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Cryptocurrencies - a technological disruption and a challenge for all

Aside from acceptance and trust, issues include high volatility, price manipulations, data loss and theft, technical woes, delays and some high transaction costs.

Cryptocurrencies make a positive contribution to society only if the profit generated from using them is invested in productive capital.

Mr Muller says the likeliest way cryptocurrencies can work is for them to be complementary to established currencies, not as alternatives to them.

THE recent interest in cryptocurrencies and their volatile price developments are in no small part a product of investors' quest for financial return. However, the low-interest environment of developed countries, especially in Europe, as well as dissatisfaction with the expansionary monetary policy pursued by major central banks over the past few years, have played a role as well, as have technological advances, especially in Asia.

First of all, it's worth defining the meaning of cryptocurrency. At present we count roughly 1,500 of such virtual currencies worldwide. Not all of these are meant for public use: some are dedicated to a specific sector, such as energy trading, others operate exclusively as currencies for Internet payments, yet others are based on what are known as decentralised applications, focused on specific usages defined by their developers.

But they all have one thing in common: they rely on an electronic decentralised payment system known as distributed ledger, which does not need central banks, intermediates or a central technical infrastructure such as an exchange to work. Exchanges of digital values and goods are made directly between two individuals, with the oversight taken care of by the network itself, in a fashion akin to peer-to-peer oversight.


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Ever since the convertibility of paper money into gold was abandoned, which in the US happened in 1971, the intrinsic value of money has become a fuzzy subject, ruled by complex economic and monetary mechanisms that increasingly fail to reassure consumers. This unease has risen in the wake of the various monetary easing programmes introduced by many central banks over the past 10 years.

As a result, a growing number of people feel that the value of their wages is being systematically eroded. Indeed, real wages have stagnated or even fallen in several developed countries over the past few decades.

It is worth recalling that, as part of a socio-economic ecosystem, money as we know it has three functions: a medium of exchange, a measure of value and a store of value. While cryptocurrencies often struggle to fulfil the first two in a satisfying way, it is on the last point that many investors have pinned their hopes, as conventional currencies are seen to fall short.

Going a bit further, some are fearful that a cashless society may pave the way for total surveillance, since every electronic transaction leaves a trail.

In several European countries governments already limit the amount of money citizens can withdraw from banks in cash on any given day - a form of daily nationalisation of private assets. As all of these things are happening at a time when some people have little trust in governments and central banks, it is no wonder certain people look for alternatives. Indeed, from a societal point of view, cryptocurrencies seem to some people to be an idea whose time has come. Now that technology allows us to disintermediate central authorities from the creation of money, the genie is out of the bottle.

On the other hand, the current batch of cryptocurrencies come with their own shortcomings. High volatility, price manipulations, data loss and outright data theft are but a few of their most obvious vulnerabilities.

Another raft of issues are technical problems, delays, and in some cases high transaction costs when attempting to use these currencies as a means of payment, apart from the still very limited number of businesses that accept payments in cryptocurrencies at all. Already the process of mining each new coin is saddled by very high energy costs.

Finally, as a measure of value, the individual who routinely expresses the value of any good or service in terms of a virtual currency still has to be born.

Even as a store of value, the cryptocurrency sector is far from being mature and transparent enough to claim its place among established asset classes, as shown by the drop in many currencies' values since the start of the year. So far, there doesn't appear to be enough trust in these currencies to give them a stable valuation.


Cryptocurrencies so far lack consistent governance and regulation - and by that I mean smart regulation, which will require a new approach to monetary oversight: just think about the repercussions on social welfare if governments can't deduct tax revenue from cryptocurrency transactions due to lack of regulation. The risk of jeopardising future infrastructure and social spending programmes should not be underestimated.

Yet, for many it is the very absence of a central regulatory body that makes them appealing in the first place.

As soon as governments try to regulate one cybercurrency or one distributed ledger network, another unregulated one may well spring up in its place. In my view, the likeliest way cryptocurrencies can work is complementary to established currencies, rather than as alternatives to them. We can have varying forms of money performing separate functions in different places as long as there is a record of our mutual obligations.

So far, Asia leads the way in cryptocurrency trading: At the end of November 2017, Japan, South Korea and Vietnam contributed 80 per cent of bitcoin trading activity globally, up from just under 28 per cent in 2013.

Past economists such as Silvio Gsell and Friedrich Hayek have advocated the feasibility of private currencies long before technology made their creation and their adoption as easy as it is today. In Austria one such experiment in 1932 was deemed a great success in pulling a region out of recession, only for the central bank of the time to step in and put an end to what it saw as undue competition. Where Karl Marx once argued that power lies with those who control the means of production, perhaps it really rests with those who control the means of production - of money.

Though cryptocurrencies still represent a trivial fraction of all payments in the world economy, this may change. They may well become widespread in emerging economies with dysfunctional government monies. While a system of private monies by no means guarantees price stability, arguably the mere threat of competition from private monies imposes market discipline on any government that issues currency. This may turn out to be cryptocurrencies' best feature.

Paraphrasing the economist Adam Smith, central banks may thus be forced to a "tolerable administration" of money. However, cryptocurrencies make a positive contribution to society only if seignorage, that is, the profit generated from using these currencies, is invested in productive capital. Otherwise the overall social and economic benefit is nil.

Asia, thanks to generally low electricity costs, is home to a large proportion of the servers on which cybercurrencies run. In this sense, Asia is arguably the first region to have benefited from these new means of payment via an investment rush into computer and data storage hardware on a gigantic scale. Regardless of what happens on the technological front however, the aforementioned reflection on taxation, a determinant of whether and how far the public purse participates in the wealth generated by cryptocurrencies, clearly plays a role here.

On another level, the most disruptive impact of cryptocurrencies may not even have anything to do with money but rather with the potential of the underlying technology. Distributed ledger technologies are already being employed in a host of commercial applications, from streamlining manufacturing processes to improving corporate supply chains, and from smart contracts to peer-to-peer interbank payment systems within legal and financial services.


In recent years we have already witnessed a stark share price outperformance of companies that manage to exploit intangible assets versus those that don't. The investments going into these types of intangible assets generate a return for the companies involved but are not yet fully captured by statisticians, which partly explains why official data show a fall in investment in recent years in most developed economies.

Nevertheless, it appears certain that these investments will bear fruit - and it is thanks to cryptocurrencies, which have made the underlying technology known to people otherwise not interested in electronic networks, that most investors will take notice.

  • The writer is global head of Chief Investment Office, Deutsche Bank Wealth Management