Bitcoin and other digital rivals are nowhere near ready for prime time. They might never match the utility of today’s financial-system incumbents, the banks and payment companies that facilitate the flow of funds over tens of millions of merchant locations.
Yet much like millennials will never have a landline, a coming generation might do without bank accounts thanks to secure, peer-to-peer cryptocurrency transactions. Blockchain technology and the vast new crypto wealth have opened the door to four cryptocurrency futures that could usher in a new financial order.
The Federal Reserve could issue its own digital currency, as some global central banks are exploring.
Large companies such as Amazon, Walmart and Starbucks might issue digital coins that inspire trust and gain wide acceptance.
Retail giants, by accepting payments in the currency, could elevate Bitcoin, Ethereum or another cryptocurrency above the others vying to offer safety, soundness and utility.
Finally, if trust is lost in government-backed, or fiat, currencies, a cryptocurrency future could come about by default. That may be a risk not only in places like Venezuela, but in the U.S., where federal deficits are spiraling.
“Virtual currencies might just give existing currencies and monetary policy a run for their money,” International Monetary Fund director Christine Lagarde predicted last fall. “Citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash — no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities,” she said.
That explosive potential helps explain why so many tech entrepreneurs and investors turned cryptocurrencies into a 21st Century gold rush, even as JPMorgan Chase (JPM) CEO Jamie Dimon has trashed Bitcoin as “a fraud.”
Dimon and other titans of finance voice certainty that commercial banks will remain indispensable, cryptocurrencies will stay on the fringe, and governments will want to keep it that way.
Blockchain’s potential to revolutionize the financial system has some central banks studying whether to issue their own digital currency. Yale University scholars have proposed the FedCoin. In this cryptocurrency future, FedCoin could make monetary policy more flexible and forceful, even allowing for negative interest rates.
If a cryptocurrency acted as a reliable, widely accepted store of value, people could cut ties to their banks. They could keep some crypto cash in digital wallets, with other liquid assets in mutual funds, stocks and government bonds.
A Bank of England study concluded that a central-bank cryptocurrency could boost GDP by 3%. Gains would come, in part, from shrinking “monetary transaction costs that are analogous to distortionary tax rates.”
Yet FedCoin looks far-fetched at present because of the massive disruption it could cause. Central bank crypto dollars “could endanger the economically and socially important financial intermediation function of commercial banks,” JPMorgan analysts warned.
The contribution of fractional reserve banking to global growth — turning each $1 of deposits into $10 in loans — could fade. “We would expect that central banks would think twice before disturbing this source of capital to the private sector.”
Dimon is surely right about one thing: The cryptocurrency future will depend heavily on government. That could mean smothering it with regulation, stealing its thunder via FedCoin or cultivating it with a light regulatory touch.
Bitcoin hit its 2018 low early on Feb. 6, the morning of a key Senate cryptocurrency hearing, briefly undercutting $6,000. The chairmen of the Securities and Exchange Commission and Commodity Futures Trading Commission both urged stronger oversight. But the financial regulators stopped short of sounding an alarm. Nor did they call for any legislation to rein in cryptocurrencies. In the weeks after that hearing, Bitcoin rebounded to around $11,000 but it has retreated yet again to below $7,000.
Bitcoin had doubled in the first half of December, hitting a peak above $19,000 just as Bitcoin futures began trading on Cboe Global Markets (CBOE) and CME (CME). The anticipation of futures trading, touted as validation from U.S. regulators, stoked speculation.
At the Senate hearing, Sen. Mark Warner, D-Va., who earned his fortune as an early investor in the cell phone industry, said he sees a parallel between mobile phones then and cryptocurrencies now. “The same kind of transformation is about to take place,” he said.
Warner criticized the CFTC for embracing Bitcoin options at this stage. He fretted that total cryptocurrency market capitalization could hit $20 trillion — vs. $300 billion now — with another 2017-like surge.
“This rises potentially to the level of a systemically relevant event,” Warner said.
Yet there’s reason to doubt that cryptocurrency frenzy will return. JPMorgan Chase, Bank of America (BAC) and Citigroup (C) — Ma Bell in Warner’s analogy — banned credit-card purchases of cryptocurrencies. Meanwhile, the SEC and foreign governments have cracked down on initial coin offerings. And lately, Alphabet (GOOGL)-unit Google, Facebook (FB) and Twitter (TWTR) have banned cryptocurrency ads.
Even Ethereum founder Vitalik Buterin warned via Twitter not long ago that cryptocurrencies “could drop to near-zero at any time.” He added that “traditional assets are still your safest bet.”
The Bank for International Settlements, the central banker for global central banks, has warned that cryptocurrencies in the future could become a “threat to financial stability” if regulators aren’t vigilant. U.S. regulators appear to be playing catch-up. As of Feb. 6, the cryptocurrency working group put together by Treasury Secretary Steven Mnuchin had held a single meeting.
Politicians and central bankers worry that cryptocurrencies won’t hold value in a panic. “When things really go bad, where do Americans turn?” Philadelphia Federal Reserve President Patrick Harker asked a fintech conference last fall. “Well, they’re going to come back to the government. That’s the history of the country.”
Harker did allow that other currency models might work if another “large player” besides the government provided trust.
Who could fill that role? Starbucks Chairman Howard Schultz offered some thoughts on the coffee chain’s January earnings call.
“I personally believe that there is going to be one or a few legitimate, trusted digital currencies off of the blockchain technology,” Schultz said. He doubted that Bitcoin would be one of them.
Cryptocurrencies “will have to be legitimized by a brand in a brick-and-mortar environment, where the consumer has trust and confidence in the company that is providing the transaction.”
Starbucks wants to play a role but isn’t making a big investment in a cryptocurrency future right now, Schultz said.
Cryptocurrency investors have speculated that Amazon might accept Bitcoin or one of its digital rivals. That specific cryptocurrency would vault past competitors as a trusted store of value and useful medium of exchange. Amazon even registered the domains AmazonEthereum.com, AmazonCryptocurrency.com and AmazonCryptocurrencies, kicking such talk into high gear.
Alternatively, Amazon, Walmart — or a consortium of large companies — might issue their own cryptocurrency. Doing so could let them save on transaction costs and act as a competitive weapon.
But Amazon has also been cozying up with JPMorgan. Recently, Amazon and JPMorgan have partnered in a health care venture and in creating a new type of bank account.
Yet imagine if Amazon or Walmart rewarded loyal customers with tokens that could escalate in value. The tokens would jump to the head of the cryptocurrency pack with potential for broad acceptance as a currency. Customers would likely hoard the tokens, rather than spend them. The effect on sales and profits might be electric.
For a digital currency to gain wide acceptance from outside businesses, the issuer would have to act like a central bank. Governing a currency requires trust, so some functions might need independence from corporate issuers.
Those milestones could ease fears of a massive cryptocurrency crash. The Fed shouldn’t need to rush in and save the day if AmazonCoin or WalmartCoin crashed.
Currencies rely on conservative and predictable rules to assure the public that massive money printing won’t destroy value. Could people trust the central bank of Amazon?
Then again, will people always be able to count on the Fed?
The Fed controls the creation of money, but central bankers seem to be losing their grip. Any loss of faith in the dollar and the Fed bodes well for a cryptocurrency future as dollar-skeptics look for an alternative store of wealth — besides gold.
Bitcoin’s peer-to-peer electronic payment system, first proposed in 2008 to verify transactions through a decentralized public blockchain, arrived on the scene as the global financial crisis triggered bailouts of one big bank after another.
Bitcoin fulfilled famed economist Friedrich Hayek’s idea of denationalizing money. He believed competition could help keep central banks honest and prevent runaway inflation.
Doubts fueled by “ballooning balance sheets of the major central banks in the aftermath of the global financial crisis” motivated early cryptocurrency investors, JPMorgan analysts wrote. Yet the lack of any upsurge in inflation since “has surely reduced concerns about fiat (legal tender issued by a central bank) money.”
Yet the Fed now faces a much different challenge: a runaway federal deficit even amid a strong U.S. economy. The deficit will top $1 trillion in fiscal 2019 and $2 trillion by 2027, and there’s no fix in sight. Republicans have overseen big deficit-financed tax cuts and increased government spending. Democrats want more generous Social Security benefits, Medicare for all and debt-free college.
“The continued growth of public debt raises eventual sustainability questions if left unchecked,” Goldman Sachs economists warned recently.
The Fed seems on track to suffer the same fate as the Bank of Japan. The BoJ has been forced to accommodate sky-high government deficits with easy money and asset purchases. Japan, with a falling working-age population, hasn’t had a whiff of inflation. But the U.S. might be a different story.
Deutsche Bank global credit strategist Jim Reid put this shocking headline on a November report: “The Start of the End of Fiat Money?” Reid argued high debt levels will keep the Fed and other central banks too accommodative, putting fiat currencies at risk.
“The fiat currency system may be seriously tested over the coming decade and ultimately we may need to find an alternative,” Reid wrote. “Cryptocurrencies are all the rage at the moment and are as much about blockchain as anything else, but there could be an increasing desire for alternative” mediums of exchange in the years to come.”
Keep in mind that fiat money is a relatively young innovation. It’s only truly been the norm since President Nixon ended the dollar’s quasi-gold standard in 1971.