There is so much written and said about crypto today, and it is hard to differentiate hype from substance. Following a recommendation from The Economist, I turned to this book, 'Cryptocurrency and the future of many', by Eswar Prasad, Economics Professor at Cornell.
This book is very well written, clearly explaining very complex topics from distributed ledger technology to central bank policies. It puts it all in the larger context of money, governments and trust. Having said that, perhaps it does underplay the short term opportunities for crypto fortune making and thus the volatility that they could unleash for the broader economy. However, what does come across very strongly is the fundamental role of trust in money, and how our entire system is at risk if significant value is associated by significant numbers of people to private forms of money. Over the longer term, that seems unlikely for the reasons Prasad articulates in the book. But the technology likely still has significant opportunities. p.189 " ...by parceling out the various functions, cryptocurrencies have already changed the nature of money. Fiat money bundles together multiple functions as it serves as unit of account, medium of exchange and store of value. Now, with the advent of various forms of digital currencies, these functions can be separated conceptually"
He lays out the 'bedrock' as he calls it. That we are certainly going to continue moving to a cashless world, which then blurs the boundaries between fiat currencies and other currencies. But interestingly, he probably sees a far longer path for cash in the US and other 'reserve' currencies today. While others may move faster to fully digital money, that does expose them to the risk of even greater volatility than has been seen when capital flows move across countries, particularly emerging economies. China seems to have been pushed to making a more substantive move towards a CBDC (central bank digital currency) due to it's less developed commercial banking system and the success of private companies for retail payments through Alipay and WeChat Pay.
He provides a very helpful primer on cryptocurrencies and blockchain technology. He goes deep into many real world experiments by countries, central banks and private firms. In some ways, it feels like these technologies have been embraced more fully than I realized. At the same time, those experiences seem to have already confirmed that there are severe limitations to cryptocurrencies as money for daily transactions. Instead, the technology itself has some very interesting applications for the infrastructure of money and finance. The jury seems to be still out on whether bitcoin and others become reliable stores of value vs gold and fiat money. p.188 "While cryptocurrencies are a tempting target of derision, it is less easy to dismiss them given the sums of money involved... But it is also worth keeping in mind that these are just notional levels given how little trading activity there is in many cryptocurrencies. If a number of holders ... were to attempt to get rid of their holdings ... the value could plunge to nothing in very little time."
Prasad has a really interesting, and topical, perspective on the impact sanctions can have on the dollar's predominance in a section 'Is the Dollar doomed?' He quotes Jack Lew on p297 "Sanctions should not be used lightly... The risk that sanctions overreach will ultimately drive business activity from the US financial system could become more acute if alternatives to the United States as a center of financial activity, and to the US dollar as the world's preeminent reserve currency, assume a larger role in the global financial system... The more we condition use of the dollar and our financial system on adherence to US foreign policy, the more risk of migration to other currencies and other financial systems in the medium-term grows." Wow.
In Foreign Affairs magazine, Justin Muzinich echoes some of these same themes in his essay "America's Crypto Conundrum". He makes the sensible point that US policymakers should move quickly to come up with a balanced framework, preserving the market's ability to innovate without sacrificing the government's capacity to perform essential functions. It seems clear that there is plenty of opportunists taking advantage of many through speculation around cryptocurrencies, coins, NFTs and other blockchain related applications. It seems clear that there is plenty of fraud and bad actors taking advantage too. The fact that the government can't decide who oversees these needs addressing fast - whether these are securities, and so under the jurisdiction of the SEC, or commodities, under the CFTC.
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