What future for crypto-currencies?

Bitcoin, the original cryptocurrency, has made countless headlines since its launch in 2009. Today, there are over five thousand different cryptocurrencies with a consolidated market value of about $1.6 trillion (£1.15 trillion). 

Cryptocurrencies’ energy consumption and carbon footprint have been a concern for a long time, but with their exponential growth along with their derivatives and tokens based on the PoW (Proof-of-Work) protocol (e.g., Bitcoin, Ethereum, Litecoin etc), they are now considered to be anti-environmental.

So much so, that on May 12 2021 Bitcoin fell by 12% after Elon Musk’s tweet announcing the suspension of Tesla's plans to accept payments in bitcoin owing to concerns over the cryptocurrency’s carbon footprint.

A week later, Chinese officials signaled a crackdown on cryptocurrency use and mining in the country, and the week after that, the cryptomarket fell by about 50% from the year's high. From a yearly high of almost $65,000 by 14 April 2021, Bitcoin’s value had dropped to around $37,000 just five weeks later. 

The cryptomarket is highly volatile. It reacted positively to recent institutional announcements, including the decision to create a Bitcoin Mining Council at the MicroStrategy meeting of Elon Musk with leading North-American miners, with a view to standardising cryptocurrency mining, reporting energy use, pursuing industry ESG goals, and increasing general awareness of these topics.

Other positive signals came from hedge fund billionaire Ray Dalio who invested in Bitcoin, and Mark Cuban who has added the Ethereum-backed platform Polygon to his investment portfolio.

Despite all the potential changes that cryptocurrencies can bring to the existing monetary and financial systems, their future as a significant investment in their current shape remains uncertain. But, for sure, digital assets based on blockchain are here to stay.  

Digital assets are an evolution of both financial and payment systems. They can have a positive effect on countries’ GDP, minimise frictions, and decrease some of the deadweight associated with traditional financial systems.

Cryptocurrencies as an asset class have witnessed unprecedented growth in a very short span of time. This asset class has not only outperformed others in terms of returns, but has also been hailed for its diversifying and hedging characteristics, even against macro-level uncertainties such as inflation. Once considered a potential threat to financial stability by financial regulators, there are now ways of protecting investors and cryptocurrency users against fraud, excess risk, and market crashes.

A stimulating and well-informed discussion about current issues can contribute to a better understanding of cryptocurrencies as alternatives to traditional fiat currencies and financial assets, and more so, in light of the Covid-19 pandemic, which has further accelerated the global pace of digital change. This is particularly relevant in the light of the announcements from several central banks of their intention to roll out their own central bank digital currency (CBDC).

According to a recent survey by the Bank for International Settlements (BIS), 86% of central banks are currently analyzing CBDCs. Some Central banks such as Norges Bank and the Bank of France have already successfully piloted a central bank digital currency.

Several non-European central banks have also announced their plans regarding CBDCs. The Bank of China, Bank of Canada and the Bank of Thailand launched a CBDC pilot programme back in June 2020, and the Central Bank of the United Arab Emirates and the Digital Currency Institute of the People's Bank of China have combined to create a CBDC prototype using distributed ledger technology (blockchain).

The Reserve Bank of Australia (RBA) intends to launch a retail CBDC in partnership with Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys. The Eastern Caribbean Central Bank has created its own form of digital currency (DCash), the first such blockchain-based currency introduced by any of the world's currency unions.

Countries like the United States, United Kingdom and Germany are also having internal conversations about the feasibility of their own digital currencies.

The BIS has outlined plans to embark on a variety of CBDC trials worldwide this year. The European Commission and the European Central Bank (ECB) are cooperating on a digital euro, while the ECB is considering whether to launch a digital euro project. Its recent report discusses its main reasons for and against the launch of a digital euro. ECB executive board member Frank Elderson believes that a digital euro would offer Europeans the same level of confidence as with cash.

When all is said and done, all the players involved in cryptocurrency will need to focus on long-term sustainable strategies before they mature and stand the test of time.