Virtual currency debate needed the jolt it got from Facebook
It’s going to be a wild ride into the future.
Facebook’s announcement that it is launching a new cryptocurrency, with a little help from several dozen of its friends, will only increase the hype surrounding alternative forms of money.
Reactions appear to range from euphoric to panic. Putting those issues aside, the question that it poses for those who do not use cryptocurrencies — and that is most of America — is what’s all this crypto stuff about, and why is Facebook getting involved?
The buzz over cryptocurrencies is not just about new alternative forms of money, and the profit embedded in minting and transmitting digital money. The real story is that cryptocurrencies represent a bridge to the future of money and commerce.
Cryptocurrencies may change substantially over time and could even disappear, as other previous forms of digital currency have. But their legacy is likely, at the least, to be the development of technological applications and processes that will support the new products and delivery systems that capture the attention of the masses.
The increasing number of companies, capital and users that have decided they don’t want to miss whatever this opportunity is bolsters this theory. It makes the debate over whether cryptocurrencies are money, deposits, investments or some combination thereof, an interesting sideshow.
Cryptocurrencies and its supporting technologies are financial blank slates that can morph into whatever the financial and political characteristics of an economy require. For example, in the United States, the dollar is a universally trusted fiat currency backed by the U.S. government.
Therefore, cryptocurrency may have attributes that are attractive to some U.S. users, but many may not find it necessary in its current form. However, if the U.S. economy maneuvered itself into a more precarious economic situation due to escalating debt — or other financial blunders which threatened the value or security of the dollar — cryptocurrencies might become the more stable and reliable form of value in retail and commercial transactions.
On the other hand, in countries where government stability is an oxymoron, money has been politicized and fiat currency is not trusted, the future of cryptocurrencies may be now.
When the anonymous aggregation and transmission of money and information becomes a necessity rather than a luxury, crypto products become more than an option. Indeed, those same attributes have convinced several nations that globally accepted cryptocurrencies could be an effective means of avoiding economic sanctions, asset freezes and other political punishments that are based on the U.S. dollar.
A second front in the evolution of crypto products is how digital assets like smart contracts and blockchain-enabled systems and tokens will displace traditional financial intermediaries. The potential replacement of middlemen guaranteeing identities, rummaging through title records and processing loan data is just one example of how technology will use low-cost, real-time, peer-to-peer-approved movements of information and money to improve efficiency. Big paydays await those who can redefine the role and identity of trusted intermediaries.
Nothing comes easy in the war for the next financial hill. History shows that new tech products must be able to satisfy the cost, convenience and confidence needs that users care about. For example, cryptocurrencies must provide users with confidence that their value won’t disappear and will reach its destination safely.
Facebook’s Libra and other cryptocurrencies seek to achieve that goal by linking the value of their coins to fiat currencies, exchanging legal tender for their digital coins and most importantly, backing their coins with hard, liquid assets equal to 100% of the outstanding crypto value. Collateralized crypto may not compare to the implied guarantee that consumers get from the U.S. dollar, but that’s not the case in other countries.
There is a final and equally significant front that will determine who wins and loses the war for the financial future. It is the one that government regulation eventually opens. While regulators have wisely provided cryptocurrencies with the time and room to innovate, they will not hesitate to step in when significant numbers of retail crypto users lose money, crypto coins begin to look and function like deposits, and central banks lose control of money supplies.
The challenge for governments is knowing just when to step in. Acting too soon can negatively impact the benefits that technology can generate for economies. While waiting too long could cede control of an economy to unknown forces.
When regulators do step up, at a minimum, they will want to oversee whoever controls crypto money supplies and its delivery chain; how transparent they are; who or what stands behind them; and what information is being collected and transmitted about users. To survive and flourish, cryptocurrencies and similar new products and delivery systems must anticipate and address the regulatory issues that will be raised, before they are raised.
Cryptocurrencies and the applications that support them are poised to leapfrog over the ongoing debate on whether and how to regulate nonbanks. I wouldn’t bet on that happening immediately or easily, but based solely on the capital being invested and the footprint that they have achieved, these technologies will eventually create very different-looking and functioning financial markets.
In the meantime, the question for every financial company, user and government is what they should be doing to be a relevant part of this financial future. Whatever the issues Facebook raises by taking a lead in this technological metamorphosis, we should thank it for focusing the rest of us on what’s at stake.