The Banking Executive Magazine - May 2022 Issue

Cryptocurrencies and Blockchain Technology THE ULTIMATE GROWTH OF CRYPTOCURRENCIES? The growth of Bitcoin owes a great deal to its innovative use of Blockchain technology. Predeter- mined scarcity allows as a maximum of 21 million bitcoin that can ever be mined. Psychological studies have demonstrated that humans find scarce goods more attractive. Bitcoin is also a sovereign asset, its owner can self-custody, like someone can keep physical cash or gold in their home. However, unlike cash and gold, bitcoin are easily divisible and transportable, making them exceed- ingly difficult to seize. The period since the global financial crisis has been particularly encour- aging for the growth of Cryptocurren- cies. When Bitcoin was launched in 2009, trust in governments and fi- nancial institutions was negligible. Many investors were searching for “the next big thing” following the tech, housing and commodity booms. In addition, short-term inter- est rates have consistently remained close to zero, facilitating investments in a wide range of speculative ven- tures. Cryptocurrencies may also have benefited from the boom in on- line sales and digital transactions during the pandemic lockdowns (fig- ure 1). From the start, Bitcoin have showed a very high volatility mean- while it showed also a giant appreci- ation,. The rapid rise of digital assets and the fortunes made by early adopters have attracted large pools of mostly retailers. Also catering to in- vestors’ speculative appetite has been largely unregulated, a crypto market where candidates can trade on mobile devices 24/7. For in- stance, Cryptocurrency exchanges are the primary venue for trading ac- tivity, such as Coinbase, the largest regulated crypto exchange in the U.S., has roughly 68 million cus- tomers. THE LIMITATIONS OF CRYPTOCURRENCIES Despite their popularity, Cryptocur- rencies face limitations and barriers in their effectiveness as currencies. The high volatility of Cryptocurren- cies makes them poorly suited to the three traditional uses of a currency: as a store of value, as a unit of ac- count and as a medium of exchange. In fact, apart from occasional critics in publicity, it is difficult to find out why any business would pay in bit- coin. An auto dealer that agreed to sell a car on Friday for delivery on Monday should not be willing to price the vehicle in bitcoin, for fear that the price would fall during the week-end. it would hard and difficult for a grocery store to change price tags on its merchandise at 8:00 a.m. only to have to retag it back by 5:00 p.m. Stablecoin, pegged by the issuer to the local currency, are one possible solution to this problem. Tether, USD Coin and Binance USD, for example, have been launched in recent years. However, for a stablecoin to be to- tally stable, it must be backed by local currency reserves. but, a coin backed 100% by local currency re- serves would not be profitable for the issuer. And if one coin is backed by less than 100% cash reserves or by any reserves in more volatile assets could leave holders in many situa- tions and events of a run on the sta- blecoin. THERE IS A POTENTIALLY PROFITABLE MIDDLE GROUND FOR ISSUERS A stablecoin mostly backed by local currency reserves could allow the is- suer to take profits off the top and still leave the currency “stable” until most of the coin-holders wanted their money back. For users, this should limit the attractiveness of sta- blecoin relative to national curren- cies issued and fully backed by central banks. Moreover, central banks are generally unfriendly to sta- blecoin, seeing them as both infring- ing on their territory, breaking the law and adding an unnecessary risk to economic stability. SECURITY AND TRANSACTION VOLUME Security is also another challenge to cryptos’ holders. As a digital bearer asset, Cryptocurrencies belong to the holder of the private keys associated with each token and are so naturally exposed to theft and loss. Several cryptocurrency custodians, such as Coin base and Anchorage, have the BANKING EXECUTIVE 36 ISSUE 161 MAY 2022