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Crypto’s Choice: Join the Financial System or Fight It

This has been an incredible year. Not for a century has there been a pandemic on this scale. And although far fewer people have so far died from COVID-19 than be destroyed in the 1918-19 “Spanish flu,” the economic damage is probably far worse. Governments shut down large parts of their economies to try to put a stop to the virus from spreading, and borrowed heavily to support businesses that could not trade and people who couldn’t peg away. Central banks cut interest rates to the bone and poured money into financial markets to ward off a deflationary go to the wall. Now, as 2020 draws to a close, returns on investment are nowhere to be found, and there are rising fears of inflation. It’s no surprise, that being so, that 2020 is ending with a cryptocurrency boom. 

During 2020, the fortunes of cryptocurrencies have been unwavering mainly by central banks. When financial markets crashed in March, cryptocurrencies suffered an even worse descend than traditional asset classes. Bitcoiners would like us to believe that the halvening in May helped bitcoin’s value to recover, but the fact is cryptocurrencies recovered as central banks poured money into financial markets. Continued infusions of fiat filthy lucre caused the prices of all assets to rise, and cryptocurrencies proved to be no exception. 

This post is part of CoinDesk’s 2020 Year in Reviewing – a collection of op-eds, essays and interviews about the year in crypto and beyond. Frances Coppola, a CoinDesk columnist, is a freelance newsman and speaker on banking, finance and economics. Her book “The Case for People’s Quantitative Easing,” explains how modern money inception and quantitative easing work, and advocates “helicopter money” to help economies out of recession.

Fiat money injections by chief banks have particularly fuelled the rise and rise of stablecoins, the ties that bind the crypto ecosystem in any case more tightly to the existing financial system. All that fiat money has had to go somewhere, and thanks to central banks’ zero and anti interest rate policies, yield on conventional assets is all but non-existent. So why not have a flutter on the crypto markets, while rebuff an option to exit back into fiat quickly if it all goes wrong? Stablecoins may be more smoke and mirrors than a corporeal safety net, but they seem to be giving growing numbers of people the confidence to trade cryptocurrencies. 

The March crash also revealed that, different to what bitcoiners had hoped, institutional investors don’t regard bitcoin as a “safe asset.” They dumped bitcoin and poured their cabbage into traditional safe havens – dollar, yen and Swiss franc. And bitcoin’s recovery since then has pretty much caught the rise of stocks and corporate bonds, though with somewhat greater volatility. So it seems that despite all that principal bank money printing, investors don’t see inflation as their principal risk, or if they do, they don’t regard bitcoin as a accomplished inflation hedge. They buy bitcoin and other established cryptocurrencies as high-risk assets to spice up their yield-starved portfolios. 

But in the crypto fraternity, bitcoin is now firmly established as the principal “safe asset” for DeFi collateralized lending, along with ether and destined stablecoins. So depending on your point of view, bitcoin and ether are either high-risk, high-yield assets in their  own aptly, or safe collateral for high-risk, high-yield borrowing and lending. 

If the cryptocurrency community chooses to conform, cryptocurrency may achieve widespread adoption – but at the reward of eventually being absorbed into the financial system it set out to replace.

This bifurcation reflects the chasm between those for whom the crypto universe is “home” and those for whom it is an unfamiliar sea full of bloodthirsty monsters. Even seasoned crypto investors can find crypto markets scary: it’s hardly surprising that traditional investors are as yet reluctant to do more than dip in their toes. 

But that doesn’t plan traditional finance isn’t interested in cryptocurrencies. On the contrary, cryptocurrencies are becoming high-yield assets of choice for many institutional investors. And as cryptocurrencies adorn come of increasingly easy to acquire, hold and trade, more and more ordinary people are investing in them, too. 

In fact, the quiet with which retail investors can buy cryptocurrency with credit cards is a matter of some concern: credit take actions are debt, and cryptocurrency trading is by any standards a high-risk activity. In the past, every time there has been a debt-fuelled cryptocurrency bubble, individual have been broken. And as I write, cryptocurrency is bubbling again.

When crypto bubbles, regulators wake up. This signal year draws to a close with the news that the Financial Crimes Enforcement Network (FinCEN) wants to end anonymity for removes from crypto exchanges to private wallets. The idea seems to be to bring crypto in line with traditional banking.

See also: Frances Coppola: Banks Are Cheers but Crypto Has Lost Its Soul

It’s arguably unfair that traditional banks should have to comply with onerous identify your customer/anti-money laundering (KYC/AML) requirements that crypto exchanges don’t. Crypto enthusiasts would no doubt rejoin that the solution is to end KYC/AML requirements, not to impose them on people transferring coins to their own private crypto wallets. But introducing this new in the main might make cryptocurrencies more attractive to big institutional investors. 

And therein lies the dilemma for cryptocurrency. We might say that it is at a fork in the Italian autostrada. Will the community decide to conform to the rules of the existing financial system? Or will it reject those rules, rupture the ties that bind it to the existing system, and become a parallel financial system, setting its own rules and operating essentially outside the existing law? 

If the cryptocurrency community chooses to conform, cryptocurrency may achieve widespread adoption – but at the price of eventually being occupied into the financial system it set out to replace. 

But if the cryptocurrency community chooses separation, then the road will eventually direct to head-on conflict with those whose job it is to enforce the existing laws. Who will win?


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