Is Cryptocurrency a Threat to Traditional Monetary Systems?

As one of the tastylive network’s producers, Ryan Sullivan fields questions from listeners calling in to the live show all day long. Do you have a finance or trading question for our research team to answer in this column? Send it to ryan.sullivan@tastylive.com

• Could cryptocurrencies disrupt central banks’ control over money?
• Some see cryptocurrencies as a tool for financial innovation.
• Challenging the U.S. dollar would be difficult for any crypto.

Today’s question was inspired by Crypto Conversations:

Is cryptocurrency a threat to traditional monetary systems?

There are different views on whether cryptocurrencies, like Bitcoin, might harm traditional money systems. Your opinion might depend on your understanding of cryptocurrencies, their growth potential, and their effect on central banks and monetary policies. 

Some people think cryptocurrencies could disrupt central banks’ control over money, causing financial instability. Others believe they can coexist with traditional finance, helping those without bank access and speeding up transactions, though this poses regulatory issues.

Some see cryptocurrencies as a tool for financial innovation, capable of changing finance and inspiring the creation of digital currencies from central banks. Others see cryptos as risky investments, which do not threaten traditional systems but could cause instability if a bubble bursts. Lastly, some worry that cryptocurrencies could damage the control a country has over its money, especially in places with weak currencies. 

With such a wide array of views, it can be beneficial to gain insights from industry professionals. One such expert, Ilya Spivak, the head of global macro at tastylive, shares his unique perspective on the matter. Let’s delve into Spivak’s perspective on cryptocurrencies and their potential impact on traditional monetary systems.

Since their emergence in the wake of the 2008 global financial crisis, cryptocurrencies have struggled to convince a broad-enough coalition of believers to accept that they are truly a form of money. To take up that role, these new digital assets must deliver on three key functions.  

They need to be effective at being: 

• A unit of account 
• A medium of exchange 
• A store of value 

Bitcoin and its ilk can be said to broadly achieve the first of these, though there are lingering questions about their efficiency, accuracy, and transparency relative to existing national fiat currency systems. The latter two are problematic. Crypto volatility and murky, uneven regulation undermine both. 

It isn’t difficult to understand why.  

Faith and credit

Consider the U.S. dollar. It is backed by the “faith and credit” of the U.S. government. That is far weightier than it sounds. The creditworthiness of the United States is underpinned by the largest and richest tax base in history. The country is also the world’s strongest military power.  

This makes the U.S. overwhelmingly unlikely to default, while possessing all the might needed to incentivize—and, if push comes to shove, compel—those in its debt to pay up.  

It is small wonder that the U.S. Treasury bond is the default “risk-free” asset for international financial markets while the greenback is used to settle over 80% of global monetary transactions, according to data from the Bank of International Settlements (BIS).  

Such a scale means that the dollar is unrivaled in its liquidity, enabling it to absorb large capital flows without much volatility. It also encourages the development of deep, sophisticated financial markets where the multitude of participants demand robust and predictable regulation. These benefits are self-reinforcing, making for even greater scale. 

Cryptos are hard to regulate

Bitcoin and other cryptocurrencies lack these qualities by design because they were expressly conceived to enable transactions outside the reach of governmental oversight. Not surprisingly, they have been devilishly difficult to regulate.  

This means that securing the level of trust needed for overwhelming adoption is ever elusive, which undermines liquidity. Which, in turn, keeps volatility uncomfortably high for something wanting to be “money” rather than a jumpy, speculative vehicle. This amounts to the U.S. dollar’s virtuous self-reinforcement dynamic in reverse. 

All up, cryptocurrencies have little scope to become viable alternatives to national fiat-based systems. However, the blockchain and smart contract technology at their root enables a potent challenge to traditional financial intermediaries, like banks and credit card companies.  

If national monetary authorities like the Federal Reserve can use it to create and efficiently manage vast digital payment systems without an army of private-sector middlemen, they will be able to cut them out of the loop and deal with customers directly.  

Central banks strike back

This process is already underway. The Fed, the European Central Bank (ECB), the People’s Bank of China (PBOC) and many others have made no secret of working on digital versions of their fiat currencies, the so-called CBDCs (central bank digital currencies) or “govcoins”.  

When these become operational, the financial institutions left out of the equation will have to figure out how to keep customers’ cash on their books. That is likely to mean slashing prices for services and bringing premium offerings like tax advice and financial planning to the mass market. The alternative might lead to obsolescence and extinction.  

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

Ryan Sullivan is an active options and forex trader and programming producer for the tastylive network.