Crypto what?

As an expert in payments – or banking & financial services more broadly – I am often asked by my friends and family about what I am doing exactly. I try to explain but very often loose their attention… until I talk about crypto and Bitcoin. They guess I should have an opinion on new trends. That is a good point.

A friend asked me about cryptocurrencies. She interpreted « crypto » as coins somehow manufactured in a crypt, so pretty much « dark » money. First thing, that reminded me to remain openminded and fresh when discussing banking and financial issues with « normal » people and not being condescending. Second, it appeared to be an issue to explain with simplicity crypto-currencies. Crypto and new currencies. Without getting back to History and transition from gold coins to paper and banks.

What are we talking about?

Basically, cryptocurrencies are similar to local currencies, issued and managed by a certain technology (cryptography) and available via an app on a phone, whereas local curencies or – as their name explicits – local that promote circular economies.

These currencies aim to be a mean to exchange value between people.

Bicoin? Diem?

Another question is whether Bitcoin will replace the US dollar or Euro as a global / universally accepted currency.

First thing to know is that the choice of a currency at a global level depends on the decision of corporates – especially suppliers.

There are already lots of reasons for currencies to be global – or not – and among them anti-money laundering (AML/FT) regulations take a huge place. Trying to know who does what – and putting the banks at the first row in that surveillance – have had a huge influence in the landscape. Newcomers are often put under great pressure in that regard (see N26 and BaFin recently) whereas their agility as newcomers might be somehow due to less strict application of regulations than « older » players.

Diem deciding to reduce the sail to the US is experimenting this context.

Bitcoin – and the other 600 crypto currencies – built global from scratch, spent its first decade outside the « traditional » financial system, giving the path for being a potential global currency. Will it replace fiat currencies? Difficult to say, whereas many aspects will influence its capacity to take this role. I have of course my opinion as an economist on how it should be.

Let me suggest some ideas for YOU to make your opinion.

Some ideas to reflect on

1- A good currency should be relatively stable, and knowing it can fluctuate (see the recent Musk thing) is not a good news for users. It is a good news for investors and speculators, but less for corporates buying and selling good crossborder and needing to have stable prices between order and payment.

2- Change btw Bitcoin and other currencies (USD, euro, Yuan) remains mandatory so sensitive to value change. In other terms, Bitcoin is too small to be good, yet.

3- Bitcoin is being taken into consideration by traditional players, but mainly as an investment (speculation) product and is being integrated into investment strategies.

4- This is less a way to promote it at a currency than the initiatives promoted by payments providers (Visa, Paypal…) to assume payments – change – with Bitcoin.

5- In some countries like Nigeria, Bitcoin’s use is forbidden by authorities but still largely used. What would be the impact in terms of consumer protection whether a problem occurs? Even if blockchain technology is highly secured, we know from History that anything built by human/machine can be hacked, what would the consequence for users who loose their wallet?

6- More globally, if Bitcoin is considered as a speculative product, loosing value would be ok for well aware investors, but could we accept it when it impacts less wealthy households in emerging countries?

7- Finally, all these cryptocurrencies rely on few infrastructures (Bitcoin, Ethereum, Stellar…) that could be put under pressure by the large development of usage and volumes. Stellar already encountered shortages recently.

Conclusion

To conclude, nobody knows about the future of Bitcoin and cryptocurrencies, but this remains an amazing evolution of the system – and a major step in globalisation.

What I know for sure is that Financial education/literacy is key to make people well understand the RISKS and opportunities of such products. Like my professor at the University taught me many years ago « There is no free lunch » in Finance.

RIP Georges Gallais-Hamonno.

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