Cryptocurrency has so far failed to sweep away government money or spark the wider reconstruction that its most ardent enthusiasts see. But what if the underlying technology could be used to transform traditional fiat currencies – for example, by making them easier and cheaper to use for more people around the world?
This goal can be achieved – with the help of governments, which cryptocurrency was supposed to overshadow.
Regular money leaves a lot to be desired. Most people keep them in large banks, which sometimes have resorted to tricks and even outright fraud to tax their clients, and which have been extremely vulnerable during crises. It can take days for the money to move, especially if it must go through an outdated and hacked network of correspondent banks that process international transfers. For those without bank accounts, including millions of Americans, disproportionately blacks and Hispanics, things are even worse. Checkers, ATMs, card issuers, and money transfer services charge onerous fees.
Bitcoin, the original cryptocurrency, was designed to get around all of this. Anyone with an Internet connection can create an alias account that is controlled by a private key. Users could send digital tokens anywhere and anytime thanks to a voluntary network of computers that recorded transactions in a public ledger known as the blockchain. Strong cryptography and decentralization are protected from abuse and glitches. This technology has inspired hope not only for fairer financing but also for greater stability: the collapse of one or more large global banks would do much less damage if payments could be made without them.
Bitcoin spawned a whole movement, but so far it has failed as money. Pure cryptocurrencies are too volatile to be useful, barring speculation, illegal trading, and the occasional funding of activists in despotic regimes. The computing power required for the Bitcoin blockchain makes it slow and expensive for small transactions, not to mention harmful to the environment. People are afraid of losing the keys to their cryptocurrency (it is estimated that about a fifth of all bitcoins was lost this way), so they trust their wallet apps and other platforms that are often hacked. Most cryptocurrency “proponents” use the same type of intermediaries – exchanges, PayPal, specialized ATMs, opaque trust companies – that this technology was supposed to replace. Many of these businesses are less secure and more expensive than traditional banks. Their rapid growth threatens even greater financial instability.
However, all is not lost for cryptocurrency Regardless, cryptocurrency innovation could improve the payment system.
Consider stable coins. They fight vaporization by pegging their value to fiat currencies, implicitly acknowledging the biggest drawback of pure cryptocurrencies. They can run on blockchains that are more efficient than Bitcoin and have a lower carbon footprint. Currently, they are mainly used by cryptocurrency speculators to hold funds when deciding what to bet on next or to receive interest in unregulated loan pools. But as a unique form of electronic money, they can make transfers easy, instant, and cheap. For example, the Diem Association created by Facebook wants to use them to secure payments on mobile applications such as Facebook Messenger and WhatsApp. Ultimately, the infrastructure they use may even become a rail on which government-issued digital currencies can move.
Another initiative, known as Lightning, aims to address the bandwidth and power issues of Bitcoin by creating side channels through which multiple payments can be made, with only the final balance being recorded on the blockchain. The system allowed one application, Strike, to use bitcoin as a utility for assigning money between the United States and El Salvador. User money can come in the form of dollars in one country and appear in the form of dollars in another, with little to no time wasted on volatile cryptocurrencies.
Such innovations are promising, but they also pose risks that need to be addressed by regulators.
• They could cause launches. Stablecoins, which can be exchanged for fiat currencies at fixed rates, and fiat balances in applications such as Strike must be securely protected. This is often not the case. A recent study by Bloomberg Businessweek Tether, the most popular stable coin with nearly $ 70 billion in outstanding revenues, found that the company ctly with the Fed.
• They could undermine traditional banks. If people could safely keep their money in stablecoins and payment apps, they might stop depositing it at banks, depriving the latter of the resources to make loans. The resulting credit contraction could tank the economy.
A recent analysis by the Bank of England suggests that such concerns are overblown. People will likely be slow, its authors say, to adopt new forms of digital money, allowing time for the system to adapt. Still, regulators should err on the side of caution, by forbidding stablecoins and payment apps to pay interest, or by reducing the interest they receive on their deposits at the Fed. Such restrictions could be relaxed later, once officials can assess any threat to banking and credit.
• They could crash or get hacked. It’s one thing for Facebook’s apps to go dark for a day; it would be another if the company was running a global payment system. The newer protocols aren’t yet proven – as the recent outage of the Solana blockchain demonstrated. Lightning has known vulnerabilities.
Regulators should require enough equity capital to absorb surprise losses and set standards for security and governance – for example, by testing the resilience and identifying who’s in charge of handling emergencies. If a company can’t show it would act responsibly, it shouldn’t be allowed to run a payment system. Also, systems should be interoperable, so that a dollar in one can easily be converted into a dollar in another.
• They could abet a crime. Crypto platforms usually identify users only with an alphanumeric address. This has made them useful for ransomware developers, tax cheats, and other criminals – and raised concerns that they could undermine international sanctions and anti-money-laundering laws.
Platforms and apps can and should demand identification were needed to enforce the law. If regulators required this – for example, when balances or transactions exceeded certain thresholds – crypto-enabled payment systems could remain broadly accessible and still be much more transparent than the current banking system. In most cases, transactions are already visible on public ledgers, which has helped both law enforcement and the crypto community track down and recover ill-gotten gains.
For several, the dangerous excitement encompassing cryptocurrencies won’t end well. Officials such as U.S. Treasury Secretary Janet Yellen are right to call for urgent divisions to address the mounting risks. But they’re also right not to ban crypto collectively, as China has sought to do. Surging discovery is already driving competition, both private and public, to upgrade a financial system that can certainly stand some refinement. The result could benefit people everywhere – so long as regulators don’t fall any further behind in guarding against the risks.