Reconciling cryptocurrency and United States currency. The dollar is a shit coin, too.

Nouriel Roubini, professor of economics at New York University, is on record for writing off cryptocurrency, particularly bitcoin, as a “shit coin.”  His opposition to the digital asset stems in large part to its lack of functionality.  While there is a small number of individuals and businesses that accept cryptocurrency for payment, this number is way too small for Professor Roubini and other critics to accept the coin as currency.

Meanwhile, the political class wants to take a closer look at cryptocurrency with particular attention paid to the impact cryptocurrency use and trade may have on the United States’ financial system.  Joe Biden made this clear last March when he addressed the issue in an executive order:

“We must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections; financial stability and financial system integrity; combating and preventing crime and illicit finance; national security; the ability to exercise human rights; financial inclusion and equity; and climate change and pollution.”

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And recently, Rostin Behnam, chairman of the Commodity Futures Trading Commission, remarked on the growing use of cryptocurrencies in American investment portfolios and that now may be the time to introduce regulation into the market place.

“We are here today because digital assets are trending towards becoming a part of mainstream American portfolios, with surveys and polls demonstrating that as many as one in every five adults has invested in or otherwise used cryptocurrency.[3]  This market has developed in the absence of a firmly demarcated regulatory perimeter.” 

I won’t go as far as Professor Roubini to use derogatory language to describe cryptocurrency.  Someone or some people put energy into creating a digital mechanism using today’s prevalent technology and I respect their expression of whatever personal philosophical lens through which they view the world of banking and finance.

I do, however, hesitate to go all in on referring to cryptocurrency as a digital asset.  Assets generate income.  Real assets like rental property pay rents.  Digital assets such as a website pays the owner income from advertisements, sponsorships, and affiliate programs.  Ether, bitcoin, and other cryptocurrencies do not generate that type of income.

Crypto advocates would rebut that bitcoin, Ethereum, etc., could not be used as collateral for borrowing fiat currencies that could then be deployed in other investments thus generating income.  This income would not be derived, advocates would argue, were it not for the availability of an alternative asset such as cryptocurrency.

The push back against the Crypto as good collateral argument stems from cryptocurrency’s volatility.  On May 5th, bitcoin sold at $38,753.  By June 20th, bitcoin fell to $20,240.  It has since climbed to $23,875.  Would banks or other non-bank financial institutions want to accept such a volatile asset and if so, would the borrower be willing to accept the interest rates offered by the bank for taking such a risk?

One way to boost acceptability of cryptocurrency would be to distinguish it from the dollar based on intrinsic value.  As currencies, neither cryptocurrency or the dollar have any intrinsic value.  Crypto is a string of code.  The dollar, a piece of paper. And some would argue the dollar itself is just about as useful as toilet paper given its forty year drop in value.

I don’t pretend to be a software engineer.  Never played one on TV, but if that string of code actually contained information that supported some ground breaking event or new technology, then maybe crypto would finally have some anchor point from whence investors would see continued progression.

This may sound more like a non-fungible token (again, this is not a Holiday Inn), but the bottom line is that traders in this “digital asset” should focus on boosting crypto’s intrinsic value and further separate it from the dollar, gold, and other types of “money.”  

Alton Drew

30 July 2022

Disclaimer: This blog post should not be construed as legal advice or an agreement to provide legal or political analysis.  To set up a consultation, contact us at altondrew@altondrew.com.

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