The Epic Battle: Central Banks vs. Cryptocurrencies
Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
Who will win? When and how?
The Big Four central banks of the world — the U.S. Federal Reserve, European Central Bank (ECB), Bank of Japan (BOJ) and the Bank of England (BOE) — are arguably the most powerful institutions of the face of the earth.
The Big Four decide on interest rates impacting over $41 trillion in Gross Domestic Product. And they manipulate or influence more than $5 trillion in currency transactions per day.
With that kind of massive, highly centralized power to decide the fate of the world, it’s presumed they must know what they’re talking about. And that this authority must extend to cryptocurrencies … which they bash and trash.
As I’ll explain in a moment, however, nothing could be further from the truth. But first, consider what they’re saying:
The head of the Bank for International Settlements, which is considered the “central bank of central banks,” says he’s “concerned” about the progress being made in crypto technology. He urges “young people” to “stop trying to create money.”
Other central bankers repeatedly declare that “there’s no point” in creating cryptocurrencies. After all, “Traditional money works just fine.”
And many Wall Street experts echo this view. Whenever the discussion turns to Distributed Ledger Technology, they rant, rave or just roll their eyes.
On the other extreme, crypto advocates still talk about Bitcoin or one of its peers soon rising up … replacing the U.S. dollar as the world’s reserve currency … and taking over the financial world.
My view: Both sides are half-right, half-wrong.
Let me offer an alternative scenario — one that’s more closely in alignment with the history of money, the present state of affairs and the most likely future of society.
First, let’s not forget that the Big Four:
- Helped create the great housing bubble of the mid-2000s
- Got caught flat-footed with the real estate bust and debt crisis of 2007-’08
- Broke all rules of monetary policy by running their printing presses for eight years straight
- And are now trapped with no exit from a new money bubble of their own creation.
This series of blunders doesn’t exactly imbue them with the holier-than-thou authority about alternative solutions like cryptocurrencies.
Second, let’s not ignore the fact that, while the Big Four central banks shun crypto, other central banks are jumping ahead with crypto R&D of their own.
The People’s Bank of China (PBOC) is busily filing patents to create what could be the first major centrally controlled, officially sanctioned version of cryptocurrency.
Governments from smaller nations like Sweden, Rwanda and even South Korea have reached out to development teams from promising projects such as Cardano, Stellar and IOTA. And these developers are happy to show them how to integrate distributed ledger technology into their everyday operations.
And almost anywhere beyond the turf of the Big Four, it’s safe to say that the world’s most forward-looking central banks are beginning to see the handwriting on the wall.
Rather than bucking the tsunami of DLT innovation, they’re looking for a way to surf the wave.
Granted, their goals are very different from those of most crypto visionaries. Rather than a decentralized money of the people, by the people and for the people, what they want is primarily a technological upgrade for government-made money.
They want to retain all the control they currently have, but more efficiently and more securely.
Instead of chasing money-launderers and their cash-stuffed suitcases, these central bankers now dream of replacing cash with digital money that they can more closely control.
And to crack down on crypto money-launderers, hackers and spies, they dream of snuffing out the likes of Bitcoin with their own government-controlled digital currency.
How far they can go remains to be seen. But here’s the most likely scenario:
1. Central banks make some headway with their own form of digital money.
I would not call it “cryptocurrency” per se, because it would lack the fundamental characteristics that define cryptocurrencies. It would not be decentralized. It would not be permissionless. It would not be censorship-resistant. In essence, it would just be digital fiat money.
2. Free and open distributed ledger technology also evolves, but in a different direction.
It does not have to replace fiat money to be successful! Instead, what’s more likely is that the two forms of digital money co-exist.
How? The answer lies in the recent history of news media and publishing.
The disruption of news media and publishing in the internet age provides a faithful metaphor for what I see ahead.
Before the internet, traditional news organizations and publishers dominated the flow of information. They heavily influenced what reached the public, how and when.
Smaller, independent news organizations and publishers rarely grew beyond niche markets. Some individuals sought to build an audience with mom-and-pop radio stations, or by self-publishing books. But their competitive power was practically zero.
Then came the World Wide Web, and two things happened:
First, newspapers, magazines and all forms of books were forced to go digital or die. Broadcast media eventually followed. But virtually none of these led the way.
Instead, the leadership came from the upstarts who began their life cycle as internet platforms, Web broadcasters and social media.
The need arose to sort through the plethora of information coming from millions of sources. From that, Google was born.
Users wanted to share personal information with friends, family and the broader public. So the likes of Facebook, Twitter, WeChat and Line were born.
Online shopping, once laughed at as an impossible dream, surged by leaps and bounds. Amazon became the largest retailer in the world without opening a single store.
Within just a few short years, people all over the world — previously shut out from libraries and education, unable to make their voices heard, and with no access to most kinds of goods — saw new doors open that never existed before.
Today, the two worlds — traditional and digital — co-exist:
- The large traditional players, who were both late and reluctant in their adoption of the new technology, alongside …
- The smaller, innovative players, who led the charge and created their own vibrant industries in parallel.
Ultimately, the former is bound to shrivel and fall behind — like radio after the diffusion of TV.
But for several decades, the two should continue to co-exist.
This is also the pattern I foresee for the future of central banks and cryptocurrencies:
- Central banks will mine cryptocurrency technology for parts. They will pick and choose the aspects they like. They will adapt and adopt strictly the pieces that fit their goal of retaining control. Whether their endeavor succeeds or not remains to be seen. But they will certainly try.
At the same time …
- Cryptocurrency developers and sponsors will lead the way and create their own world, the Smart Economy of the future. Nonbank banks and money service organizations … decentralized currency exchanges … decentralized markets for stocks, bonds, commodities, real estate and collectibles … not to mention travel, lodging, jobs, dating and more.
Suddenly, within just a few years, people all over the world — previously unable to borrow, raise or transfer money … no hope of starting their own business … no way to buy or sell services globally — now see new avenues opening for the first time.
Ultimately, the old, traditional models may shrivel and fall behind. But for several decades, the two should co-exist.
I think this is the most likely scenario. But whether I’m mostly right or mostly wrong, the fact remains that open Distributed Ledger Technology is going to transform the world of finance and value transfer.
And it will do so in the same way that the internet transformed the world of media, publishing and the access to information.
No matter how long and how forcefully the Big Four central banks seek to defend the status quo, the rapid advance of digital money, cryptocurrencies and DLT applications is unstoppable.
There’s also another problem that the Big Four banks facilitated: Trillions of dollars of money printing, allowing the world’s governments to amass obscene, unpayable debts with barely a second thought.
The consequences of those debts is the topic of an investor briefing presented by Dr. Weiss and my colleague Sean Brodrick. You can watch the replay here.