Satoshi Nakamoto, the pseudonym for the person or group of people behind Bitcoin, made their intentions clear: our money should not need banks, it should not be controlled by anyone. The Chancellor at the time was Alistair Darling, who would later go on to open Edinburgh’s Library of Mistakes. Dedicated to financial history and specifically how things have gone wrong; covering events ranging from the most recent financial crisis to City of Glasgow Bank’s collapse almost 150 years ago.
Some may be looking at their crypto wallets following the recent crash in crypto markets, tumbling to well below half its peak, and wondering if the Library should make some space for Bitcoin and the many cryptocurrencies it has spawned. I would argue, no. Bitcoin, and specifically the blockchain technology it relies upon, has reshaped the world of finance for the better.
Bitcoin was intended to be a form of digital gold, designed as a deflationary asset, not controlled by any individual or government so that it could not be devalued through policy. A hedge against the proposed incompetence or malice of central banks or governments (as is evident by its widespread adoption in certain developing countries). However, despite being born out of the last recession in 2009, crypto is arguably yet to be tested by a proper recession. Unfortunately, as central banks tackle inflation and the wider markets are taking a beating, it is failing that test and the notion that crypto is immune to macroeconomic policies or serves as an inflation hedge is not looking good.Why is this? No sooner had the courts and regulators started to come to terms with crypto as an asset – creaking the door open for investors and institutions with crypto to comfortably borrow against their holdings – than the market collapsed. This caused some investors and crypto hedge funds to fail to meet margin calls. Bitcoin, and crypto in general, stumbling is not news. The extreme volatility is almost a feature for those with a stronger stomach than me. However, this crash is different. While crypto markets were historically dominated by retail investors buying and trading in relatively small amounts, institutions are now major players and the cheap money hunt for risky assets has been put on hold as interest rates rise and the availability of capital decreases. This has led to mass selling off as the appetite for risk diminishes and money moves into traditional, safer assets such as bonds.
It is too soon to say whether the likes of Bitcoin have failed, or if they will ever be a genuine alternative currency, but crypto technology has transformed finance. BNP Paribas and JPMorgan are among the banks utilising blockchain and smart contract technology with digital tokens for trading in repurchase (repo) markets. Abrdn recently confirmed it is exploring the use of blockchain technology to enable retail investors to purchase digital tokens in various assets. Individuals and institutions are using blockchain technology to market and trade in tokenised carbon credits to increase their price and incentivise environmental efforts. Central banks across the globe have woken up to the opportunities of central bank digital currencies (CBDC), specifically the threat posed by privately created or decentralised global currencies. Some, like the Bank of England, are still consulting on the best route forward for a CBDC, whether that be retail (effectively letting citizens hold deposits at the central bank) or wholesale (cross-border payments) use cases. Others, including the People’s Bank of China, are already testing a CBDC.The past 150 years have shown the rise and sometimes fall of life-changing innovations in finance, from the ATM to the credit card, the internet to the smartphone. Crypto technology is shaping the next 150 years. This crash might be what the market needed as an opportunity to shake off the cheap money allure of “anything blockchain related” projects, while encouraging regulators to react quicker to the systemic risks involved in institutional crypto trading. While some of the core principles of decentralised finance are still being tested, the innovation it is bringing will continue to reshape our financial lives.
Stuart Gillies is a Senior Associate, Dentons