The rise of cryptocurrencies has its roots in several fundamental reasons that leaders should not overlook.
It is possible to distinguish four main reasons:
- Digitization of the whole world,
- Technological progress,
- The power of new global companies,
- Mistrust of national currencies.
The fourth point is by far the most annoying for the leaders of the nation states.
A truly interconnected world
Let’s start with the first point. Cryptocurrency can now spread across the entire planet quickly because the whole world is computerized and interconnected. We can say, even if there are obvious local nuances, that everyone has a computer or a smartphone connected to the Internet, both companies and individuals, NGO or State services (public administrations and services). And all of them use digital services. This makes the world population accessible to (nearly) all digital content, and especially to digital currencies.
From all over the world, one can trade, buy or sell in any digital currency, be it dollars or bitcoin.
The technological conditions for the emergence of cryptocurrencies
The second point is the technological aspect: it is not enough that everyone is interconnected for a virtual currency to exist, it is also required that digital technologies exist, in particular blockchain and online payment.
Without the blockchain, what is an international virtual currency ? it is Interflora’s Fleurin. You know, this international network of florists. They set up the equivalent of a virtual currency – the Fleurin – to be able to exchange transactions from one florist to another. It was back in the 1950s and 1960s.
With the blockchain revolution, virtual currencies gain in transparency and traceability. The purpose of this article is not to go into the details of how a blockchain works, but let’s just say that with this technology, all exchanges and all histories are known and – until further notice – tamper-proof.
Paradoxically, we can say that the blockchain has brought credibility to virtual currencies.
As for online payment, it is becoming more widespread because the power of digital debits allows the growth of e-commerce (and all e-transactions for that matter). With 56Kb modems or 3G cell phones, this was impossible. Keep in mind that the first smartphones appeared only fifteen years ago and the first iPhone was only marketed in mid-2007.
Global digital companies
The third point to underline is the rise of private businesses of unchallenged global power to date. We obviously think of GAFA (Google Amazon Facebook Apple) but that would be reductive. Many private companies now have global market capitalization and organization that allow them to compete with sovereign states, or even to act like states.
We must distinguish a virtual currency like Bitcoin, as famous as it is, and the virtual currencies that powerful multinationals plan to launch.
Bitcoin was started by a man (or a group of men) named Satoshi Nakamoto. Bitcoin is a purist’s currency, with actors implementing a mathematical economic theory. There is no idea of competing with nation states and their sovereign currencies, just the idea of implementing a concept.
A currency like the DIEM, launched by Facebook and 27 other private companies, is several steps ahead of bitcoin. Even if they swear about their philanthropic objectives, they are indeed in the process of voluntarily creating a trading tool with the objective of supplementing national currencies, or rather the currencies which are used for international transactions: the dollar, the Euro, the Swiss Franc, the Japanese Yen or the British Pound, to name only the main ones.
The stringent reactions of state chancelleries clearly prove that the danger is real and well spotted.
The end of sovereign coins
We come to the fourth point: distrust of traditional currencies
A currency has traditionally been based on the trust that users place in it. If one is convinced that the crumpled little piece of paper he holds in his hands is worth ten dollars because it’s written on it and that wherever he goes, today or in five years, it will (almost) always have the same value, and that in addition to millions of people think as he does, then this currency has a future.
Conversely, if you detain currencies of a country with a faltering economy and no one any longer trusts those same little pieces of paper called banknotes, then your currency has no value. Ask the Lebanese or the Zimbabweans about it.
Today, there is a high level of confidence in the international currencies mentioned above (dollar, euros, yen, pound sterling, Swiss franc). Or should we write “used to”? That’s the whole point.
Apart from the Swiss Franc, all these currencies are linked to countries or economic zones (for the euro) that are very heavily indebted and for which central bankers are printing more money every month. We say “quantitative easing” to make it look expert, but it is nothing more than masked devaluation and increasing debts.
A devaluation can undoubtedly be a monetary policy tool. But the more time passes, the more the tool becomes like an acid that crunches users’ confidence. What is a dollar or a euro really worth when the central bank can issue more and more for years? One is legitimate to ask the question.
In short, the signature is not as reliable as it once was. For sure this loss of confidence is yet marginal, but it is real.
With a fast-discrediting currency, everyone is tempted to find a replacement solution, an alternative. This is where cryptocurrencies come in. For that reason, the first groups of people to seize these currencies have been the mafia networks and the darkweb; they all want to operate their activities without being seen by states authorities and governments, most often because of their illegal nature.
Other groups of people, being more “geek” than mafioso, have started using them too, driven by technological curiosity, then from there, visionary entrepreneurs and some specialized media, then finally, the general public and the mainstream media.
All, with different levels, make the same reasoning: confidence in national currencies is slightly eroded and this should increase because States authorities do nothing to stop it (or even, they do everything to make it happen.) ; if we anticipate this trend a little, what will happen when confidence has completely vanished in these “strong” international currencies?
Their answer is rational: you need a credible alternative for exchanging goods and services. A tool to be able to trade (or barter) and which is the most widely accepted.
Of course, such discourse looks like “survivalist” or “collapsologist” and it is not certain that currencies or civilizations are going to suddenly collapse. But who can exclude it?
The balance of power that is coming between nation owned currencies and cryptocurrencies is based solely on the trust that will be placed in them. As long as an Italian industrialist prefers to be paid by his South African customer in US dollars, the US currency has a bright future ahead. The day when economic actors (whether companies, individuals, States, banks, etc.) will have the same level of confidence (or distrust for that matter) in these national currencies as in these virtual currencies, then these cryptocurrencies will be in able to kill national currencies.
Today, the volatility of Bitcoin, coupled with the absence of a power project (in the sense of sovereign power) of its founders, several early bird scandals (such as trading rooms that disappear overnight) and also the novelty of virtual currencies, all this limits the confidence that the public can place in it.
Now imagine a virtual currency that does not suffer from such volatility, that is well monitored, that enjoys professional marketing and communication, and that is managed properly by experts. Such currency would have all the assets to challenge national currencies. It’s coming faster that expected.