Panic in the crypto market. These virtual currencies, which are not governed by a central bank or a government, are exchanged on the Internet and can be used as a means of payment. They are particularly sensitive to speculation because their value is based only on the confidence of those who invest in them. Since the existence of these financial assets, prices have been up and down. The most famous of them, bitcoin, has experienced a spectacular decline over the past six months. While a bitcoin was worth, in November 2021, around 58,000 euros, it is only worth, this Thursday, May 19, more than 29,000 euros. That’s a 50% drop. For Mariannethe economist Nicolas Dufrêne, senior civil servant and director of the Rousseau Institute, returns to this crack.
Marianne: How do you analyze this brutal fall of bitcoin, and cryptocurrencies in general?
Nicolas Dufrene: It is neither the first nor the last. The price of bitcoin has gone through several up and down cycles. Nevertheless, we can now see that more and more people, including in the crypto-asset ecosystem, are realizing that bitcoin is not, and never will be, a means of payment.
Why can’t they be means of payment in the same way as money?
There are several obstacles that mean that bitcoin does not allow a system to simultaneously manage several hundred thousand transactions in the same way as Visa or MasterCard. The energy consumption of this asset has been exponential over the years. It is clearly not desirable for society to continue on this path when all the transition scenarios towards 0 carbon are based on the idea of energy sobriety.
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Beyond these technical elements, there are others that relate to the model of society promoted by bitcoin. With cryptoassets, it is clear that money is not seen as a commons, which I think is desirable, but as a commodity like any other. Anyone can issue them, without rules, constraints or controls. This puts in competition currencies in which there is no guarantee. In the event of a financial crisis, no one can reinject money to calm things down. When bitcoin loses two-thirds of its value, there is no deposit guarantee as with the traditional banking system. In short, it is in no one’s interest to invest their savings in this type of asset in order to use it as a means of payment since holding it has above all a speculative interest. It cannot be used as a monetary alternative because no state or central bank can provide a guarantee. The price fluctuates at the whim of the markets, without any protection.
Does bitcoin really only have speculative interest?
Largely yes. Now, I can play devil’s advocate by elaborating on two points where cryptoassets can meet legitimate needs. First, they can help with anything related to money transfers between foreign countries. Today, these exchanges remain complicated and costly. This is one of the real problems of the international monetary system. Bitcoin overcomes these complications, but other assets, such as Ripple, were created exclusively for this.
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Second point, the emergence of autonomous communities of investments and exchanges. A kind of finance that would be decentralized. We are already seeing this type of group being set up today, which makes it possible to control investments, to choose their nature by a vote and to share the gains equitably. This would avoid going through traditional financial intermediaries such as investment, management or pension funds.
Everything is therefore not to be thrown away?
In reality, the two examples that I have detailed can also be the result of a digital currency which would be controlled by central banks and States. This will even overcome the problems of cryptoassets explained before.
What difference between the two?
Establishing digital currencies would be a real monetary revolution. One can imagine central banks opening digital currency accounts and giving companies and individuals direct access to them. So far, only banking institutions have access to central bank money. This situation has consequences. As soon as a central bank wants to buy assets or inject liquidity into the economy, it has to go through private banks. If the currency is accessible to citizens and businesses, this intermediation is eliminated. Thus, the central bank can itself steer the rates without going through the private sector and injecting money.
You pointed out the lack of protection for cryptoassets, what are the dangers of this totally deregulated system?
The US Court of Auditors has already warned of the multiplication of illegal transactions using crypto-assets. They are used for human trafficking, drug trafficking and money laundering. More and more ransomware, this malicious software that blocks a computer and then asks for a ransom to be able to regain control of the machine, asks for bitcoins or other. Some explain that the blockchain system makes it possible to trace and therefore avoid these problems. But this is entirely false. We can trace a bitcoin as such but it is very complicated to know who is the physical person behind the exchange. It is very easy to split payments to slip under the radar of the police services.
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Beyond these real risks for society and citizens, there is also the question of financial risk. In less than a month, the total valuation of the cryptoasset market fell from $3 trillion to less than $1.5 trillion. Many small investors have lost colossal sums. Studies show that some of the biggest holders manipulate these markets up and down. They have sufficient liquidity to resist when there is a slack in the markets. But this is not the case for small savers who invest hoping for quick gains. We can see cryptoassets as speculation for the poor, of which they are the first to pay the price.