A scam designed to snatch naive investors. A black market currency for gunslingers, drug dealers, pimps and terrorists. A bubble that makes a 17th century Dutch tulip look like a solid investment and an escape on global energy. There are so many different ways in which the bitcoin digital currency is going to destroy the world, sometimes it is difficult to keep track of it. Everyone, from Warren Buffett to Mark Carney, told us that bitcoin is a serious threat to financial stability and any sane person should stay away.
True, there are many reasons to suspect bitcoin. It is volatile, complicated and largely unregulated. But given the appetite that clearly exists for this (the market capitalization at the time of writing was £ 85.7 billion), it is not time for us to start seriously considering what would be its long-term success for 39; global economy? After all, if money is fundamental to the way the world works, what happens when the nature of money changes radically?
In the ten years since its creation, bitcoin has had a seismic impact on the global financial system. From modest beginnings, it has become one of the main asset classes and has generated a series of rival cryptocurrencies, such as litecoin and ethereum. Once reserved exclusively for cyber-punk novels, cryptocurrencies have increasingly become an accepted part of the financial system. Most large banks began to trade them one way or another and are accepted around the world. International legal systems have even begun to adapt to the new problems and opportunities they present. For example, both the Swiss canton of Zug and the US state of Wyoming have passed laws to encourage the trade in cryptocurrency. Wyoming gave cryptos a legal status distinct from money, bonds or property, while Zug became the first government in the world to allow citizens to pay bitcoin taxes. Starting from the margins, the bitcoin, in front of the cryptic cousin, has gradually moved into the mainstream.
Of course, it still has a long way to go to seriously challenge the dollar or the euro. Bitcoin is notoriously volatile. Last year its price reached a maximum of £ 14,354 before collapsing to under £ 5,000. It has been more stable so far this year, but continues to move regularly 10% or more in a week. It can not become a real rival to cash in while this remains the case, simply because volatility of this type encourages maniacal spending or hoarding – at least in well-functioning economies.
At the same time, regulators in the world's leading financial centers still have to approve the crypts and the technology for mining and storage is still relatively unproven. For these reasons, there are many people who believe that the whole market could easily disappear overnight.
Obviously these are important warnings. But it is also worth mentioning that no new technology is ever created without problems. Bitcoin is ten years old and has only had a couple of years in the mainstream. If it continues to grow at the current rate, if the legislators accept it, and if the technology on which it is based will stabilize, perhaps it could really become the new global currency. After all, it makes sense that a global and digital economy has a digital and global means of exchange. If this were to happen, however, the changes that would have set in train would be vast.
By definition, the success of bitcoin would break the hegemony of central banks and national governments in terms of dictates of fiscal policy. Indeed, the global adoption of bitcoins would make central banks equally irrelevant. Right now, the Federal Reserve, the European Central Bank, the Bank of England and the rest of them are the only institutions that can print money. Of course, you can change money in other assets like gold or property or shares, but there is only one option for actual expenses. This gives those banks the power to set interest rates and to finance deficits or execute surpluses whenever they wish. If bitcoins become an important alternative, with equal status for the dollar or the euro, central banks would lose those powers forever. For better or worse, we would have effectively returned a system much more like the Victorian gold standard.
Even corporate multinational banks would lose power. At this time, they monitor payment processing worldwide. Companies can not trade without putting money through a bank. But the blockchain technology that supports bitcoin and other cryptocurrencies is decentralized and open to all. Companies and individuals can trade among themselves using bitcoins without going through any form of financial institution. True, banks have other services that they provide. But it is in the processing of money that their real strength lies. If this should fade, we might expect that HSBC, BNP Paribas and Bank of America will gradually fade into insignificance. In simple terms, we would have started to no longer need it.
The success of the widespread adoption of cryptocurrencies like bitcoin would greatly accelerate the process of globalization: instead of national currencies, we would have a single medium of exchange that could really be used everywhere. Global trade has exploded for much of the post-war period, as trade barriers and tariffs have been gradually dismantled. A triumph of digital currencies would catalyze this process by several orders of magnitude. Combine this with the ease of doing business across borders in the Internet era and we would find ourselves, suddenly, inevitably, close to creating a completely seamless global economy.
Although it is reasonable to pay attention to the warnings of Buffett and Carney, we must also recognize the possibility that bitcoin or another cryptocurrency reach the type of critical mass that changes the game and sees its price quoted around the world alongside – or before – the euro, the dollar and the yen. That day could be very far or much closer than we think. The only thing we can be sure of is that if the bitcoin really succeeds, a lot of the fundamental elements on which the commercial systems of the world are founded will be changed beyond recognition.