As investors pull back from risk assets amid fears of slowing economic growth, what do the future of digital assets and cryptocurrencies hold?

Are cryptocurrencies a sufficient tool to meet our society’s challenges?

Profound changes marked the last decade. In the aftermath of the global financial crisis and its implications, technological progress has triggered a process of long-term change which is not just one-dimensional but multifaceted and complex.

The rapid migration to digital technologies driven by the COVID-19 pandemic will continue into the recovery. While moving to a more digitalised world, the pandemic recovery comes with an unprecedented price tag. Even before the pandemic, global debt rose from an all-time high to an all-time high without an end.

The Covid-19 pandemic and its aftermath have increased the global debt by $32 trillion in 2020 to $290.6 trillion, led by government and non-financial corporate debt, and will continue to rise in 2021. According to Moody’s, government debt surged to 105 per cent of global gross domestic product (GDP) from 88 per cent before the pandemic, its highest level since the second world war.

An increased money supply growth has accelerated rapidly amid the pandemic to stimulate spending. However, consumer spending during the pandemic has focused on needs rather than desires, driving inflation and diluting consumer savings. If the money supply continues to grow, prices begin to increase, especially if output growth reaches capacity limits, already reflected in rising commodity and property prices, underlining that global demand for goods is strong relative to global supply.

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Inflation is at a 40-year high. The annual inflation rate in the US accelerated to 9.1% in June of 2022, the highest since November of 1981, from 8.6% in May and above market forecasts of 8.8%

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Since the value of money is a social construct built on trust, central and commercial banks serve as their guarantors. But trust in financial institutions has diminished significantly due to the global financial crisis, constant scandals, unlimited quantitative easing and the resulting dilution of purchasing power and consumer savings.

Therefore, cryptocurrencies were developed to counter the loss of confidence in the existing financial system. A cryptocurrency is a digital currency using cryptography to ensure security and prevent double-spend. Cryptocurrencies are based on blockchain technology, a distributed ledger enforced by a decentralised network of computers. The most prominent cryptocurrency is Bitcoin, invented after the global financial crisis by Satoshi Nakomoto, an unknown individual or group.

To determine whether cryptocurrencies are an adequate means to meet society’s challenges, we should look at the five fundamental ethical principles: trust, accountability, proximity, cultural lag and privacy.

Trust

As mentioned before, the value of money is a social construct built on trust. But unfortunately, its value has been deteriorating since the end of the gold-backing dollar in 1971, which was the last time inflation brought its toll on the global economy. Further, the global financial crisis accelerated the move towards a trustless society and eventually resulted in the invention of Bitcoin.

Cryptocurrencies have evolved to compete with state-monopoly currency and repair the loss of trust through their decentralised nature. This happens especially in countries where the population has lost confidence in state institutions suffering from inflation, such as Venezuela and Turkey. Despite high volatility, the population trusts a supra-national digital currency without a central authority that governs monetary policies.

Accountability

Accountability is essentially a question of fairness and responsibility when things go wrong. Through regulation, countries and regulators can better identify and separate untainted cryptocurrencies from those tainted by money laundering, terrorist financing and other crimes. Recently, El Salvador recognised Bitcoin as a legal tender, which means regulatory clarity for its citizens. Other countries have already signalled that they would follow suit.

Further, regulation will make ownership of cryptocurrencies more secure. Clear and enforceable rules will pave the way for a much-needed layer of control for central and commercial banks and owners of cryptocurrencies. The ability to reject unwanted or suspicious transaction requests, freeze irregular transfers in transit or even reverse malicious transfers after illicit behaviour or purposes such as human trafficking can be proven by law enforcement.

Proximity

In psychology, proximity is a fundamental variable in explaining behaviour in many circumstances. Proximity denotes how physically or emotionally close we are to someone or something. The emergence of our trustless society has made our world increasingly distant and unapproachable, leading our leaders to apply increasingly un-proximate cost-benefit analyses when making decisions that may affect large sections of society. Bitcoin is no different.

Like the Bible has its ten commandments, Bitcoin also has its commandments specified in its source code. The monetary policy of Bitcoin is to have a finite and limited supply to keep inflation and unlimited quantitative easing in check. There are only 21 million Bitcoins that can be mined in total. Once the miners have released this number of Bitcoins, the supply is exhausted.

However, the Bitcoin protocol may be changed to allow for a larger supply. Once a majority of Bitcoin holders conclude, it is morally reasonable to move forward to tackle unforeseeable future challenges, which makes it inherently a proximate and democratic monetary decision.

Cultural lag

Cultural lag is the idea that it takes time for culture to catch up with technological innovations and that this lag causes social problems and conflicts.

As human beings, we tend to overestimate the effect of technology in the short run and underestimate the impact, in the long run, reflected in Bitcoins and the cryptocurrencies markets boom and bust cycles of the past couple of years.

However, unforeseeable events, such as the recent COVID-19 pandemic, are forcing humankind to adapt to new technologies rapidly. COVID-19 has fundamentally changed our behaviours within a few weeks. We have moved to work remotely, shop groceries online, and gather with friends and family via video call.

The pandemic has led consumers to abandon cash in favour of contactless and digital payments.

Privacy

Privacy is one of the critical issues of our time, and we need to start thinking much more deeply about it. Maintaining a balance between privacy and profitability in the commercial sector, or security in the public sphere, is an increasingly important challenge globally.

Bitcoin is wrongly considered an anonymous payment method. All Bitcoin transactions are public, verifiable and irrevocably stored on the Bitcoin network. The Bitcoin address is the only evidence that shows where the Bitcoins are stored and where they are sent. A user’s wallet privately generates this address. However, when these addresses are used, they are associated with all the transactions. Anyone can see the balance and transactions of any Bitcoin address. Bitcoin addresses cannot be private, as users usually have to reveal their identity to receive goods or services. Since the blockchain is permanent, something untraceable could become traceable in the future.

Therefore, creating a regulatory and secure environment that protects privacy while cryptocurrencies cannot be misused for illicit activities is essential.

Outlook

In 30 years, it has been taught that establishing cryptocurrencies as a mission-critical financial infrastructure layer paved the way for a more inclusive and accessible financial system, which provided financial stability throughout economic turmoil and the unprecedented quantitative easing measures of the former prevalent banking system.

The unofficial introduction of the notion of cryptographic and digital parallel currencies alongside former national legal tender currencies enabled a smooth transition from the old to the new world, eventually establishing a genuinely global, national-agnostic and neutral world reserve currency alongside national digital currencies. As a result, physical paper money will lose its value entirely.

Cryptographic, digitalised money will be the prevalent exchange of value and payment, laying the foundation for an unprecedented financial transformation. This transformation helped accelerate international cooperation through a more interconnected and on each other reliant synergetic society, which ushered in an era of constant economic growth and prosperity.

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