Cryptocurrency went through a big crash last year but is now bouncing back. Photo / AP
OPINION:
After last year’s meltdown, you would think we’d seen the back of crypto. But no: as long as regulators remain unwilling to act against it, there is no deterring the promoters of the world’s largest-ever Ponzi scheme.
After the briefest period of penance for the more than US$1 trillion ($1.545 trillion) of losses suffered in last year’s crypto winter, back these virtual currencies have come, with their leading player, Bitcoin, having surged by more than 30 per cent in less than a month.
Back, too, come some of crypto’s keenest promoters - not, obviously, FTX’s now notorious Sam Bankman-Fried, who is awaiting trial in the US, but others who went bust and are now re-emerging with new ventures as if oblivious to past failure.
A period of silence from the snake oil salesmen of crypto would be very welcome, but no such luck. They simply refuse to lie down and die.
Jamie Dimon, chairman of JP Morgan, described Bitcoin as a “hyped-up fraud” at last week’s meeting of the World Economic Forum in Davos. This has been obvious to all grounded observers from the moment of the virtual currency’s inception amid the ruin of the financial crisis more than a decade ago, but it doesn’t seem to have made any difference to its apparently enduring appeal.
Unrepentant, its legion of implausible miked-up frontmen, cheerleaders and self-proclaimed libertarian “visionaries” still strut their stuff before credulous audiences of adoring followers.
Whether it be tulips, bulls’ semen, the South Sea bubble, or the dotcom boom, crypto is in most respects no different from past investment manias. Essentially just a form of gambling, it functions on the “greater fool theory” of investment - the idea that whatever you pay for the “asset” there will always be a greater fool willing to pay even more.
Until the music stops, that is. At which point, there is no one left willing to pay almost any price and you find that the promoter has in any case run off with the money.
Only the lucky or well-informed few manage to get out at the top. One such was Elon Musk’s former business partner, Peter Thiel, whose venture capital fund sold out just before the crash last year at a reported profit of about US$1.8 billion ($2.7b) even as he was still preaching the merits of crypto and ridiculously proclaiming “the end of the fiat money regime”.
Thiel’s Palantir Technologies is meanwhile bidding for a £480 million ($919m) NHS data contract – nothing to do with crypto, of course, but there’s another sheep there for the fleecing, it might be thought.
In any case, there is a marked reluctance among Western governments and regulators to see crypto as just a sophisticated scam, and like China, ban it entirely.
That’s what central banks should be doing, but they hesitate. Instead, they remain faintly in awe, preferring to see the wild west of crypto as a systemically irrelevant distraction rather than the parasitic thievery it really is.
Rishi Sunak, the British Prime Minister, still hopes to make Britain a digital currency superpower and has ordered the Bank of England to respond accordingly. Is this entirely wise? Others are apparently chasing hard. Such luminaries of the global financial landscape as El Salvador and the Central African Republic have even adopted Bitcoin as legal tender. Snooze and you lose.
Crypto is admittedly a little bit different from tulips and other basically imaginary “assets” that have tended to fire past manias. Instead, it poses as an alternative to fiat currencies, and a more trustworthy one at that, as theoretically, the amount of coin in issue is in most cases strictly finite and therefore cannot be devalued.
Nothing wrong with private currencies as such, but unfortunately, crypto is not what it pretends to be, and never will be; there is no other “asset class” I can think of which is quite as volatile as Bitcoin, prone as it often is to movements of as much as 10 per cent in a single day. This in turn renders it virtually worthless as a means of payment.
The emergence of so-called stablecoins such as Tether - crypto which is supposedly backed by fiat currency reserves - has so far failed to close the credibility gap. In most cases, reserve backing is, shall we say, somewhat non-transparent, and almost certainly wouldn’t cover withdrawals if everyone decided to cash in at the same time.
Given all this, why is crypto all of a sudden making a comeback? It may or may not surprise you to learn this, but far from being the jailkeepers, central banks are in fact the unwitting midwives of the whole crypto phenomenon. It probably wouldn’t exist at all as anything other than a curiosity were it not for the disaster of the financial crisis, which undermined trust in ordinary money and created fertile ground for the cryptonites to spin their survivalist nonsense.
You would have thought, after the failures in oversight that prompted the banking crisis, that central banks and consumer protection agencies would be somewhat wary of these new forms of “financial innovation”, but instead, they stood aside and allowed them to flourish, even as they came down hard on the traditional banking sector.
While prudential regulators were busy fighting the last war, crypto blossomed, unbound by the sort of protections and oversight afforded to much of the rest of the financial sector. From the word go, it was an accident waiting to happen. Yet Bitcoin, Ether and the rest could not have succeeded without another crucial ingredient - central bank money printing. Crypto is just one of the most visible of the asset price bubbles that years of quantitative easing helped to feed.
It is no coincidence that Bitcoin fever is always at its most manic when the central bank printing press is at its most active. As soon as the QE life support is turned off, as happened last year, the price collapses. Now that the monetary tightening seems to be drawing to a close, the price has started to revive anew. As a general rule of thumb, governments should never ban something unless it is manifestly doing active economic and social harm. We allow gambling, despite its morally and socially questionable attributes, so why not Bitcoin?
Some of the technologies associated with crypto - encryption, tokenisation, smart algorithmic contracts, and so on - could moreover be of wider benefit in finance. The UK Government’s current plan is to regulate crypto in a manner that makes it both politically acceptable and renders the City a globally trustworthy centre for trading the stuff. But what’s the point?
I wonder whether crypto can survive at all in a highly regulated environment. Why go to the bother of attempting to regulate the crypto carpetbaggers when it would be much easier simply to outlaw them and leave their destructive behaviours for others to manage?
ANZ stopped accepting deposits into others' accounts last year.