A Crypto Cataclysm? The Case for The Long View

 

A Crypto Cataclysm? The Case for The Long View

Material By : Olaf J. Groth, Tobias Straube, and Dan Zehr

Cryptocurrency is here to stay. Business leaders and policymakers are rightfully skeptical - but they should not ignore the hype.

The waves of cryptocurrency news are enough to leave anyone confused about its future. Just when one major announcement suggests a new threshold of credibility – in October, for example, PayPal announced plans to integrate crypto into its payment solution – another headline comes along to raise more questions. Even Elon Musk’s announcement in March that Tesla would invest $1.5 billion in Bitcoin raised as much criticism as it did praise. While the underlying concepts of blockchains and decentralization have gained much broader acceptance, too many signs of a crypto bubble remain. Bitcoin’s value rose to an unprecedented $56,000 in February 2021 before falling back to $45,000 later the same month. Is this unusual? No. It has crashed more than a dozen times since 2011, by as much as 30 to 80 percent. The crypto environment includes far more than just Bitcoin, but given its volatility and the lingering memories of past financial collapses – not least the subprime mortgage crisis in 2007-2008 and the dot-com bust in the early 2000s – it’s hard to fault anyone for questioning the wisdom of crypto investments.

groups of investors to develop insurance for things that traditional industry players might never consider. One DeFi insurance protocol, called Etherisc, already provides a platform for offerings such as flight-delay insurance, hurricane insurance, crop insurance and even social insurance. A growing set of decentralized lending platforms has developed, as well, utilizing smart contracts to allow everyday people to lend their cryptocurrency and receive interest in exchange. While decentralized lending is collateral-based, like traditional lending schemes, it allows users to take out loans without declaring their identity or providing a credit score. Such platforms could open up lending services to a new array of currently underserved people and remove possible biases in the assessment of a person’s creditworthiness.

While the true believers in DeFi see it has a way to decentralize and re-create the entire global financial system, the underlying ability of decentralization to ensure trust in transactions remains one of crypto’s most promising benefits – and will serve as the core for these and an array of other new platforms and services. These innovations remain in their infancy, not unlike the foundational pillars of today’s robust digital economy were during the dot-com days of the early 2000s. But even now, it doesn’t require too much imagination to envision how crypto’s innovations – and the trust they can foster if developed thoughtfully – could herald a new model for economic transactions, liquidity, and transparency. As the breadth of these applications continues to increase and the diversity of users and usage expand, the system will become increasingly robust. Centralized exchanges that made negative headlines in the past will beef up security measures to attract institutional investors. Financial management vehicles will become more professional 1 as will investment products and services they offer. The pendulum of regulation will swing and, one hopes, reach an equilibrium at which innovation can flourish and investors can confidently transact without fear. To be sure, these developments concern policy makers and regulators alike, for many good reasons. How will they be able to shape and safeguard the economy, influence important outcomes like unemployment levels or trade imbalances, if the levers are so heavily decentralized? It will take not just technology innovation, but policy and regulatory innovation to answer those important questions.

Perhaps the bubble will blow and we suffer a crypto cataclysm. Perhaps smart regulation will slowly deflate it, or a more professionalized ecosystem will absorb the chaos and heal it. Regardless, the foundations for a new, more-decentralized structure of global finance are beginning to emerge, potentially pushing us toward a more resilient, equitable and trusted approach to transactions. We should nurture them, carefully, yes, but concertedly to create a more equitable financial system.