The writer is chairman of Fulcrum Asset Management
Investors in bitcoin and other cryptocurrencies have enjoyed a phenomenal run, but they are now worried that Janet Yellen’s arrival as US Treasury secretary may herald a new era of hostility from regulators and central banks towards what boosters call “libertarian” forms of digital money.
In her last press conference as chair of the Federal Reserve in 2017, Ms Yellen said bitcoin was a “highly speculative asset” and “not a stable store of value”. These dismissive remarks were echoed by many other public officials at the time. Since then, however, the market value of bitcoin has roughly doubled. Digital currencies are here to stay.
In the first crypto frenzy of 2017-18, comedian John Oliver described bitcoin as “everything you don’t understand about money combined with everything you don’t understand about computers”. The technology aspects, particularly the blockchain network of digital ledgers that are used to record transactions, have not really lived up to the initial hype, but they are beginning to make progress. The issuance of $20bn in “initial coin offerings” seemed to contain elements of a speculative bubble, but the funds raised are now being used to launch projects broadly similar to other IT ventures in Silicon Valley.
Jay Clayton’s recent departure from the chair of the US Securities and Exchange Commission may result in less hostile regulatory scrutiny of these activities, especially if Gary Gensler, who teaches about digital currencies, replaces him.
However, resistance to digital currencies as payments and transfer vehicles is likely to remain. Partly because of high transaction costs, bitcoin is not widely used for payments, and its future role seems limited.
The outgoing Treasury secretary Steven Mnuchin has been working on new regulations to increase transparency in bitcoin transfers and reduce the scope for money laundering. Ms Yellen, in conjunction with the Fed, is likely to adopt an even more orthodox approach, treating the payments system as a quintessential public good.
The Fed is collaborating with foreign counterparts in investigating the development of central bank digital currencies. It is almost certain that CBDCs will eventually be issued in the major jurisdictions, following China’s lead. However, they will be denominated in national currencies, not crypto.
Private competitors denominated in genuinely new currencies, such as bitcoin, will be heavily regulated or actively discouraged. Hybrid stablecoins, such as Facebook’s libra, that are pegged to a single currency or other real assets may be more welcomed by central banks, if they were directly transferable into traditional currencies. Furthermore, they may not be powered by blockchain. Each of the major central banks may develop its own distributed ledger technology.
That still leaves a role for crypto as an investment vehicle and store of value. Can bitcoin seriously compete with gold as a safe asset for the largest investors? History, regulation and market volatility make that seem improbable, but it is beginning to develop a more important role. Many big hedge funds and some conventional asset managers have followed Paul Tudor Jones in adopting bitcoin as a core hedge against inflation. While this may have seemed attractive when central banks were in effect creating money by buying up government debt last year, there are few signs of inflation on the imminent horizon.
Yet bitcoin prices have continued to rise, apparently driven by a narrative that holds that a privately created asset, which in theory has a finite supply, cannot be “printed” like the “legacy” fiat currencies.
According to Gold Hub, gold stocks held above ground amounted to 198,000 tonnes at the end of 2019, with about 57,000 tonnes of proven reserves below ground. This total stock would be valued at about $17tn in today’s prices. The latest market value of bitcoin is about $0.6tn — bitcoin bulls see this as a gauge of how much further its price could rise.
There seems little reason on monetary policy or financial stability grounds why regulators should be worried about cryptocurrencies competing with gold as a store of value.
The crypto world is currently in a frenzy of short-term speculation. However, if investors continue to buy into the dubious narrative that these private currencies are “safer” than those controlled by the central banks, they could rise much further in market value in coming years.
Stranger things have certainly happened in financial markets.
Letter in response to this column:
At least bitcoin does what it says on the tin / From David Crook, Chief Executive, Tail Wind Advisory & Management, London WC2, UK