Is the big crypto debate any different this time around?
Cryptocurrencies will replace fiat.
Banks, and even central banks, will be disintermediated. Volatility and risk will dominate the day.
And, if people don’t have access to bitcoin or other crypto alternatives they want, there will be riots on the streets.
Or maybe there will be an orderly transition to a coexistence between sovereign currency and cryptos. The traditional banking system will evolve, embracing blockchain and a wave of innovation that will be as radical as anything that has been seen in the past three decades.
Circle CEO Jeremy Allaire and Kenneth Rogoff, professor of economics and Thomas D. Cabot professor of public policy at Harvard University (and co-author of the best-selling book “This Time is Different: Eight Centuries of Financial Folly “), told Karen Webster that fears of systemic risk as cryptos take root around the world are not as great as some might fear.
This does not mean that the environment is risk free. But regulation will be needed, along with early warning systems that will raise flags to make sure this time is really different.
The conversation took place against a backdrop in which venture capitalists have invested tens of billions of dollars in crypto-related businesses so far this year, with more than 540 transactions in 2021 to date. Beyond these venture capitalists, payment heavyweights such as JP Morgan, Citi, Visa, Mastercard, PayPal and others have invested and developed the crypto ecosystem.
What VCs Want
Investors want to stimulate, participate, and get a return on investment (ROI) from what Allaire has said is infrastructure development that rivals the development of the web itself or the advent of smartphones.
At a high level, he said, cryptocurrencies “are pervasive technology – actually a new operating system, with layers being built for the Internet. The value of the public Internet is truly there. deep and enables an incredibly diverse range of applications. ”
Among investors, Allaire said, “they’re trying to grab the tiger by the tail, so to speak, and enter a sparkling market. The promise they pursue could be likened to the “10x effect,” in which things can be turned and improved into leagues – with disruption added to the mix.
Crypto is keeping that promise for economies as a whole, according to Allaire. Banks, at least for now, are trying to offer high net worth clients a range of ways to buy synthetic bitcoin derivatives, while the innovation lies in small, non-traditional financial services players.
Scale can come quickly in the midst of innovation. Allaire said that with blockchain networks in place, USDC stablecoins can transact at around 50,000 transactions per second, with a finality of 400 milliseconds, and transactions cost a fraction of a dime.
“It’s on a linear growth path,” explained Allaire. “Storing value, moving value and integrating it into different forms of financial contracts can become a commodity, a free service on the Internet, like data and content. “
Digging a little deeper, these crypto developers, exchanges, issuers, and blockchain companies are still grappling with growing pains that mark the early stages of any new industry.
Rogoff said, “It’s a bit of the Wild West, and they’re all under the umbrella of cryptocurrencies, but they’re completely different animals.”
Circle stands out as a company that has focused on issuing stablecoins, particularly USDC, but has expressed its intention to become a regulated bank. It is now targeting a new business model as a preventive strike to anticipate the direction that the regulatory framework is taking.
Financial Stability Board members around the world have said that global stablecoins, according to Allaire, “look, smell and smell more like large-scale banking and payments, and should be treated that way.”
Circle’s USDC has grown from $ 4 billion in circulation a few years ago to $ 33 billion today – and it’s on its way to hundreds of billions of dollars in circulation, according to Allaire.
As for the banking app, he said, “We don’t intend to operate a fractional reserve lending business. We want to take these dollar deposits. We want to keep them in full reserve. We want to work with the federal government to determine the right kind of liquidity reserve clauses. “
Winners take it all
The winners of the game will be the companies that learn to be what Rogoff has called “pro-regulation.”
No matter where you look, this regulation is coming, as policymakers contemplate the potential of crypto at the scale of billions of users and immense amounts of value to be transferred between lending and payment activities.
For now, there may be concerns about a systemic crisis, at least on the part of some observers. Indeed, Rogoff’s famous 2009 book, “This Time It’s Different,” chronicles centuries of financial crises that shook nations to their economic nuclei. But importantly, when it comes to cryptocurrencies, some things are really different.
One of the reasons cryptos are worth so much (even given the volatility), according to Rogoff: Interest rates are about zero, and investors and speculators are looking for returns.
“I don’t really see how crypto could cause a systemic crisis because it is not yet regulated,” he said. “It’s not like a banking system goes down… if bitcoin goes down to $ 1,000 tomorrow, it would really be like a falling stock. From a systemic point of view, it would really only be a bullish. shoulders. “
Policymakers are rightly worried about how to regulate the sector, which businesses will grow large enough to qualify as “systemic” and the risks involved, he said. Allaire said current and future concerns would focus on money laundering and tax evasion.
It’s the specter of cheating governments on their due that could seriously trigger regulation, Rogoff said. There is simply no way for policymakers to sit idly by indefinitely while a vehicle grows if it is used to dramatically reduce government revenue.
Chasing currencies that have been around for centuries is utterly naïve, said Rogoff, who co-authored the “G30 Paper” that examined digital currencies made up of bitcoin and its brethren,
“There is a giant financial infrastructure, which is very efficient in some ways, but very inefficient in other ways,” he said. “And there is always change. And that’s a really big deal. “
Countries like El Salvador can experiment with bitcoin, but the idea that individuals and businesses can bypass this giant financial structure is folly.
As Rogoff put it, “If you play a game with the government where he can keep changing the rules until he wins, you’re going to lose.
That’s not to say that there won’t be friction as cryptocurrencies evolve, Allaire said. After all, even where autocratic governments are in place, there has been access to the Internet (albeit with censorship). Governments could say cryptos are illegal, Allaire said, “but people are smart” and will find their way to VPNs.
“You could actually have a civil conflict that starts to emerge because people and entities want to participate in a different economic system… Internet digital currency will overturn some forms of monetary sovereignty,” Allaire said.
Ultimately, he predicted, governments will capitulate and keep non-sovereign and digital currencies on their balance sheets.
Rogoff countered that if this were to happen – a very big if – it would happen with much smaller nations, where the state’s ability to control things is limited. As an example, he cited Venezuela, where sanctions have been imposed by other countries and where there is at least some desire to circumvent those sanctions (and in some cases support the development of underground economies. ).
For cryptos to coexist and become an inherent part of the financial services ecosystem, Allaire said the evolution must include interoperability with the Federal Reserve’s account infrastructure, the Fed’s payment rails and the international financial infrastructure.
“We are constantly scrutinized by governments,” he said. “We are audited by large accounting firms and their autonomy as well. Self-governance around technology standards, information, security, cybersecurity compliance and transparency is really essential. “
Rogoff said central banks around the world are looking at central bank digital currencies (CBDCs) – and the question remains, “How far do we want to go?” What does the public think about the central bank having full control over what is private and not private, or would you like there to be an intermediary between you and the government? “
For now, innovation is coming from the private sector, while Rogoff said policymakers need to tackle what they think the world of digital currencies should look like.
As Allaire said, “smart money, if you will, is really focused on building an Internet infrastructure that will generate very significant value and new types of businesses and business models over the next five to five years. next ten years. “