Satoshi Nakamoto, a pseudonym for the person or group of people behind Bitcoin, has made his intentions clear: our money should not need banks, should not be controlled by anyone. The chancellor at the time was Alistair Darling, who later opened the Edinburgh Library of Errors. Dedicated to financial history and specifically how things went wrong; covers events ranging from the most recent financial crisis to the collapse of the City of Glasgow Bank almost 150 years ago.
Some may be looking at their crypto wallets after the recent crash in the crypto markets, which have fallen well below half of their peak, and wondering if the Library should leave some room for Bitcoin and the many cryptocurrencies it has spawned. I would argue, no. Bitcoin, and especially the blockchain technology it relies on, has reshaped the world of finance for the better.
Bitcoin was conceived as a form of digital gold, designed as a deflationary asset, not controlled by any individual or government, so it cannot be devalued through politics. Protection against the proposed incompetence or malevolence of central banks or governments (as evidenced by its widespread adoption in certain developing countries). However, despite being born out of the last recession in 2009, crypto has yet to be tested by a proper recession. Unfortunately, as central banks grapple with inflation and broader markets come under fire, it fails that test and the idea that cryptocurrency is immune to macroeconomic policies or serves as a hedge against inflation doesn’t look good. Why is it like that? As soon as courts and regulators began to come to terms with cryptocurrency as an asset—opening the door for cryptocurrency investors and institutions to comfortably borrow against their assets—the market collapsed. This has caused some investors and crypto hedge funds to default on margin calls. Bitcoin, and crypto in general, faltering is not news. Extreme volatility is almost a feature for those with a stronger stomach than me. However, this fall is different. While crypto markets have historically been dominated by retail investors who bought and traded relatively small amounts, institutions are now the major players and the hunt for cheap money in risky assets has been put on hold as interest rates rise and the availability of capital shrinks. This has led to a massive sell-off as risk appetite wanes and money moves into traditional, safer assets such as bonds.
It is too early to say whether they have failed like Bitcoin or will ever be a true alternative currency, but crypto technology has transformed finance. BNP Paribas and JPMorgan are among the banks using blockchain and smart contract technology with digital tokens to trade in repo markets. Abrdn recently confirmed that it is exploring the use of blockchain technology to allow retail investors to purchase digital tokens in a variety of assets. Individuals and institutions are using blockchain technology to market and trade tokenized carbon credits to increase their price and drive environmental efforts. Central banks around the world have woken up to the possibilities of central bank digital currencies (CBDCs), particularly the threat posed by privately created or decentralized global currencies. Some, like the Bank of England, are still consulting on the best way forward for CBDCs, whether for retail (effectively allowing citizens to hold deposits with a central bank) or wholesale (cross-border payments) use cases. Others, including the People’s Bank of China, are already testing CBDCs. The past 150 years have seen the rise and sometimes fall of life-changing innovations in finance, from the ATM to the credit card, the Internet to the smartphone. Crypto technology is shaping the next 150 years. This crash could be just what the market needed as an opportunity to shake off the cheap-money allure of “anything blockchain” projects, while encouraging regulators to respond more quickly to the systemic risks involved in institutional cryptocurrency trading. While some of the core principles of decentralized finance are still being tested, the innovations it brings will continue to reshape our financial lives.
Stuart Gillies is Senior Associate, Dentons