The alchemist’s paradox, central bank sovereignty and the fate of crypto

CRYPTOCURRENCY exchange FTX filed for bankruptcy on Nov 11, as Sam Bankman-Fried’s estimated net worth plummeted from US$16 billion to roughly zero. While I’ve always been a crypto sceptic, I tempered my opinion because I did not understand the technical underpinnings or fully grasp the broad-use cases. This led me to discount what was obvious: that the crypto craze had all the signs of a speculative bubble, and that cryptocurrencies fulfilled none of the critical requirements needed to replace major currencies or serve as “digital gold”.

Whatever the value of the technical innovation that minted them, cryptocurrencies suffer from two major and insoluble problems that make it extremely doubtful they would ever supplant fiat currencies or be used as an underlying commodity to which the value of a currency is pegged.

Problem 1: The alchemist’s paradox

One of the keys to crypto’s value proposition is the concept of supply constraint. According to their proponents, cryptocurrencies cannot be minted ad infinitum the way paper currencies ostensibly can. Each cryptocurrency can supposedly be reined in by programmatic constraints that prevent arbitrary increase in supply and preserve a cryptocurrency’s scarcity value. This sounds great in theory, but it only applies to single cryptocurrencies. Because crypto technology is so easily replicated, nothing prevents entrepreneurs from launching new cryptocurrencies. Which is precisely why there are now roughly 12,000 varieties circulating in cyberspace.