Cryptocurrency crash exposes the hollowness of its liberating promise

For its proponents, cryptocurrency is, at its core, a liberating project to free humanity from government constraints—most of all its ability to weaken “paper” currency by printing more of it. Do Kwon, creator of the stablecoin TerraUSD, from South Korea has regularly equated fiat currency with “state violence.”

So when inflation kicked in, the cryptocurrency proponents were victorious. Venture capitalist and bitcoin investor Peter Thiel declared in April that the value of bitcoin “tells us that central banks are bankrupt, and that we are at the end of the fiat money system.”

Then a funny thing happened. As the Federal Reserve responded to rising inflation by raising interest rates, the fiat currency rose a long time ago. Bitcoin has fallen 30% against the dollar since Mr. Thiel’s comments. TerraUSD, which was supposed to trade one-to-one with the dollar, is now trading eight-for-one. In terms of fiat money, the total value of cryptocurrency has fallen by 56%, or $1.6 trillion, since November.

Perhaps this is just another of the many temporary withdrawals of cryptocurrency. Or perhaps higher interest rates have exposed the emptiness of the liberating promise of cryptocurrency.

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 more recently. Cryptography was different: it sought to completely replace the financial system with one that was faster, cheaper, less government-controlled, and more accessible to the poor.

She had 13 years to make the case, but she failed. Bitcoin makes up only 0.2% of international remittances, according to Manuel Orozco of Inter-American Dialogue, a US-based think tank. El Salvador submitted a legal tender for bitcoin last September and greatly supported its adoption. Use has since declined; Only 20% of companies in El Salvador accept it and less than 5% of sales are made in bitcoin, according to a study in April. It turns out that the poor do not need new currency: they need cheaper ways to use the old currency. Encryption makes everyday transactions more expensive, not less. Bitcoin ATM fees can range from 7% to 20%, and transaction fees from $1.78 to $62. The only companies that truly embrace cryptocurrency are those that are sensitive to censorship, such as ransomware and sanctions breaches.

After it failed as a medium of exchange, cryptocurrency remained as an asset class: today, crypto is mainly used to trade other cryptocurrencies. Here, too, libertarian arguments are made for the superiority of cryptocurrencies over more regulated assets such as stocks. Mr Thiel said the stock is a “government-related entity”. “Woke companies are almost under government control in a way that bitcoin will never be.”

“Unlike the IPO boom, unlike venture capital, [crypto] It doesn’t require that you know a guy, be in good contact, or be an approved investor to get involved. This is an opportunity for underrepresented communities to be in the wealth-creating phase of some new stuff, rather than eventually coming.” This, he said, is why “there are more minority investors than white investors in cryptocurrency.”

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There are of course profound differences between stocks and cryptocurrencies. Stocks have an intrinsic value: they are a demand for the company’s cash flow. Its price may be out of control with this cash flow but at least you can make a judgment. Stocks can go to zero and investors can lose their fortune. But those risks are mitigated by regulations: companies must disclose information materials for their stock price, mutual funds must report their assets, and stockbrokers and their clients must meet certain standards. This regulation has costs, including barriers to entry.

Instead of standardized regulatory filings, cryptocurrency issuers publish language-specific “white papers” on the Internet. Aside from some stablecoins, cryptocurrencies are not backed by tangible assets, so even outlandish predictions of their value cannot be refuted. Crypto promoters argue that cryptography is not security and should not be regulated as such, and it has been heavily spent and recruited to make these opinions heard in Washington. So, while regulators have brought and filed law enforcement lawsuits, laissez-faire has largely prevailed at the federal level.

Du Kwon, creator of the stablecoin TerraUSD, regularly equates fiat currency with “state violence.”


picture:

Wuhe Chu/Bloomberg News

This means that barriers to entry and investor protection are low. TerraUSD breakdown illustrates the risks. Stablecoins are usually pegged to the dollar and keep 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 with a reserve fund now depleted of bitcoin and other cryptocurrencies, i.e. nothing concrete.

With libertarian reasoning, Mr. Kwon once argued that this made TerraUSD superior to regular stablecoins that are “hostage to those who feel they control the underlying bank deposits.” Mr. Kwon said TerraUSD offered “the purity of decentralization in the sense that no one can freeze your assets…it is more powerful than regulation.” Of course, this meant that when TerraUSD and Luna’s total value rose from $48 billion to less than $3 billion in less than two weeks, there weren’t many assets left for investors either. (Mr. Kwon announced a plan to distribute 1 billion tokens from a new version of Luna to existing Luna and TerraUSD holders and developers.)

Investors, including underrepresented communities, who were involved in creating crypto wealth are now taking part in destroying their wealth. Someone might say to warn about it. With the exception of Timothy Massad, the former CFTC chairperson, he said: “We have determined that caveats in financial markets are not a good way to grow markets in general… Financial access and inclusion must come with a reasonable framework for investor and consumer protection.”

write to Greg Ip at greg.ip@wsj.com

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