Bitcoin and blockchain technology have transformed the financial world for the better – Stuart Gillies
Satoshi Nakamoto, the pseudonym for the person or group of people behind Bitcoin, made their intentions clear: our money should not need banks, it should not be controlled by anyone. The chancellor at the time was Alistair Darling, who would later continue to open Edinburgh’s Library of Mistakes. Dedicated to financial history and specifically how things have gone wrong; covering events from the recent financial crisis of the City of Glasgow Bank’s collapse almost 150 years ago.
Some may look at their crypto wallets after the recent crash in the crypto markets, fall well below half of the top, and wonder if the library should make some room for Bitcoin and the many cryptocurrencies it has created. I would argue, no. Bitcoin, and especially the blockchain technology it depends on, has transformed the financial world for the better.
Bitcoin was meant to be a form of digital gold, designed as a deflationary asset, not controlled by any individual or government, so it could not be devalued through politics. A safeguard against the proposed incompetence or malice of central banks or governments (as evidenced by its widespread adoption in certain developing countries). But despite the fact that it was born out of the last recession in 2009, crypto has no doubt not yet been tested by a proper recession. Unfortunately, as central banks deal with inflation and the wider markets are beaten, it does not pass the test and the notion that crypto is immune to macroeconomic policy or acts as an inflation hedge does not look good. Why is this? Not before had the courts and regulators begun to reconcile with crypto as an asset – something that opened the door for investors and institutions with crypto to comfortably lend against their holdings – before the market collapsed. This led to some investors and crypto hedge funds failing to meet margin requirements. Bitcoin, and crypto in general, stumble is nothing new. The extreme volatility is almost a function for those with a stronger stomach than me. However, this crash is different. While the crypto markets have historically been dominated by retail investors who bought and traded in relatively small amounts, institutions are now major players and the cheap money hunt for risky assets has been put on hold as interest rates rise and the availability of capital decreases. This has led to mass sales as the appetite for risk decreases and money moves into traditional, safer assets such as bonds.
It is too early to say whether such as Bitcoin have failed, or whether they will ever be a genuine alternative currency, but crypto-technology has transformed finance. BNP Paribas and JPMorgan are among the banks that use blockchain and smart contract technology with digital tokens for trading in repurchase markets (repo). Abrdn recently confirmed that they are exploring the use of blockchain technology to enable retail investors to purchase digital tokens in various assets. Individuals and institutions use blockchain technology to market and trade in tokenized carbon credits to increase their prices and stimulate environmental efforts. Central banks around the world have woken up to the potential of central banks’ digital currencies (CBDCs), in particular the threat posed by privately created or decentralized global currencies. Some, like the Bank of England, are still consulting on the best way forward for a CBDC, whether it is retail (which effectively allows citizens to keep deposits with the central bank) or wholesale (cross-border payments). Others, including the People’s Bank of China, are already testing a CBDC. The last 150 years have shown the increase and sometimes the fall of life-changing innovations in finance, from ATMs to credit cards, internet to smartphones. Cryptotechnology will shape the next 150 years. This crash may be what the market needed as an opportunity to shake off the cheap lure of “anything blockchain-related” projects, while encouraging regulators to respond more quickly to the systemic risk involved in institutional cryptocurrency trading. While some of the core principles of decentralized finance are still being tested, the innovation it brings will continue to reshape our economic lives.
Stuart Gillies is a senior assistant, Dentons
