DIGITAL COINS: Cryptocurrencies have still not overthrown the monetary system, they have failed to become anything more than a speculative investment
- While bitcoin hits the headlines with every surge in its price, it has failed to deliver on its initial promise to be used as a payment method.
- The main reason is that cryptocurrencies are not currencies.
- The revolution of the monetary system could be played out through digital state currencies, such as the digital yuan launched in China.
Although we talk about it regularly, bitcoin is not about to revolutionize the world. Since its creation in 2009, this cryptocurrency has continued to return to the front of the media scene with each new surge in its price. Latest explosion to date: Elon Musk’s coup on Twitter . In February, the boss of Tesla blew up the price of bitcoin by adding the mention “#bitcoin” on the bio of his Twitter account, followed by more than 44 million people. Result: it reached its all-time high at over $ 50,000. In recent months, many financial companies have also shown their interest. However, virtual currencies are struggling to shake off their image as an instrument of speculation.
“For the moment, the promise of bitcoin and other cryptocurrencies to be used as a means of daily payment has not been fulfilled, admits Manuel Valente, director of analysis and research at Coinhouse, a leading player in France. Very few people use it to make payments or purchases, despite the fact that there are merchants that accept payments in cryptocurrency ”. Note that we are talking about bitcoin, the oldest and best known, but there are hundreds of others such as ethereum (the second most important), ripple, litecoin …
For the moment, we buy them in order to invest and build up wealth. “99% of people who come to Coinhouse do not come to buy cryptocurrencies in order to spend but in order to invest part of their assets and their savings”, continues Manuel Valente. And that’s a good bet since its inception, bitcoin has been down just 430 days, according to Coinhouse.
Bitcoin is not a currency
So how can we explain that cryptocurrencies have still not succeeded in replacing our euros in our wallets? First of all – it will come as a shock to you – bitcoin is not a currency. “Money is not good, it is a payment system,” explains Michel Aglietta, scientific advisor at CEPII, professor emeritus at the University of Paris Ouest and co-author of the book The Future of Money (Odile Jacob ) ”. This liquidity can only be sovereign, that is to say verified by a political entity that expresses the social bond in a country. Basically, joining a new currency cannot be improvised. It must be expressed by a central bank and create a social bond.
“Money gives a sense of collective belonging in market societies”, describes Michel Aglietta. When paying, the payment must be considered final, so that we can be sure that there is no fraud. “This goes through a hierarchical system whose transactions are settled on the books of the Central Bank”, continues the economist. Another major element: the unit of account. This “is defined by the constitution of the country”, he underlines. A currency whose unit of account is not formalized in the constitution of nations cannot be a currency. With bitcoin, Satoshi Nakamoto (the pseudonym of the developer (s) behind the technology) did not create a currency, but a speculative asset.
“A bitcoin, as an asset, has a value that has been provided by demand, it’s a bit the same as a masterpiece,” continues Michel Aglietta. A painting is an asset that is sold and bought in the markets. It totally loses its value if no one wants it anymore ”. Bitcoin is defined in its own unit of account which has nothing to do with the official unit of account. Its value in dollars or euros can fluctuate in an almost unlimited way with times when it explodes and others when it collapses. It is true that stocks also fluctuate. When a person buys or sells it, it is because he anticipates the value of the share in the official unit of account (dollars, euros, etc.), and this limits volatility. On the contrary, bitcoin has almost no limits. When he flirted with the $ 20,000 in 2017,
A revolution that will not take place
You might as well forget about the “bitcoin revolution” right away. It will probably never happen. Bitcoin will not become currency with the snap of a finger. To see the next revolution, we must, as often, look to China. The country is one step ahead of the development of a state cryptocurrency. The digital yuan is expected to be the first central bank virtual currency to emerge, closed-loop tests have even started. It would thus tick all the boxes to become a real currency: a form of liquidity recognized by all and whose payments can be verified by a “superior” entity.
“The development of the digital economy necessarily involves the creation of a central bank digital currency to respect the hierarchy of a form of sovereignty above all payment acts”, points out Michel Aglietta. Other countries could also follow suit. The European Central Bank (ECB) launched on October 12, 2020 a public consultation on a “digital Euro”. It remains to be seen how the monetary system might take shape.
The most futuristic – and unlikely – scenario would be a central bank that issues money on behalf of all citizens directly. This idea poses a problem because it is necessary to know to whom one is issuing money, what is the capital of these people and what is their repayment capacity. This supposes a gigantic centralization of information. The other possibility described by Michel Aglietta is a “license system”. A set of banks would be admitted to enter the blockchain as “minors” and could create new payment entities.
The future is already playing out in China
As a reminder, all cryptocurrencies are based on a blockchain, a technology for storing and transmitting information, transparent, secure, and which operates without a central control body. In the case of bitcoin, technology is used to record financial transactions by updating each member’s balance.
Back on topic. In the monetary system of the future, “narrow banks” would mine on behalf of citizens. The money would then be centralized by the digital system of the central bank. “We say ‘narrow banks’ because, to be sure that the system works, they have to issue digital currency as part of the blockchain with absolutely safe assets in return. They cannot engage in financial speculation, they must hold safe securities, insists Michel Aglietta. But that means that there is a separation between finance (the transactions of selling, buying assets, issuing debt, betting on the future) and money creation ”.
And there, we could really speak of revolution. Let’s keep an eye on China, it may well bring us into the world of tomorrow quickly.