You could make a strong argument that the most important economic or financial development of the last decade is the advent and growth of crypto currency. This new form of currency is appealing because it is anonymous, online, independent of any central authority, and driven by a growing global network of miners (who ‘produce’ the coins through complicated computing processes) and investors.
Once a quirky innovation on the fringes of the internet, crypto currencies have now become a ubiquitous part of mainstream culture and finance. The most valuable crypto currencies, like Bitcoin and Ethereum, are worth tens of thousands of USD per coin, and the entire circulation is worth around $2 trillion. Accordingly, the commentary surrounding crypto currency, both positive and negative, has inflated tremendously.
I was, and to some extent still am, in the grumpy-armchair-cynic camp, questioning the advantage and relevance of crypto currency. But I have gradually come to appreciate that it must be taken seriously. It belongs as a chapter within the long-term story of money, if for other reason than many millions of people are earnestly trying to get rich off of it.
This article is not a historical deep dive into the origins and development of crypto currency. Because, for one, I am far out of my depth with this subject, and I also don’t think that would be very interesting. Instead, I am drawn to crypto's larger purpose: to overtake and replace traditional, government-issued currencies. This goal is inextricable from the concept of crypto itself, as the very first crypto, Bitcoin, came with an attached White Paper written by its shadowy, messianic founder, Satoshi Nakamoto. Here, I want to offer some brief thoughts on the extent to which crypto will achieve this goal.
Let’s start with success. In one sense, crypto’s success has already been acknowledged: it is spreading, gaining consumers and institutional recognition. Like many other financial innovations that have come before it – like the first joint-stock companies in 17th century Holland or the advent of credit and debit card payments – crypto currency is unlikely to persist in exactly the form we currently find it. But it is downright impossible that it simply disappears.
Governments have had to respond. They have issued their own digital currencies, developed their digital financial infrastructure, and some are even moving to make certain cryptos like Bitcoin legal tender (El Salvador has already done so). At the very least, the meteoric rise of cryptos has prompted considered self-reflection amongst central bankers on what innovations and changes they might bring over to their own currencies.
In short, the world of currency is getting a major update. Many ordinary people are reconceiving the foundations of value, putting more faith in encryption and amorphous online structures than the traditional apparatus of government. Remember, every crypto transaction represents an exchange of ideas as well as an exchange of monetary value. So even if the party ends, with crashing markets and sparse wallets, the long-term legacy of these reconceptions is sure to be profound.
Simultaneously, crypto is bound to fail. It will never wholly replace traditional currency, nor do I see it becoming the dominant medium of exchange or store of value. Because one of its inherent tenets, anonymity, is also its greatest handicap. Because of the inherent anonymity of all crypto exchanges, the risk and potential for criminality will always be overpowering. This might seem preposterous to a crypto influencer or investor, but its true.
This might be utter balderdash on my part, but I think that most people don’t like risk, because most people can’t afford risk. Rightly or wrongly, people need their monetary lives to feel interwoven with a broader system, where their money is represented by a voice and a place. For most people, faces matter, accountability matters.
The other crux of crypto’s failure is government: no strong government would ever, ever give up its currency monopoly without fighting tooth and nail. Money is the alpha and omega of everything else governments want to do. And the second crypto interferes with that, the red tape will come out. We already see it happening. China recently banned crypto mining, the SEC in America is starting to rev up strict regulations, and many countries in Europe are building new bureaucracies to rein in the excesses of the crypto market.
Put differently, the control of currency specifically is a stand-in for government control generally; it is part of the foundation of the social-political contract. Accordingly, one cannot change independently of the other. If a government’s currency monopoly weakens, if a government cannot control the medium by which exchange and transaction occurs, then the government itself weakens.
Now, in theory it’s perfectly possible for the role or function of government to shift or even decline; it happens all the time. But for such a thing to happen in strong, democratic states like the US or in the EU, it takes a lot more than I think crypto can really muster. Crypto currencies exist in a loose, floating network of mostly anonymous actors. Set against the determined will of central governments who know exactly what they want to accomplish, it’s unclear how cryptos could continue to flourish.
I do not mean to exaggerate government control, and obviously nothing on the internet could ever be truly blotted out of existence. We are still in the early stages of this phenomenon, and my armchair might be interfering with my judgment. But I do feel strongly that government jealously and regulatory heft is inevitable. Moreover, it will form the permanent ceiling on the potential of crypto currency.
What would happen then is anyone’s guess. Crypto might yet find other avenues to burst through the cracks, fulfilling all the dreams of its most ardent supporters. In fifty years, or a hundred years, maybe the goal will be achieved. That is, assuming that Nakamoto’s goal remains crypto’s goal in the decades to come.