Can Cryptocurrency Free the World From Credit? Well Maybe Not
Cryptocurrencies have gotten everyone’s attention in 2017. Digital currencies like Bitcoin, Litecoin, and Ethereum have taken the financial world by storm, shooting up in price and making a lot of investors very happy.
Plus, they’ve no doubt put a smile on the face of those interested in alternates to fractional reserve banking.
One of the byproducts of cryptocurrency use is as a method to seemingly escape the cycles of debt and credit which have become a mainstay of modern economics.
Virtual currency’s peer-to-peer architecture means all transactions are settled on an equal basis, since digital assets obviously can’t be in two wallets at the same time.
Plus, some blockchain securities platforms like tZERO have made it a mission to simplify the Wall Street practice of ‘trade, clearing, and settlement.’ One type of new transaction called the atomic cross-chain swap even makes it impossible for just one side of a trade to get done.
But even with these technological innovations, some worry that the potential to make big profits with cryptocurrencies encourages investors and other buyers to make the same types of risky decisions with credit, that those in the crypto and blockchain world are actively seeking to get rid of.
For example, there are reports that some consumers in the United States are happy to go into debt in order to collect cryptocurrency. Joseph Borg, the president of the North American Securities Administration, told CNBC about instances where credit cards, equity lines, and even mortgages were created in order to buy Bitcoin.
A lot of leading virtual currency exchanges also offer margin trading. One in Japan even lets users leverage up to 15x their cash deposits. Even though much of the lending on these exchanges are peer to peer, there was talk at CoinDesk’s Invest conference last month to introduce things like prime brokerage and securities lending-type services.
These moves were discussed as a way to meet big demand from institutional investors.
There’s also swirling rumors that Tether has been pumping out tokens in order to boost the price of Bitcoin on Bitfinex, a major Asian cryptocurrency exchange. However, Tether says an upcoming audit will put these speculations to rest.
Examples like these are pieces of a growing concern from many in the cryptocurrecy community. Some believe that the introduction of Bitcoin into the mainstream is going to lead to fake Bitcoin that doesn’t even exist.
This could all but eliminate cryptocurrency as a legitimate store of value.
However, some see the concept of credit and cryptocurrency as a necessary component. Professor Perry Mehrling of Barnard College at Columbia University wrote that “Cryptos fear credit, but I suspect they will soon discover that credit is a feature not a bug, and that will require them to re-examine the implicit monetary theory that underlies their coding.”
He explained how the forces creating the markets around cryptocurrency are inevitably relying on the concept of credit in order to manage a balance sheet in search of a profit.
Still, Caitlin Long of enterprise blockchain startup Symbiont sees things a bit differently. She casts doubt on the idea that net settlement has to be a feature in a market, labeling the concept as just “allowing multiple buyers for only one asset.”
She believes the financialization of Bitcoin would ultimately kill its status as a true store of value even if prices might go up in the short term.
Even with these contrasting viewpoints, the concept of credit and cryptocurrency is an important one. Digital currency has called several longstanding financial practices into question, and credit is one of them, especially since cryptocurrency transferred between people is just an electronic abstraction.
Many are hopeful that virtual currency represents liberation from both the all-encompassing power of central banks, and from particularly nasty forms of credit, truly carrying out the adage of: ‘Debt is slavery.”
However, even as the technological innovations of cryptocurrency seem to at least reduce the influence of credit, it’s still starting to sneak inside the blockchain economy.