14 April 2018

The Economist: Catching the bitcoin bug

The latest bank to take a shot at crypto-currencies is Barclays, which devotes a lot more of its “Equity Gilt Study 2018” to the impact of technological change on finance and the economy than it does to either equities or gilts.

The report describes crypto-technology as “a solution still seeking a problem”.

It identifies four challenges in particular. The first is trust. In most countries, consumers and businesses have faith in the currencies issued by the government. The second is sovereignty: the potential for tax avoidance and loss of financial control means that neither governments nor central banks will be keen to see private crypto-currencies take off.

A third challenge is privacy. Although they can be used pseudonymously, crypto-currencies are less reliably anonymous than cash since the blockchain that lies behind them records all transactions. If a pseudonym is cracked, the user’s purchase history is revealed. A fourth relates to the ability to undo a transaction in cases of error or fraud—blockchain transactions are hard to reverse.

On top of all these problems is the fact that existing alternatives seem to work perfectly well. It is easy to make payments and transfer money in an instant.

So what is the appeal of digital newcomers? Private crypto-currencies can be attractive in societies where trust is low, or where governments are unwilling or unable to provide reliable means of exchange—in wartime or during periods of sovereign default, for example. Barclays also suggests that in countries where opportunities to invest are limited, “crypto-currencies may be one of the few ways to diversify savings out of domestic assets.”

None of these conditions applies in rich countries. But they hold in some emerging markets. There could also be demand in the developed world from criminals (although they now strongly favour cash). By making generous assumptions about the size of these low-trust and criminal markets, Barclays comes up with a maximum total value for all crypto-currencies of $660bn-780bn. That is roughly where they were priced at the beginning of 2018.

Full article on Economist (subscription required)

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