological risk, as bitcoin mining requires a lot of electricity. But also a risk of financial integrity, linked to the fluctuation of asset prices and the fact that they are used to launder money. And finally, an important risk that is the loss of monetary sovereignty, which is delivered to private actors. I would also add a final observation: the value of a crypto is not related to the real economy of a country. This can promote bubble phenomena and jeopardize economic stability.
Is the cryptocurrency boom competing with the sovereign monopoly of currencies?
AB: The original ambition of bitcoin was to “fix the monetary system” after the subprime crisis and the discredit suffered by banks. However, it is clear that it has not been established as a means of payment since it is still very little used in the financial sector or in day-to-day transactions. Bitcoin and similar crypto assets have primarily become investment and portfolio diversification instruments. As they are very risky, they can offer very high potential profits … but also, on the other hand, large losses.
However, central banks around the world have understood the interest of the blockchain technology on which crypto assets such as bitcoin are based. Also, Bitcoin with a capital “B” designates the blockchain itself. This is the reason why these institutions intend to develop, or at least study, the implementation of central bank digital currencies (MDBC), a digital version of national currencies. Now we are talking about digital yuan, eNaira for Nigerian currency and soon edollar or digital euro.
Can MDBCs, or state cryptos, be part of the monetary system for a long time or are they doomed to remain just objects of speculation?
AB: CBMs are not designed to be speculative objects, unlike private cryptos that voluntarily or involuntarily play this role in the financial world. The first goal, on the contrary, is to provide a complement to existing payment offerings and disrupt the frenzy around private cryptocurrencies by taking over the technology they carry.
After banning its use, China is preparing to launch its own virtual currency: is this a radical change or rather a way to guarantee a state monopoly in this sector?
AB: China is indeed one of the toughest countries when it comes to regulating crypto assets. On the one hand, it seeks to appropriate blockchain technology, but also to eliminate competition to meet two objectives. Domestically, a digital yuan would allow China to outshine national tech giants, BATX (Chinese GAFAM), which are now the largest payments players in the country. Externally, China hopes, with the digital yuan, to be able to end the hegemony of the dollar in international trade. In fact, the dollar represents more than 60% of world reserves, compared to only 20% of the euro and 2% of the yuan. However, it is still used in the vast majority of international trade. The low level of the yuan in the world monetary system is therefore contradictory to the Chinese goal, which is to become the world’s leading economic power. But nothing says that the launch of the digital yuan will close this gap. Especially since an edolar will also see the light in the coming months.
Can we consider having a state crypto one day in France? Could the issue become a presidential issue?
AB: The question in the 19 countries of the euro zone is whether a digital euro would make sense. This is precisely the challenge of the investigation phase launched this summer by the ECB. The central bank will make a floor for two years to assess the viability of said project. A digital euro could be used to better control monetary creation, improve the effectiveness of monetary policy and facilitate payments between the countries that make up the area. It would be very appropriate for a candidate to address the question. From a personal point of view, I find it very regrettable that no politician talks about blockchain or financial innovation. However, these are critical issues for our future.
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