Opinion by Viktor Prokopenya Fintech investor
There are moments in history where those viewing events from a particular perspective realise that we are standing on the edge of a precipice.
So it was before the 1930s depression, the 1970s oil crisis, and the 2008 economic crisis.
All around us, life goes on as normal. To a close observer, however, small changes indicate that something profound is about to happen.
As an expert in crypto and the founder of two fintech companies, I of course monitor developments closely.
In recent weeks, we have seen a seismic shift in the crypto world. This week, the major crypto lender Celsius froze withdrawals as markets tumbled. In early May, we saw the collapse of a series of stablecoins.This collapse of Luna and Terra tokens led to multibillion-dollar losses, and shocked crypto investors as they were a supposedly safe form of cryptocurrency, as they are tied to another currency or asset such as the US dollar or gold.
Such tokens have a combined market value of about $161 billion, led by Tether, Circle’s USD Coin and Binance USD. Essentially, people lost trust – the fundamental basis for all currencies, and the value of stablecoin went down just as fast as it had gone up. Imagine if the dollar were to lose 99 per cent of its value in a sudden loss of trust.
Governments around the world are now racing to protect stablecoin, a key component of the cryptocurrency industry. The crypto community is also working to find solutions, with Terra being rebooted in a new iteration not pegged to the dollar.
The Treasury has announced they are stepping in, proposing an insolvency regime in the event of further stablecoin collapse. This is welcome news – however central banks must act much faster if they are to prevent a breakdown of the system. For I fear that Luna and Terra are the canaries in the mine. The instability here could develop much further. We are currently sitting on a time bomb.
This is because a lot of money held in stablecoin is not collateralised. Some reserves do exist, but existing banking regulations rightly designed to prevent money laundering mean they can be difficult to cash in. Nor are they necessarily backed by real assets.
They are based on trust, and trust can evaporate all too quickly. What we know from history is that if too many try to cash in, we will see a 1930s style ‘run on the bank’ or a collapse similar to the 2008 subprime mortgage crisis. Add to this picture the scale of the issue – which is not perhaps apparent to national banks.
Crypto ownership has grown hugely over since the inception of Bitcoin in 2008. This has multiplied over the last five years, as crypto has become a mainstream investment. During the pandemic, many people began investing in crypto for the first time, often with limited knowledge of the risks involved.
Now, some 15.5 per cent of the global population now holds crypto. There is a new post every three seconds on social media about Bitcoin alone. In the UK, 6.1% of people own crypto, with a fifth having bought crypto at some point. This global investment is worth hundreds of billions of dollars – which could disappear overnight.
I believe this would in turn lead to a lot of people losing money, and ultimately to social unrest and political turbulence. So what should happen in order to prevent this crypto doomsday scenario?
First of all, central banks need to grasp the scale of the problem. Then they need to act to deal with a completely unregulated and vulnerable economic sphere. At the moment, what we see is a status quo where authorities act within their mandate, with banks in charge of moderating inflation, and governments in charge of employment and tax. Governments and financial institutions tackle macro level issues – but not global issues outside their sphere. In fact, the reports they receive from officials often overlook these next generation world forces, so that they are not even within view.
Banks and governments regulate the areas they have looked after for decades. Now with the crypto sphere growing so quickly out of nowhere, they are too slow to see it properly or adequately react. They would rather pretend it does not exist. But it does exist, and avoiding regulating crypto properly threatens the wellbeing of millions of people. In the new economic order, this blinkered approach is no longer working. Central banks must act now with crypto, introducing the right regulation and support in order to ensure political stability.
They need to speed up issuing their own stablecoins, and recognise that our monetary system must evolve, as it did from bartering economies, to Roman gold, paper notes and now modern-day digital money. Digital Euro and Digital USD are in progress – but they have some way to go, and further delays have been reported. Often we wait for a really big event to drive change – let us preempt this and take action now. If institutions fail to read the runes and do not react to the new forces at work, our banks risk losing trust. As well as leading to collapse, this will necessarily cause them to lose their power.
Conversely, if they act quickly and decisively now, they can unleash a new era of financial democracy where crypto and next-generation fintech become a force for good. Some countries are leading the way. In early June, Japan became one of the first major economies to introduce a legal framework around stablecoins, linking them to the yen and defining them as digital money. The EU’s MiCA – the first European level legislation on cryptocurrency – is also doing a good job in trying to regulate stablecoin, but we are three years away from real change. This could well be too late.
Here in the UK, we must also step up to the challenge. This means regulation and Government backed stablecoins. Nobody else can fix this – the buck stops with the banks and Treasury. They must learn from recent events and move much faster – the time to act is now.
