How will cryptocurrencies impact national currencies? - a $120 billion question

Are cryptos going to threaten and disrupt national currencies?

How will cryptocurrencies impact national currencies?
- a $120 billion question


For some, the answer is obvious. ”The world ultimately will have a single currency, the Internet will have a single currency. I personally believe that it will be Bitcoin,” Jack Dorsey, CEO of Twitter and payment processor Square, famously declared in March 2018

Others, like the Indian government, express fear that cryptos may already ”destabilise” their national currency. And in a way or another, cryptocurrencies are a stone in the shoe for most governments and regulatory institutions. ”The rise of distributed-ledger technologies and the peer-to-peer concept of private digital money challenges the raison d’être of central banks, which for centuries have dominated currency issuance,” noted Bloomberg last year.

But what are (or could be) the main impact of the rise of cryptos on money issued by banks? There is probably no direct answer to that, but it’s possible to provide parts of it.

(by Chris McCann – Medium)

Size matters

As of this writing, the 2,000 existing cryptocurrencies are globally weighing $121 billion. How big is this number? 

On the one hand, it is small compared to traditional currencies: to speak only of physical money (the amount of notes and coins in circulation, also called M0), there is about $5 trillion in the world. Cryptocurrencies therefore represent only 2.4% of physical fiat money, and much less if you take into consideration other forms of money, sitting in checking or savings accounts for instance.

But, on the other hand, this amount is far from negligible. The current value of cryptocurrencies is equivalent to the GDP of countries like Ukraine or Morocco. Which means that all crypto-currencies owners combined represent a biggest wealth, by GDP value, than any of 130 countries.

And this is during a ”bear market”, also called a ”crypto winter”, that saw most cryptos losing a significant part of their value in the last couple of months. In January 2018, Bitcoin alone reached a market cap of more than $300 billion. If Bitcoin was a country, it would have been at this time in the Top 40 of the richest countries by GDP. 

Many analysts are predicting the end of the crypto winter, and some industry leaders have expressed very optimistic views: Dan Morehead, founder of investment firm Pantera Capital, said last year that the crypto market cap could reach $40 trillion, while Tim Draper, venture capital investor and founder of Draper Fisher Jurvetson, predicted last September that the total market capitalization of cryptocurrency would ”reach $80 trillion in the next fifteen years.” If this was the case, cryptocurrencies would simply dwarf the amount of physical fiat money and their impact on national and global economies would be obviously significant.

Money or not

To assess whether or not cryptocurrencies can have an impact on national currencies, it could help to figure out if the former are currencies (or money) in the first place. The least we can say is that opinions diverge on this.

In France, officials strongly reject the use of the word ”crypto-currency” and insist on referring to Bitcoin, Ethereum, Litecoin or any other cryptos as ”crypto-assets”. ”Crypto-assets are not currencies, as they don’t provide the three essential functions of currencies – store of value, means of payment, and units of account,” the Banque de France (French central bank) explained. And the government, after commanding a detailed report on cryptocurrencies this year, is working on some complex tax schemes and regulations of crypto-assets. 

Things are quite different in Germany, where an official ruling from March 2018 established that “so-called virtual currencies (cryptocurrencies such as Bitcoin) are considered equal to the legal means of payment, as long as they have been accepted as alternative and contractual means of payment by the parties involved in the transaction and have no other purpose than being used as a means of payment.” Other countries have adopted regulations in favor of cryptos: Bitcoin is a legal tender in Japan since March 2017 and Australia established in July 2017 that digital and cryptocurrencies will be treated ”just like money.”

Bitcoin is a legal tender in Japan (Shutterstock)

The worldwide legal situation of cryptocurrencies is therefore complicated. As stated by Investopedia, ”Many countries are still analyzing ways to regulate the cryptocurrency. Overall, Bitcoin remains in a legal gray area for much of the world.” It’s fair to say that most governments are struggling to cope with crypto-currencies.

Bitwage, a service allowing companies to pay their contractors in crypto-currencies, has a userbase of 20,000 and expanded to let companies pay salaried employees in cryptos

In the meantime though, the crypto-ecosystem is developing. Plenty of merchants accept crypto payments: from plane tickets to vaping gear or VPN services, pretty much anything that can be bought online can be paid in Bitcoin or other cryptos. Crypto-banks, that had been put on hold in January 2018 after the failure of a major Visa card issuer, are now flourishing: Wirex, Bitwala, MCO, TenX and others are offering crypto-wallets linked to standard Visa or Mastercard bank cards, allowing anyone to spend their cryptos at any physical shops around the world, as they would with fiat money. Bitwage, a service allowing companies to pay their contractors in crypto-currencies, has a userbase of 20,000 and expanded last month to let companies pay salaried employees in cryptos (while staying legally compliant). And, in the US, after the state of Ohio started to accept the payment of taxes in Bitcoin last October, the states of Indiana and New Hampshire both introduced similar bills in January this year, that will allow crypto-currencies to be paid and accepted as taxes. By the way, the state of Wyoming also adopted on February 11, 2019 a new bill fully legalizing crypto-currencies. ”Virtual currency is intangible personal property and shall be considered money,” the bill reads. 

If an increasing number of people can buy goods and services in Bitcoin, couldn’t we agree that Bitcoin is a de facto currency? (Credits: Pixabay)

If an increasing number of people can have their salary paid in Bitcoin, buy goods and services in Bitcoin, and pay their taxes in Bitcoin, couldn’t we agree that Bitcoin is a de facto currency? And if so, we should probably (or  logically) expect a substantial effect of cryptocurrencies on the use – or decline – of national currencies.

National cryptos

Speaking of which, a few countries have embraced cryptos – to the point of creating their own. 

In February 2018, the Marshall Islands, a tiny independent nation in the Pacific Ocean, issued a ”Sovereign Currency Act” introducing a new blockchain based currency called the Sovereign (SOV) and destined to become “a legal tender of the Marshall Islands for all debts, public charges, taxes and dues.” It may sound anecdotical, but it’s not if you consider that this could lead to ”the world’s first crypto that is [officially] real money.” Although the project seemed to have stalled (crypto winter again), the team in charge detailed its ambitions earlier this year. ”We plan to develop an ecosystem in the Marshall Islands, which will attract existing and new banks, exchanges, and startups to operate physically and virtually from the Marshall Islands and grow a new industry there with a friendly and inviting regulatory framework, served with a native sovereign cryptocurrency,” the team explained last month, confirming that the SOV will be launched later this year.

National cryptos can also be used to circumvent markets and trades limitations or sanctions. That’s what the Venezuelian government is trying to do with the Petro, a crypto-currency supposedly backed by the country’s reserves of oil, gasoline, gold, and diamonds, launched in February 2018. Although the Petro can be bought right now (with Bitcoin or Litecoin), it is a controversial and quite confusing project that looks like an ongoing telenovela in itself. For one, No One Knows What Venezuela’s Petro is Actually Worth, as noted by CCN last month. Still, at least on paper, the Petro has the legit ambition to increase economic stability and financial independence of a country in turmoil, while allowing the ”creation of a freer, more balanced and fairer international financial system,” all that thanks to a crypto-currency.

For Thomas Coughlin, CEO of Allocated Bullion Exchange, stablecoins are simply ”the money of the future” as they have ”the potential to transform the cryptocurrency scene and move blockchain technology into the mainstream.

In stable we trust

Others are more focused on another breed of national cryptos: stablecoins. 

Pegged to fiat currencies and therefore showing a permanently stable value by design, stablecoins such as Tether have been used for a while. They offer a low volatility compared to regular cryptos, while pertaining some of the benefits of blockchain-based transfers of value. As more and more stablecoins appear on the crypto-markets (Stronghold USD, USD Coin, USD Vault, Dai and many others), several countries seem to be attracted by the idea, including China and Russia that have both expressed their intention to create their own stablecoins in a near future. And this could be a big deal. For Thomas Coughlin, CEO of Allocated Bullion Exchange, stablecoins are simply ”the money of the future” as they have ”the potential to transform the cryptocurrency scene and move blockchain technology into the mainstream.”

All this is happening in a context where central banks are seriously considering moving to electronic forms of money – or ”Central bank issued digital currencies (CBDCs)”, as they are officially labelled. The International Monetary Fund (IMF) issued a detailed report on the subject in November last year, assessing the benefits and potential risks of replacing existing fiat currencies with fully digital systems. Clearly, the IMF is not ultra favorable to cryptos. The word ”blockchain” does not appear a single time in the 39-pages report, while the three main existing cryptocurrencies, Bitcoin, Ethereum and Ripple, are (briefly) mentioned twice and considered to ”struggle to fully satisfy the functions of money.” Later on, the report gives scores to different possible solutions of electronic money according to several criteria. Cryptocurrencies get a ”Low” for 6 out of 9 criteria, with some highly debatable mentions (cryptos are judged ”not suitable for large payments,” offer ”limited services through exchanges,” or ”do not allow interest returns,” all things that could easily be proven wrong). For the IMF at least, existing cryptocurrencies or newly created stablecoins (which are also absent from the report) are neither a promising direction nor a threat to standard currencies. 

No more cash

In any case, the disappearance of physical money is on the agenda. ”Paper money is going away, and crypto is a far better way to transfer value than pieces of paper, that’s for sure,” Elon Musk, CEO of Tesla and SpaceX, commented in an interview. With this evolution, many argue that we will need true, decentralized cryptocurrencies more than anything else.

For Arthur Hayes, former trader for Deutsche Bank and Citibank and currently CEO of Honk-Kong based crypto-exchange BitMex, it makes no doubt that we are heading toward a cashless society, as ”government after government will gradually make physical cash obsolete.” For instance, Sweden’s central bank, Sveriges Riksbank, may be among the most advanced countries on the subject, with the e-krona project, a CBDC that could soon replace the existing national Krona. 

E-money will be efficient and convenient, but it will not change the key paradigms of today’s monetary system – and could actually make it worst

E-money will be efficient and convenient, but it will not change the key paradigms of today’s monetary system – and could actually make it worst, as ”physical cash has been the best form of money with respect to privacy,” he noted. ”A digital society requires digital cash. But there’s a very big difference between a truly decentralised cryptocurrency like Bitcoin and what could be called centralised ‘e-money’,” Hayes wrote in January, concluding that ”Bitcoin, or something like it, is perhaps society’s best hope for a private form of electronic money.” 

In a short essay published this month, two independent researchers (including So Zhu, CEO of FX Hedge Fund Three Arrows Capital), share a similar view. ”The elimination of cash, even if most payments are already digital, will make society more vulnerable to surveillance, financial control, and authoritarianism,” they wrote, arguing that ”we more than ever need Bitcoin to succeed, as it is a hedge against high inflation and against the demonetization of cash and the rise of the cashless society.” 

In a way or another, money as we know it is meant to evolve. It’s highly probable that crypto-currencies are here to stay and that they will have a significant impact on national currencies and economies. In many aspects, they already have. Whether the money of the future is a simple e-cash solution, a centralized, government-issued cryptocurrency (stable or not), or a more liberal version such as Bitcoin is another story. At the end of the day, the choice will be ours.



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