Time for Gov Coins and Crypto Stability

One thing few people, even true believers, admit about their cryptocurrency investments is that they aren’t buying it to use but instead to accumulate old-style money that they all claim not to believe in anymore. "Dogecoin to the moon?" Elon Musk has tweeted. But what's he comparing it to? Oh, that’s right - fiat currency.

If investors truly believed that cryptocurrencies, independent of government oversight, were the future, then the price of Bitcoin hasn’t changed since 3 January, 2009 when the Bitcoin network came into existence. One Bitcoin is still equal to one Bitcoin.

While formerly doubting Thomas institutions have now come around and recently provided further validation by making large cryptocurrency investments, it does seem like they are still more influenced by investment FOMO than by the underlying technology or fiduciary impact on our economies.

As I write this, the total market capitalisation of cryptocurrencies is $US 2.27 trillion. From its origins as an internet meme joke currency, Dogecoin now has a market capitalisation of $US 68 billion -- that would firmly place it in the ASX top 10. Since 1 January of this year, Dogecoin has risen 100 times and at one point jumped to 150 times that price in the lead up to Musk’s appearance on Saturday Night Live, where he proclaimed himself to be the ‘Doge Father’.

Market Manipulation?

This brings us to Tesla and Musk’s position on Bitcoin. Musk changed his Twitter bio on 29 January simply to #Bitcoin. That day, the cryptocurrency rose from $US 32,000 to $38,000. It is difficult to pin down precisely the influence Musk has on Bitcoin and crypto pricing. However, the Blockchain Research Lab has determined that Musk influenced returns to be slightly abnormal, with lifts of up to 19 per cent, though not all his Bitcoin-related tweets and commentary resulted in immediate impact.

That said, the Bitcoin trading by Tesla has had a significant impact on the stock’s financial performance. Its last quarter of reported earnings equated to a profit of $US 438 million. Two key events saved their quarter: $US 518 million of emissions credits and $US 101 million in Bitcoin trading profit. Without the Bitcoin capital gains, Telsa would have missed its Wall Street earnings forecast. Just when you thought Bitcoin was an interesting way for an auto manufacturer to deliver its earnings, on 14 May Musk took to twitter to announce Tesla was no longer accepting Bitcoin as a payment option for its vehicles, citing environmental concerns with the platform’s energy usage.

“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transactions. Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at a great cost to the environment.”

What is astounding is Musk trumpeting the negative environmental impact as some kind of newly discovered revelation. The carbon emissions impact of bitcoin mining has been well documented for years. Additionally, every one of his SpaceX Falcon 9 launches emits the equivalent carbon dioxide of 395 trans-Atlantic aeroplane trips. If Musk’s crypto shenanigans does not amount to market manipulation, then I don’t know what does.

Crypto Stability?

A better way to avoid the trading tomfoolery that accompanies the crypto revolution (and it is a financial revolution – more on that later) would be to use so-called stablecoins. This is what most major fiat currencies used to be when they were backed by the gold standard, though the US exited this position in 1973.

Stablecoins are cryptos that are supposedly backed with holdings of fiat currencies. The most prominent of these is the controversial currency Tether. Tether has long claimed to be fully backed by the US dollar and still to this day, trades around the $0.99 mark. The upside of the stablecoins is exactly as we imagine. Futures contracts and trading of commodities across financial systems enjoy all of the efficiencies of a blockchain-based currency system (such as smart contract capability, low-cost transactions, reduced cross-border friction and anonymity), while simultaneously removing currency risk for trading parties.

The problem is that the benefits claimed by Tether are far from its stable reality. It turns out that Tether only holds a mere 5 per cent of its market capitalisation in US cash and treasury bills. Outside of its conventional holdings, Tether’s asset-backing base is made up of many questionable securities. Yet this hasn’t stopped the platform releasing more tokens, with Tether releasing another 850 million to the market in January. Unsurprisingly, this coincided with the record highs reached by other popular cryptocurrencies that month as cross-platform trading reached record highs. If this seems problematic to you, trust your instincts.

Bring on Gov Coins

What we can be certain of is that cryptocurrency as a technology and a facilitator of commerce is inevitable. It is easy to forget that modern currency itself is a technology and its formats have mirrored advancements of each human epoch, from cowry shells to ferrous coins to the printing of fiat. Although still nascent, cryptocurrencies’ benefits for a global economy cannot be understated. Cryptocurrencies will reduce transaction costs, create banking autonomy, simplify cross-border payments, and feature increased financial security and mobility, while facilitating smart contracting inside currency enclaves.  

But in order for any of this to happen, a crypto economy would require stability. To do that, we need governments the world over to step in. Governments need to take crypto from the fringe to financial markets with fiduciary control. It’s time for central banks to disintermediate the disintermediators.

While this might sound like the opposite of what you’d expect from a technology evangelist, it is exactly what we all need. Our economies would reap the benefits of cryptocurrencies, because governments would continue to control the levers which enable vital investments in infrastructure, healthcare, education and taxation. It may actually be as simple as moving to Australian Crypto (AUC) with a price that is $A1 = 1AUC. Economic participants can then transfer their existing cash in and out of a new blockchain based currency system. If we really want cryptocurrencies to be stable, then why not go straight to the source of what we want to peg them to?

Every so often, we need to be reminded that currency is not, or at least shouldn’t be, an investment. I have little doubt that crypto, unless underpinned by the tax collectors and those with the monopoly on violence, will ever be more than a speculative tool simply because that is exactly the opposite of what we need when it comes to currency: stability.

If any of us want economic stability, then we should hope for Gov coins to emerge with protocols that allow for the benefits of the blockchain, and possibly even restrict irresponsible governments from debasing their own currencies, which so happens to be the same thing that underpins their sovereignty.