Bitcoin is already a barbarous relic in fintech time. It has failed to make the grade as a daily means of exchange after 12 years of agitation, bar money laundering, cyber extortion, and Iranian sanctions-busting.
It has not progressed beyond the stage of a speculative asset. It is captivating but is not what the evangelists promised.
Some of the other 8,000 cryptos may acquire social utility. Goldman Sachs says Ethereum could muscle into financial contracts, becoming the "Amazon of information". Fixed stablecoins may find a profitable role, though they still have an umbilical cord to dollars, euros, or yen, and import their credibility from a central bank exchange peg, and therefore are not currencies at all.
But one thing that cryptomania will certainly not achieve is to create a Hayekian catallaxy of denationalised "free" currencies that break the fiat monetary control of established states, and this surely was the original purpose after the Lehman debacle. The rebels are more likely to bring about the exact opposite: yet greater concentration of power in the hands of overmighty central banks and the digital oligarchy, the robber barons of our time.
Cryptos have set off a stampede by governments for all-enveloping digital currencies, and it is this that poses an insidious threat to liberty. The ultimate effect may be to subvert free enterprise and turn Western democracies into something a shade too close to Xi Jinping's totalitarian surveillance state. In short, cryptos should be viewed with extreme suspicion by the very libertarians who guard the crypto faith.
My presumption – at the risk of making more enemies – is that the $2 trillion crypto balloon (or is it $1.3 trillion this week?) will deflate once liquidity dries up, reminding us that these coins have no tax-raising authorities behind them and therefore no floor.
Nor do they have much legal recourse. It must have been painful for Stefan Thomas in California to watch his stash of 7,000 bitcoins reach almost $450m in value last month. He had lost the passcode . Then his back-up hard drive failed. Whoops.
The broad point about cryptos has been made by the Bank of England's Andrew Bailey: "Buy them only if you're prepared to lose all your money."
It has also been made by Agustin Carstens at the Bank for International Settlements. I do not wish to labour the critique but it is worth citing his speech, because it is the definitive verdict on digital currencies from global regulators. He calls Bitcoin "Tesla without the cars" , or a "community of online gamers, who exchange real money for items that only exist in cyber space."
He thinks the mechanism may "break down altogether" once Bitcoin hits the hard cap of 21m coins. The seigniorage incentive for verification by "miners" then evaporates, transactions slow to a snail's pace, and the regime becomes vulnerable to a "majority attack". No doubt crypto enthusiasts will dispute that this is an Achilles heel.
They will dispute too that miners are using as much electricity as mid-sized countries to obtain the reward, and mostly from CO2 disaster sites such as Iran (using oil), often inside mosques where power is free; or from coal plants in China, at least until the crackdown by the State Council this week.
The Cambridge Centre for Alternative Finance estimates that these miners were burning electricity at a rate of 145 terawatt-hours a year as of early May, fast catching up with the UK at 270 TWh (2019 data), and at times well above it. It is something of a mystery that the G20 has not shut down this racket already.
Dozens of central banks have a task force developing a state-backed e-coin , not so much because they feel threatened by the crypto insurgency – they do not – but rather because cryptos have planted a tempting idea in their heads. Some see it as a way to drive interest rates further below zero, even to minus 2pc. Others see digital mania as an excuse for institutional empire building.
The problem when central banks embrace digital currencies is not just that cash becomes extinct, and therefore erodes the freedom of anonymous pure money. That is happening already as contact and debit cards take over. Cash use in the UK has collapsed. Try finding a shop or restaurant that still accepts krona notes in Sweden.
The bigger question is who controls how money is used. China is already rolling out its digital yuan in a dozen cities as a trial. It appears on smartphones with a silhouette of the tyrant Mao. This e-currency (DCEP) has many purposes: to leverage artificial intelligence and big data, and in the words of one Chinese official to counter the US’s ability to "exercise global hegemony and carry out long-arm jurisdiction" through the Swift payments system.
Above all, it is a tool of domestic control, allowing the state to collect data on every transaction in real-time, in a centralised computer system with algorithms to flag activity deemed a threat to the Communist Party. It can block activity. Which is why the Central Commission for Discipline Inspection – the Party enforcer – loves it.
It joins face-recognition cameras and social credit scores in Mr Xi's Orwellian state, but it is also intended to subdue Alipay, WeChat Pay and Tencent before they become a law unto themselves. "It is not just a technical experiment. It is a giant leap for the Communist Party's control and influence in Chinese society," say Yaya Fanusie and Emily Jin from the Center for a New American Security in Washington.
Western central banks are not trying to oppress their people. Yet their digital currencies are nevertheless Leviathan beasts in cubhood, offering authoritarian temptations. The danger rises if the Federal Reserve, the Bank of England, or the European Central Bank expand from wholesale to retail digital banking, an idea already floated.
Do we want them to offer bank accounts directly to firms, funds, and households, competing head on with commercial private banks? This would risk a rush to central bank safety in a financial crisis, setting off a vicious circle. One may not weep for bankers, but it is surely worse for state agencies to acquire a monopoly over money deposits and private savings, deciding who receives loans, draining the lifeblood out of capitalism.
The central banks answer to political fashion. Private wealth would be steered to pet causes, or what Hayek called the "social-engineering state". Economic pluralism would give way to a centralised, quasi-Chinese version of Leninist capitalism, or in less extreme form to the dirigiste planning of Brussels, at odds with the vibrant chaos and political insolence of the Smithian market. It would scarcely be better if Facebook had such power through its Diem currency , since Facebook is not a neutral social actor.
The beauty of today's fractional reserve banking system – foundation for three centuries of galloping progress – is that the allocation of private money is not controlled by the state. The central banks provide safe and stable money. They do not – or rather did not – pick winners and losers.
They crossed a line when they began to use QE as a routine tool of inflation management, to the point where the ECB is the preeminent buyer of European corporate bonds, and the Bank of Japan owns much of the Tokyo stock index.
Price signals have broken down in the bond markets. Financial repression has prevented the Schumpetarian process of creative destruction and led to a stagnation trap.
The last thing we want is a brave new world where central banks acquire another way to meddle in everything. The historical theme running through Georg Simmel's Philosophy of Money is that freedom evolved hand in hand with the extension of fungible and anonymous money. It broke the social controls of feudalism and patronage. Let us keep it that way.
T his article is an extract from The Telegraph's Economic Intelligence newsletter. Sign up here to get exclusive insight from two of the UK's leading economic commentators – Ambrose Evans-Pritchard and Jeremy Warner – delivered direct to your inbox every Tuesday.
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