To its advocates, cryptocurrency is, at its heart, a libertarian project to free mankind from the shackles of government — most of all its power to debase a “fiat” currency by printing more of it. Do Kwon, the South Korean creator of the stablecoin TerraUSD, regularly equated fiat currency to “state violence”.
So when inflation took off, crypto’s supporters were triumphant. Bitcoin’s value “is telling us that the central banks are bankrupt, that we are at the end of the fiat money regime”, venture capitalist and bitcoin investor Peter Thiel declared in April.
Then a funny thing happened. As the Federal Reserve responded to rising inflation by raising interest rates, fiat currency rallied big time. Bitcoin has fallen 30% against the dollar since Thiel’s comments. TerraUSD, which is supposed to trade one-for-one with the dollar, now trades eight-for-one. In fiat money terms, crypto’s total value has plummeted by 56%, or $1.6tn, since November.
Perhaps this is just another of crypto’s many temporary downdrafts. Or perhaps rising interest rates have exposed the hollowness of crypto’s libertarian promise.
Bubbles are a regular byproduct of our financial system, from dot-com stocks in the late 1990s to subprime mortgages in the mid-2000s to green technology recently. Crypto was different: It sought to replace the financial system altogether with one that was faster, cheaper, less under the thumb of government and more accessible to the poor.
It has had 13 years to make that case, and failed. Bitcoin comprises just 0.2% of international remittances, according to Manuel Orozco of the Inter-American Dialogue, a US-based think tank. El Salvador made bitcoin legal tender last September and heavily subsidised its adoption. Usage has since plunged; only 20% of companies in El Salvador accept it and less than 5% of sales are conducted in bitcoin, according to an April study. The poor, it turns out, don’t need a new currency: They need cheaper ways to use the old one. Crypto makes day-to-day transactions more expensive, not less. Bitcoin ATM fees can range from 7% to 20%, and transaction charges from $1.78 to $62. The only businesses to truly embrace crypto are those allergic to oversight, such as ransomware and sanctions busting.
Having failed as a medium of exchange, crypto survives as an asset class: Today, crypto is primarily used to trade other crypto. Here, too, libertarian arguments are made for crypto’s superiority over more regulated assets like equities. A stock “is a government-linked entity,” Thiel said. “Woke companies are sort of quasi-controlled by the government in a way that bitcoin never will be.”
Brian Brooks, chief executive of Bitfury Group, a bitcoin-mining company, and a former Trump-appointed bank regulator, told Congress last year: “Unlike the IPO boom, unlike venture capital, [crypto] doesn’t require that you know a guy, or that you be well-connected, or that you be an accredited investor to participate. This is a chance for underrepresented communities to be in on the wealth creation stage of some new thing, as opposed to coming in at the end.” That, he said, is why “there are more minority investors than white investors in crypto.”
There are, of course, profound differences between stocks and crypto. Stocks have intrinsic value: they are a claim on a company’s cash flow. Its price may be out of whack with that cash flow but at least you can make a judgment. Stocks can go to zero and investors can lose fortunes. But those risks are mitigated by regulations: companies must disclose information material to their share price, mutual funds must report their assets, and securities brokers and their customers must meet certain criteria. This regulation has costs, including barriers to entry.
Instead of standardised regulatory filings, cryptocurrency issuers publish jargony “white papers” to the internet. Aside from some stablecoins, cryptocurrencies are backed by no tangible assets, so even outlandish predictions of their value are unfalsifiable. Crypto promoters argue crypto isn’t a security and shouldn’t be regulated as such, and have spent and recruited heavily to make those views heard in Washington. So while regulators have pushed back and brought enforcement cases, laissez-faire has by and large prevailed at the federal level.
That means barriers to entry and investor protections are low. TerraUSD’s meltdown illustrates the perils. Stablecoins typically peg themselves to the dollar and hold a reserve of actual dollars in a bank deposit to redeem the coins. TerraUSD was an algorithmic stablecoin backed only by another coin called Luna and by a now-depleted reserve fund of bitcoin and other cryptocurrencies, i.e., nothing tangible.
With libertarian logic, Kwon once argued this made TerraUSD superior to regular stablecoins which are “held hostage to whoever feels like they have control over the underlying bank deposits.” TerraUSD offered “decentralisation purity in the sense that there’s nobody that can freeze your assets…It’s a lot more robust from regulation,” Kwon said. Of course, that meant when the combined value of TerraUSD and Luna went from $48bn to under $3bn in less than two weeks, there wasn’t much in the way of assets for investors, either. (Kwon has announced a plan to distribute a billion tokens of a new version of Luna to existing Luna and TerraUSD holders and developers.)
Investors, including from underrepresented communities, who shared in crypto’s wealth creation are now sharing in its wealth destruction. Caveat emptor, one might say. Except, Timothy Massad, former chairman of the Commodity Futures Trading Commission notes, “We’ve decided that caveat emptor in the financial markets is not a good way to grow markets overall…Financial access and inclusion needs to come with a reasonable framework of investor and consumer protection.”
Write to Greg Ip at [email protected]
This article first appeared in the Wall Street Journal.