Cryptocurrency prices haven’t found a clear floor since reaching record highs in 2021. A very small audience has seen the appeal of cryptocurrency’s promise to reinvent money wear off. The new technology’s proponents will need to overhaul their marketing strategies to reach a larger, more diverse user base. Think of the person you know who is least likely to experiment with money or technology—perhaps your cousin, your dentist, or someone else you know.
But if it meant that she could buy a house faster, she might be prepared to confirm her identity on the website of her mortgage lender. She wouldn’t even need to know if the digital identification process was supported by the blockchain technology that underpins cryptocurrency.
Like her, the majority of people are uninterested in new technology unless it can improve their ability to complete tasks swiftly, affordably, and safely. That is why iTunes was successful. Because of this, Amazon.com is a titan. Because of this, Netflix has grown so popular. And for this reason, popular payment apps like Zelle and Venmo are so popular.
Crypto’s current drawback is that many of the problems it claims to solve have already been solved, in addition to its volatility, scams, and failures of untested intermediaries. We are already capable of opening online savings accounts and sending electronic payments. The same cash we use for cash transactions and tax payments can be used to accomplish this. Why then is cryptocurrency required?
Let’s start at the beginning: our need to believe in money. Because of this, the financial sector frequently uses words like “trust,” “security,” “custodian,” and “guarantee. Nevertheless, there occasionally occurs a catastrophic breach of trust that leads to an increase in bankruptcies, the loss of investors, and the loss of jobs and homes for millions of people.
The Great Depression is one instance where individuals learned their faith in the banks they had put their money in wasn’t as solid as they had anticipated. To assist rebuild confidence, the government’s authority and a new regulatory framework were established behind the banks. In the US, this entailed establishing the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and a new housing authority to encourage a rise in the house loan.
Then, the financial crisis of 2008 revealed how insufficient those safety measures were. The collapse of home prices and its impact on financial markets and the overall economy seemed to catch big financial institutions and their regulators off guard. Suddenly, people lost faith in the government or the banks.
On October 31, 2008, a few weeks after Lehman Brothers filed for bankruptcy and the government and Federal Reserve began saving banks, a white paper that would later become the foundation of Bitcoin was published. The study concluded that trust in financial institutions was overly reliant on digital commerce. “An electronic payment system based on cryptographic proof instead of trust” was the concept.
People could choose to join the blockchain, a secure, decentralized network, as opposed to depending on the bankers who repossessed their homes while giving themselves sizable bonuses. The proponents of cryptocurrency predicted that eventually, it would compete with the current centralized financial system. After nearly 15 years, much of the idealistic attractiveness of this new money has faded. It turns out that this new financial system does, for the majority of users, require putting your trust in a third party, possibly a wallet provider, token exchange, or decentralized finance (Defi) lender. And far too many of them have proven to be con artists or hacker targets.
Even some of the most ardent supporters of cryptocurrency today claim that government regulation is necessary for the market to regain confidence and attract the established financial institutions that were once crypto’s adversaries,
If a cryptocurrency doesn’t provide a more trustworthy alternative to traditional money, what is it for? According to what is known so far, the majority of its users are those who are reluctant to use their own country’s currency due to political or economic risk or because they want to avoid police enforcement. Otherwise, its main use has been speculation, or betting on the value of the currencies or digital assets like NFTs bought with the currencies.
There is money, a form of trade that makes it easier than bargaining for us to purchase or sell products and services. But for such a medium to be trusted, it needs to be a consistent store of value. Otherwise, you run the risk of exchanging your valuable product or service for a token whose value quickly depreciates. The need for trust is heightened by the inter-temporal nature of some transactions.
Therefore, when we discuss money, debt—i.e., a transaction that is inter-temporal from the outset—is the second topic we also cover. Total credit to the private nonfinancial sector in the US was over $37 trillion at the end of the first quarter of 2022.
Additionally, mortgages are among the most common forms of debt. Purchasing a home in 1920s America might have involved paying for half of the cost upfront and borrowing the remaining half for five years. Before the US government intervened, lenders lacked the confidence in customers to offer a 30-year loan with only 10% or 20% down, as is typical today. Residential mortgages in the US now total more than $10 trillion.
However, the quantity and complexity of the documentation needed for mortgage loans and real estate transactions are well known. It might be difficult to keep track of the relevant data and use it effectively. Making crucial data about properties, owners, and loans available on an immutable digital ledger could make crypto essential for facilitating those kinds of transactions.
After an initial investment in technology, a digital record might result in significant time and labor savings for loan originators. The borrowers could get some of those cost reductions. Automated identity, income, bank account statements, and similar verification would expedite the stressful but necessary mortgage application process.
Established and regulated financial services organizations may ultimately relocate a plethora of other services if they shifted their home loan documents to such an ecosystem. Several well-known businesses have already made investments in blockchain technology. Some of the largest names in finance and technology have endorsed Hedera Hashgraph, including Boeing, Deutsche Telekom, Google, LG, and Nomura.
Onyx coin systems are a digital ledger that JPMorgan Chief Executive Officer Jamie Dimon is investing in although he has referred to cryptocurrencies as “decentralized Ponzi schemes. According to JPMorgan’s website, Onyx coin systems aims “to help address the complex challenges of cross-border payments, simplify clients’ liquidity funding needs, and offer next-generation corporate treasury services.
Could this portend a new era for the underlying technology of cryptocurrencies? a tightly controlled network of well-known businesses conducting business over a more secure electronic database? These projects not only lack the Wild West vibe of early cryptocurrency, but they also go against the completely decentralized and anonymous networks that crypto enthusiasts sought to establish. Defi is referred to as “an alternative to a system that is opaque, heavily regulated, and kept together by decades-old infrastructure and practices” on the Ethereum website.
Ethereum’s examples for DeFi’s current use cases, however—helping people obtain loans without the need for personal identification and allowing crypto-savvy Argentines to avoid inflation—seem unlikely to spread to the general public.
I was hopeful that the crypto space would restart when I first began to consider it concerning trust. But as I gave the structure of current crypto platforms more thought, it seemed nearly impossible to change the Defi and NFT culture into something that can displace current banks and money. However, the notion of transferring a portion of our financial system to a distributed ledger may still be viable.
We might develop a system of trust that combines elements from three different trust frameworks: regulatory protections, trust in well-known brands and institutions, and trust in a purportedly immutable and unhackable digital ledger. These have all been exposed as flawed by the Great Depression, the global financial crisis of 2008, and the crypto catastrophe.
Possibly, the combination will be less faulty. There is some benefit to that. However, it is not the way that money will be used in the future. Harrison is a Washington-based blogger who covers bonds and currencies for Bloomberg’s Markets Live website. The views expressed in this column may not necessarily be those of Bloomberg LP or its owners.