G20’s cryptic message should be a warning to Bitcoin investors

Bitcoin and its fellow cryptocurrencies are about to lose the unique allure that has captivated the attention of libertarians, anarchists, tax evaders, money launderers, drug dealers and other people who want to circumvent capital controls and international sanctions.

In the early hours of Wednesday UK-time, the leaders of the Group of 20 developed and emerging countries will draw the crypto issue into their web of obfuscation and broad-brush discussion.

The G20’s communique will include a statement on cryptocurrencies. It will doubtless be bland and not call for any action (as is typical for these fora). But the fact they have chosen to debate the issue means that the whole debate about the price, legality, and regulation of these schemes is now part of public policy.

Much as the innovators of the blockchain computer technology might have thought they had created a form of money and monetary exchange that was outside the embrace of governments and their central banks, that is no longer the case.

This has been on the cards for some time. Brazil has banned cryptocurrency investments and is working on a wider regulation approach. Fellow G20 member China has banned initial coin offering (a way to raise funds for a new cryptocurrency venture) and cryptocurrency trading.

As it happens many governments are not that troubled by the launch of currencies that aim to remain outside the reach of official regulation, thus potentially depriving them of tax revenue.

The Financial Stability Board, the inter-governmental body of central bankers that was set up after the 2008 financial crisis, has told the G20 it does not believe that crypto-assets pose any risks to global financial stability. This is because they are simply not big enough to harm the financial system. Even at their recent peak, their combined global market value was less than 1% of global GDP compared with credit defaults — the villains of the last crisis — whose value hit 100%.

The potential for the bursting of the bubble was almost written into the blockchain computer code

But even if cryptocurrencies can safely operate below the radar of the G20 and the FSB, this does not mean there will not be winners and losers. Last year saw a Bitcoin surge from $985 a coin to a peak of £17,549 in December before dropping to about $8,700.

Many people will have been sucked into buying in the final stages of the upward curve in the price graph and will have seen the value of their holdings — in real currencies such as dollars and pounds — tumble. It’s happened before with tulips, railroads, the internet, and even the XIV index that allows people to bet against an outbreak of volatility on world markets.

The potential for the bursting of the bubble was almost written into the blockchain computer code. The supply of cryptocurrencies can only ever go up and it can never go down, as so-called miners work to crack various codes and get rewarded with the creation of new coins. Unbelievably Bitcoin mining eats up more energy than the whole of Ireland uses in a year.

Supply cannot fall but demand can collapse, as media reports of fraud, advertising bans and the widespread failure of ICOs undermine confidence. The implications for value are obvious. This is why central banks can and do reduce fiat money supply.

The deflation of the bubble has simply meant a transfer of wealth – proper wealth in proper currencies – from gullible bubble buyers to bubble sellers. This has very important consequences at an individual level, but it is generally not yet on a large enough scale to have macroeconomic consequences.

While those who sold out have doubtless made a fortune, those still left holding cryptocurrencies have found it fairly useless as a form of money: it has provided a poor store of value; it is not a medium of exchange at any major retailer; anyone using it as payment faces long delays and high transaction fees.

One reason why regulators are cautious about clamping down too hard on cryptocurrencies is that they can see the potential that the underlying technology could have for improving payment systems — anyone who has had to wait three days for a cheque to clear would applaud.

Distributed-ledger technology could also be used for tax and medical records, interactions with public agencies, and business supply chains, while offering the potential for instant peer-to-peer payments.

The G20’s intervention will convey a much-needed message that the crypto-asset ecosystem must be held to the same standards as the rest of the financial

System. Few people would want to abolish the internet because of the misuse of data collected by Facebook. The challenge for the authorities is to embrace the potential of the technology while closing the door to the ne’er-do-wells that innovations always attract.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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