By Nick Saponaro
The Financial Stability Board (FSB), a global finance watchdog that monitors financial activities in 24 countries, recently issued a warning about the potential threat that crypto markets posed to the global economy.
In a statement released to the media it said, “Although the extent and nature of use of crypto assets varies somewhat across jurisdictions, financial stability risks could rapidly escalate, underscoring the need for timely and pre-emptive evaluation of possible policy responses.”
The basis of the FSB’s concern stems from the increasing number of banks and financial institutions that are willing to undertake activities in, and gain exposure to, crypto assets. The statement goes on to say that, “If the current trajectory of growth in scale and interconnectedness of crypto assets to these institutions were to continue, this could have implications for global financial stability.”
Certainly, crypto assets are volatile. Therefore, any financial institution that is looking to explore the market has a fiduciary responsibility to its stakeholders to ensure that any exposure is measured against the potential risks.
However, you could argue that, while prone to volatility, the pattern of growth and decline in Bitcoin and the other major crypto currencies is not dissimilar to that of the S&P 500. Looking at the current trajectory of crypto assets, they are following a very similar pattern to that of the equities market.
I would also argue that, while a fledgling sector like crypto is not without risk to investors, there are far more destabilizing forces at play within the traditional financial system.
The destabilizing impact of current monetary policy
Quantitative Easing (QE), which is a fancy term for printing absurd amounts of money and pumping it into the economy and stock market, is already having a deeply destabilizing effect, and it’s a government policy.
We are already seeing the aftershocks of the multi-trillion dollar packages that have been deployed in the U.S. Inflation is at an all-time high and increasing, while the value of the Dollar continues to free fall.
This is only going to get worse, and it isn’t the financial institutions who are going to suffer but the man on the street. Populations of major Western economies around the world are facing a cost of living crisis, the kind that we have not seen for decades. People who rely on the cash economy are being hardest hit and they are the exact same people who can afford the hit the least.
When you consistently debase the currency people are earning, it doesn’t matter how hard they work, their taxes get higher, and their salaries and savings are worth less. It means they never reach that far off nirvana where you have enough to get off the hamster wheel.
Add to this the clear and present danger of recession and you’ve got to wonder why the focus is on crypto when current economic policy has the potential to result in far worse outcomes.
One answer might be the often-cited accusations of crypto being a haven for money laundering and other illicit activities by some of society’s undesirable groups. But as the always excellent and uber successful internet entrepreneur Gary Vaynercheck recently said in a CNBC interview, “I don’t think the crypto space has any more problematic issues than the Internet, society at large, mainstream media, or Wall Street.”
I have to agree. A recent example are the awful events unfolding in the Ukraine, which have shone a light on the extent of money laundering that takes place in the financial sector.
So, what’s really going on?
Pulling back the iron curtain
There is no doubt that when crypto currencies make their way into mainstream use, they will have a destabilizing effect.
But that effect is most likely to be felt by those very people who are now trying to pour cold water on the crypto world. I refer of course to those people who have a vested interest in maintaining the status quo. Governments, Central Banks and the myriad participants in the payments industry, who all stand to lose out.
Consider the central tenets on which the crypto economy is built.
Self-custodianship: The ability for people to control their money, including how and when it is accessed, and used. If you’ve ever had your bank or Paypal account frozen without warning, you’ll know that your money is not your own. Crypto will change all of that, ensuring that your money and the keys to it are controlled by you and no one else.
Democratization: According to the Global Findex database, there are 1.7 billion unbanked adults in the world. These are people who do not have access to a bank account or the adjacent services that we take for granted in high income economies. Crypto will ensure that each and every person in every economy has access to and can benefit from basic financial services.
Trust: In the crypto economy, there are no custodians controlling and manipulating the currency or market. There are no middlemen creaming massive profits off every transaction. There is no centralized oversight. The market is driven by code. The rules are immutable. Every transaction is traceable. There is no center of influence. Instead, the system incentivizes people to cooperate and collaborate.
None of the above lends itself to the type of monopolization of control and free flowing of profits to a small number of beneficiaries that traditional power centers have enjoyed over the financial system for so long. In fact, they obviate the need for them completely.
It therefore comes as no surprise that some governments have moved to ban crypto completely from their sovereign shores. However, despite their opposition to the trading of crypto assets and the acceptance of cryptocurrencies as legal tender, these same states are pushing forward with the development of their own Central Bank Digital Currencies or CBDCs.
At a time when money is already mostly digital, why would governments be looking into creating their own digital currencies? There are a number of reasons and quite frankly none of them are good.
Instead of bringing about a new dawn for financial services, CBDCs could usher in a period of unprecedented centralized control and surveillance. At best, they recreate the old system in digital form with all of the problems that come bundled in with it. At worst, all finance is controlled by one central body (most likely the government) and is used to increase the powers that body exerts over the population.
We are already seeing this in China where the government has eyes on every transaction, can control how and where money is used, and freeze the accounts of anyone at will. Some might argue that this kind of surveillance and control is nothing new to the Chinese and it would be much harder to undertake similar sanctions on individual finance in the West.
You only have to look at Canada and the Government’s attempts to freeze the bank accounts of vaccine dissenters to see that this is not true, CBDCs would make these actions eminently easier to execute in any country. As financial systems continue to heave under the strain of uncontrolled monetary policy, it’s not hard to believe that more governments would be likely to exercise this power, once they have it.
So the question remains: is crypto a threat to the global economy? My answer? Very likely. But probably not for the reasons that those who greatly benefit from the status quo would have you believe.
About the author:
Nick Saponaro is the co-founder and CEO of Divi Labs, developers of a decentralized payment ecosystem that's on a mission to improve people’s lives by making crypto easy and accelerating its mainstream adoption.
A dedicated proponent of the founding principles of the crypto movement, Nick is working towards the delivery of a new paradigm for financial services. One that is truly decentralized, accessible to all, and works for everyone.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.