By L. Glenn Lawrence
I’ve read with pained interest some recent opinion pieces on cryptos. I’m saddened that those with fervent anti-crypto agendas are using the horrific Russian invasion of Ukraine as a contrived excuse to criticize cryptos.
In an Op-Ed in The Washington Post, “Ukraine is a big moment for cryptocurrency, but not for the reasons its promoters think,” the author criticizes the “crypto crowd” for using the Ukrainian crisis as “the chance to hawk their holdings as a force for justice…” And, what’s much worse, goes on to state that this is “…more evidence that crypto mainly reflects a desire from the analog world: the yearning to look cool.”
Really? I seriously doubt that a Ukrainian citizen resisting the Russian invasion (who gratefully benefits from a Bitcoin transfer) is yearning to look cool.
I was also horrified when the author made a fundamental mistake in confusing and misusing the terms and concepts of money and currency. For example, she states that a Ukrainian crypto exchange “…is also assisting the government in converting crypto to fiat. This real money is much more useful…”
Again, really? Conflating fiat currency with “real money”? Any high school economics student should know better. Currency is not money.
Through the advancement of civilization, money has emerged as a medium of exchange for goods and services and as an essential store of value. Gold, and to a large extent silver, emerged through thousands of years of real-world experimentation as the primary form of money most valued by societies.
But gold is nowhere near perfect. A significant weakness is that it is difficult to use as a medium of exchange for frequent and smaller transactions. Thus paper receipts backed by gold and silver—aka currency—emerged as a more convenient means for day-to-day transactions.
The modern currency world began in 1971 when President Nixon severed the last link between the U.S. dollar (currency) and its monetary backing (gold). Thus fiat currency (rather than paper currency backed with anything of tangible value) became the basis of the world’s financial system.
Whether made with paper currencies or a digital accounting of currency units in your bank or fintech accounts, fiat currency exchanges, not money, facilitate everyday transactions. Fiat currency is simply a promissory note, a stand-in for something else that supposedly holds the real value.
The author gets right that crypto is not as useful as fiat currency in payment for goods and services. There’s no question that cryptos are not ready to supplant fiat currencies for routine transactions. They function more like crypto money—they are a store of value and function as a medium of exchange, but not for everyday purchases (exchanges) for gasoline, gum, and groceries.
For this reason, the cryptocurrency moniker is premature. The crypto universe is growing and evolving, but it’s not at a steady-state level of maturity where crypto functions as everyday currency—accepted as readily as dollars and euros for daily transactions. Today, cryptocurrencies act more like monetary assets or digital commodities than as a digital form of currency. Coins, such as Bitcoin, definitely function more like money than currency given their eternally limited supply.
The author further criticizes cryptos because the need to convert them into fiat currency is a type of “friction” on the ability of Ukrainians to use fundraising proceeds in the form of cryptos.
Once again, the author misses the point—a crucial one at the heart of cryptos. Getting international fundraising proceeds (currency) into Ukraine requires bankers’ efforts and functioning banks connected to a global funds transfer network like SWIFT. This is the actual “friction” in the banking and payments transfer arrangement.
Many people assume SWIFT is just an electronic transfer system, but it falls far short of that ideal. SWIFT is not a “system” per se, but rather a human-managed process where payment orders are exchanged and processed between correspondent banks (the exclusive club of large global banks that have accounts with each other).
And what happens to the ability to transfer fiat currency (or the author’s mistaken “real money”) if Russia seizes Ukrainian banks? Talk about friction!
The movie The Graduate had one word for us that would surely drive a post-1960s economic revolution: plastics.
So here’s one word that encapsulates what the crypto revolution is all about: disintermediation.
While establishment types may put the word disintermediation in the same league as supercalifragilisticexpialidocious, the concept of reducing or eliminating the use or requirement for intermediaries like banks and brokers is critical to crypto’s viability.
The growth curve of crypto assets as money will be linked to the advancement of the disintermediation of the banking system: cutting out the inefficient friction of humans processing payment orders while charging fat fees for the privilege. This is the real fear of the crypto-haters—that cryptos will act as a universal solvent and dissolve the need for financial intermediaries like commercial and central banks.
Cryptos are at their best as a universally empowering workaround to traditional banking. How will people transfer the author’s supposed “real money” into Ukraine if Russia seizes Ukrainian banks?
Will the SWIFT transfer process resort to tin cans and a length of string across the border? I don’t think so. Whereas a wireless network connection, even via satellite, can enable access to asset value transfers via the blockchain. Yes, cryptos may not be as convenient as fiat currency for buying a loaf of bread. However, they still enable the holding and transfer of value—which may become an even more crucial alternative if Russia gains control of the Ukrainian banking system.
Today, cryptos do not offer a fully evolved financial ecosystem. But they’re getting there. And they are continually being embraced by more and more consumers, financial institutions, and even governments.
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