After reaching all times highs in 2021, cryptocurrency prices have not found a permanent bottom. And the appeal of crypto’s promise to reinvent money has also reached its limit with a very niche audience. To appeal to a wider, more mainstream user base, proponents of the new technology will need to completely overhaul the way they promote it.
Imagine your cousin, your dentist, or someone else you know who is least likely to experiment with money or technology. I think of my mother. She will never use a bitcoin wallet or open a savings account in USDC, a digital stablecoin pegged to the US dollar. She will never want a non-fungible token for a digital collectible on Tom Brady’s Autograph Network. But she might be willing to verify her identity on her mortgage lender’s website if it would speed up the home buying process. And if this process of digital identification was powered by the blockchain technology that underpins cryptography, she wouldn’t even have to know.
Most people are like her: they aren’t interested in any new technology unless it can help them do things faster, cheaper, and more securely. This is why iTunes was a winner. This is why Amazon.com is a juggernaut. This is why Netflix has gained so many followers. And that’s why payment apps like Zelle and Venmo have massive appeal.
The problem with crypto so far – in addition to its volatility, scams and failures of untested middlemen – is that many of the problems it claims to solve have already been solved. We can already send digital payments or create online savings accounts. And we can do it with the same currency that we use to pay our taxes and conduct cash transactions. So why do we really need cryptocurrency?
Let’s go back to where it all began: our need to trust money. This is why the financial sector is full of terms such as trust, security, custodian, guarantee. Nevertheless, every once in a while there is a calamitous breach of confidence in which bankruptcies proliferate, investors are wiped out and millions of people lose their jobs and homes.
An example was the Great Depression, when people discovered that the banks they had entrusted their money to were not as safe as they had hoped. In the aftermath, government power and a new regulatory structure were put behind the banks to help restore confidence. In the United States, that meant creating the Federal Deposit Insurance Corp, the Securities and Exchange Commission, and a new housing authority to help support an increase in home lending.
Then the financial crisis of 2008 showed how insufficient these guarantees were. Major financial institutions and their regulators seemed unprepared for the collapse in house prices and its effects on financial markets and the economy in general. Suddenly, people no longer trusted the banks or the government.
Enter crypto. Bitcoin was born in a white paper published on October 31, 2008, just weeks after Lehman Brothers went bankrupt and the US government and Federal Reserve began bailing out banks. The document said digital trade was too dependent on trust in financial institutions. The idea was to create “an electronic payment system based on cryptographic proof instead of trust”. Indeed, the lack of trust. Instead of relying on bankers repossessing your house while paying themselves massive bonuses, people could opt for a secure, decentralized network called the blockchain. Crypto, enthusiasts said, would rival the existing centralized financial system in due course.
Almost 15 years later, this new currency has lost much of its utopian appeal. It turns out that, for most people, this new financial system requires trusting an institution – perhaps a wallet provider or token exchange or decentralized finance (DeFi) lender. And too many of them have turned out to be fraudsters or vulnerable to hacks. Today, even some of crypto’s most passionate advocates say the market needs government regulation to regain trust and attract established financial institutions that were once the enemies of crypto.
If crypto doesn’t offer a more reliable alternative to traditional finance, then what’s the point? So far, its main users seem to be people afraid to use their own government’s currency due to political or economic risks or because they want to evade law enforcement. Otherwise, its primary use has been for speculation – betting on the value of currencies themselves or digital assets, such as NFTs, purchased with currencies.
I have an idea, however. When we talk about financial transactions, we are actually talking about two different things.
There is money, a medium of exchange that allows us to buy or sell goods and services more efficiently than barter. But to make such media trustworthy, it must be a reliable store of value over time. Otherwise, you risk exchanging your valuable good or service for a token that quickly drops in purchasing power. Indeed, it is the intertemporal nature of certain transactions that requires the most trust.
So, when we talk about money, the second thing we also talk about is debt, that is, transactions that are intertemporal from the beginning. At the end of the first quarter of 2022, total credit to the non-financial private sector stood at over $37 trillion in the United States.
The idea of moving part of our financial system to a distributed ledger might still work
And few types of debt are more common than mortgages. In 1920s America, buying a house might mean paying half the value up front and borrowing the other half for five years. Before the US government stepped in, lenders didn’t trust buyers enough to make a 30-year loan with just 10% or 20% upfront, as is often the case today. There are now over $10 trillion in residential mortgages in the United States.
But real estate transactions and mortgages are notorious for the amount and complexity of documents required. Keeping track of necessary information and processing it efficiently can be difficult. Facilitating these types of transactions – by putting essential information about properties, owners and loans on an immutable digital ledger – could make crypto indispensable.
For loan originators, after an initial investment in technology, a digital dossier could result in significant time and labor savings. Some of these savings could be passed on to borrowers. For the mortgage applicant, automated verification of identity, income, bank account statements, etc., would speed up a stressful but unavoidable process.
If established and regulated financial services companies moved their home loan documentation into such an ecosystem, they could eventually move a myriad of other services as well.
We have already seen well-known companies investing in blockchain technology. Hedera Hashgraph enjoys the membership of some of the biggest names in technology and banking, including Boeing, Deutsche Telekom, Google, LG and Nomura. And even though JPMorgan CEO Jamie Dimon has called cryptocurrencies “decentralized Ponzi schemes,” he invests the bank’s money in a digital ledger called Onyx coin systems, which JPMorgan’s website describes as seeking “to help address the complex challenges of cross-border payments, simplify customer liquidity funding needs and deliver next-generation corporate treasury services”. Could this portend a new future for the underlying crypto technology? A highly regulated system of established businesses transacting through a more secure digital database?
Not only do these initiatives lack the Wild West appeal of the early years of crypto, but they are also the polar opposite of the completely anonymous and decentralized networks that crypto enthusiasts hoped to create. Ethereum’s website describes DeFi as “an alternative to an opaque system, tightly controlled and maintained by decades-old infrastructure and processes.” But Ethereum’s examples for current DeFi use cases — helping people take out loans without using personal ID and allowing crypto-savvy Argentinians to escape inflation — seem unlikely to stick. extend to the general public.
When I first started thinking about crypto and trust, I was optimistic about the chances of restarting the crypto space. But as I thought more about how existing crypto platforms are organized, it seemed almost impossible to turn the culture of DeFi and NFTs into something that could truly replace existing banks and money. But the idea of moving part of our financial system to a distributed ledger could still work.
We could end up with a hybrid of three different trust systems: trust in established brands and institutions, trust in regulatory protections, and trust created by a supposedly immutable and tamper-proof digital ledger. All of these were proven imperfect by the Great Depression, the Great Financial Crisis of 2008, and the crypto crash. Perhaps the combination will be less imperfect. There is some value in that. But that’s not the future of money. — (c) 2022 Bloomberg SEC