The latest slump in the prices of Bitcoin (and many of its peers) has put a serious dent in their credibility as a reliable means of payment, let alone as a store of value or a sound investment. But this is certainly not the end for digital currencies.
If anything, the crash in the prices of the purely private alternatives has strengthened the appeal of other models, whether led by central banks or developed through public-private partnerships. Indeed, there is a huge opportunity here for the UK to lead the Western world – and to rival China in this field.
Let’s deal first with the Bitcoin crash. Bitcoin is the largest of the ‘cryptocurrencies’, with ‘crypto’ referring to the way in which secure technology is used to record ownership and payments anonymously. It is decentralised and was originally intended to be used for peer-to-peer transfers between private individuals or businesses.
However, Bitcoin has never really taken off as a means of payment. Instead, it has increasingly become seen as a potential investment whose appeal depends on whether its price rises or falls. Many therefore now describe Bitcoin and its peers as ‘cryptoassets’, rather than ‘cryptocurrencies’.
Unfortunately, at least for some, Bitcoin lost as much as 30% of its value last week. This followed negative comments from early adopter Elon Musk, mainly expressing concerns about Bitcoin’s carbon footprint, and crackdowns by the authorities in both China and the US.
This isn’t necessarily the bursting of a ‘Bitcoin bubble’. There have been big price swings before, and it is practically impossible to make an objective assessment of what Bitcoin is truly worth. As a purely virtual currency, Bitcoin does not have any intrinsic value, unlike a physical commodity such as gold. Nor does it pay any income, in contrast to most conventional assets, and it is largely unregulated. For me these are red flags.
For many others, though, this leaves plenty of room for speculation. Back in January, the investment bank JPMorgan Chase claimed that a single Bitcoin could eventually be worth as much as $146,000, or more than three times its current price, if it became an established ‘safe haven’. Much higher numbers have been suggested.
Fans will continue to emphasise that the supply of Bitcoin itself is finite, unlike the ‘fiat’ currencies issued by central banks, even though it now has plenty of rivals. Some will also see the lack of state control as a plus.
It’s not inconceivable either that concerns about the environmental impact of Bitcoin mining will be overcome. The issue here is the large amount of computing power needed to create the limited number of new coin that can still be produced. This could be mitigated by greater use of renewable energy, or carbon offsets.
In the meantime, plenty of high-profile individuals and institutions have invested a lot of their credibility – and a fair chunk of their own money – in promoting Bitcoin and making it more accessible to their clients. Many might like it to fail, but others will want it to succeed.
In short, I would not write off Bitcoin just yet – at least as a speculative punt.
Nonetheless, when it comes to the development of digital currencies as a means of payment, it is clear that something better is needed. I would still be reluctant to exchange any good or service for something that might be worth 30% less the very next day, or soon have no value at all.
Indeed, further development of digital currencies is inevitable. The vast majority of ‘money’ is already in electronic form and few transactions now involve the use of physical cash. The real question is the balance between public and private involvement in the next stages of the development of new means of payment.
There are several possible models. The Bank of England and the Treasury have already launched a Central Bank Digital Currency (CBDC) Taskforce to explore a potential UK CBDC. This would be a new form of digital money issued by the Bank of England for use by households and businesses. Crucially, it would exist alongside existing cash and bank deposits, rather than replace them.
There would be several advantages over the current system. In particular, transactions costs would be lower and payments safer, because they would be made via accounts held at the central bank. In contrast to cryptocurrencies, such as Bitcoin, CBDCs would be legal tender.
Alternatively, or as a starting point for a future retail model, the UK could focus on the development of a digital currency for use in the wholesale financial markets.
The CityUnited Project has already come up with an interesting proposal along these lines (the ‘Aurora’ initiative), which would build on the UK’s established strengths in areas such as Fintech and payments architecture.
Indeed, the UK has every chance of gaining a substantial first-mover advantage here. The EU has repeated demonstrated its sluggishness in, well, pretty much everything, let alone the development of financial services. The US is not much better.
Above all, it is essential that there is a credible rival to the models being developed by China. There are many legitimate concerns about the state control and supervision of payment systems, and it is no coincidence that authoritarian China has made more progress than most towards launching a CBDC.
The UK has a golden opportunity to develop a liberal alternative, based on cooperation between the public and private sectors. We should seize it.
This article was first published in the Sunday Telegraph on 23rd May 2021