Cryptocurrencies: Why are the guardians of the traditional economy worried?

In the incessant tumult of financial markets, a new form of money has emerged, defying conventions and calling into question the very foundations of the traditional economy: cryptocurrency. With her meteoric rise, she has captivated the adventurous investor, intrigued the techie and, most significantly, provoked the ire of established economists. The latter, guardians of the old guard of finance, see in Bitcoin, Ethereum and their ilk, not innovation, but an unwanted disruption of the monetary system that they have so meticulously built and maintained.

This article aims to dive into the heart of this aversion. Why are economists, these pilots of the great macroeconomic machine, so reluctant, even hostile, towards the users and principles of cryptos? Is it a simple fear of the unknown, a lack of understanding of blockchain technology, or are there deeper and more fundamental reasons for this distrust?

We will explore the arguments of figures such as Agustín Carstens, Luis Garicano and Christine Lagarde, who have publicly expressed their skepticism. We will examine how cryptocurrencies challenge the three traditional functions of money: as a medium of exchange, as a store of value and as a unit of account. Finally, we will reflect on the implications of a possible transition to a world where digital currency could coexist with, or even supplant, fiat currency.

The economists’ point of view

Traditional economics is based on well-established principles, with particular attention paid to the management of economic fluctuations through fiscal or monetary policies. “Traditional” economists see monetary policy as an essential tool for stabilizing the economy. They use historical examples, such as the Great Depression, to illustrate the dangers of an inflexible currency. Cryptos, with their sometimes limited supply and their independence from central banks, seem to reintroduce issues similar to those of a gold standard, thus limiting the ability of governments to respond to economic crises.

For this reason and many others, several leading economists and central bankers have expressed harsh criticism of cryptocurrencies. For example, Agustín Carstens, general director of the Bank for International Settlements since 2017, views Bitcoin as a threat to fiat currency, and fears that it could undermine the ability of central banks to conduct effective monetary policy. Spanish economist and politician Luis Garicano, meanwhile, questions the usefulness of cryptos as a means of payment, store of value and unit of account, highlighting their volatility and lack of widespread acceptance.

In France, figures such as Thomas Piketty, an economist renowned for his work on wealth inequality, have expressed reservations about the use of cryptocurrencies. Piketty often emphasizes the importance of financial regulation to prevent inequality, a position that can conflict with the decentralized and largely unregulated nature of cryptos. Another French personality, Jean Tirole, winner of the Nobel Prize in economics, also spoke on the subject of cryptocurrencies. Although he acknowledges the technological innovation behind them, Tirole remains skeptical of their usefulness as money and highlights the potential risks they pose to financial stability.

These critiques highlight a deep concern about the ability of cryptos to replace or coexist with traditional currencies. Indeed, blockchain technology, although promising, is often poorly understood by traditional economists. It represents a radical departure from established financial systems, raising concerns about its stability and security. Economists are particularly concerned about the implications of this technology for monetary policy and financial regulation. Their distrust is often exacerbated by a lack of technical understanding of blockchain, making it difficult to assess its potential impact on the overall economy.

Furthermore, these economists, as advisors to central banks and other financial institutions, influence key aspects of the economy, such as interest rates and debt management. Cryptocurrencies, by operating outside the traditional financial system, could reduce this influence, and question the role of economists in economic regulation. This potential loss of control is a major source of resistance.

Cryptos and questioning the system

Furthermore, cryptocurrencies, by their very essence, provoke a profound questioning of the three traditional functions of money, as stated by Aristotle: means of exchange, store of value, and unit of account. Their volatility and limited acceptance pose challenges as a reliable medium of exchange. As a store of value, they are often perceived as speculative and unstable, contrasting with the relative stability of fiat currencies. Finally, their use as a unit of account is hampered by their lack of universality and official recognition.

While fiat money is founded on a social contract based on trust in issuing institutions, such as central banks and governments, cryptocurrencies, on the other hand, operate on a trustless model, relying on blockchain technology to ensure security and transparency. This approach challenges the traditional role of financial and government institutions in the creation and regulation of money.

The growing adoption of cryptos could have significant implications for economic policies, particularly in terms of controlling the money supply and monetary policy. This is because their decentralized nature limits the ability of governments and central banks to intervene in the economy through monetary manipulation. This raises questions about monetary sovereignty and the ability of states to regulate their economies in a world where cryptocurrencies are gaining popularity.

Despite all these reservations from traditional economists, an objective exploration of cryptos nevertheless reveals notable potential in terms of financial inclusion. This facet, often overshadowed by debates on volatility and regulation, deserves particular attention. It represents an opportunity, even for skeptics, to rethink access to financial services in a global context

Cryptocurrencies and Financial Inclusion: Towards a fairer world?

Financial inclusion is a key concept in global economic development, aiming to provide equitable access to financial services for all, particularly in underdeveloped or developing regions. According to the World Bank, approximately 1.4 billion people were unbanked in 2023, representing a major challenge to overall economic equity. Access to financial services is crucial because it allows individuals to manage their income, save for the future, invest in educational or entrepreneurial opportunities, and protect themselves against financial risks.

Firstly, cryptocurrencies, with their decentralized nature, offer a unique opportunity to respond to this challenge. They enable financial transactions without requiring traditional banking infrastructure, which is particularly relevant in regions where banking services are limited or non-existent. Cryptos can facilitate secure, fast and low-cost transactions, which is essential for populations living in remote or underdeveloped areas.

Second, blockchain technology, which underpins cryptos, provides increased transparency and security, which reduces the risks of fraud and corruption, often associated with traditional financial systems in less developed regions. Additionally, access to cryptos is typically via smartphones or computers, making financial services more accessible for those with limited access to physical banks.

The integration of cryptocurrencies into financial systems can boost the local economy by facilitating trade, enabling more efficient cross-border fund transfers, and providing new investment opportunities. This can lead to increased economic activity and improved living conditions in underdeveloped regions.

To illustrate all of the above, a prominent example is Bitcoin in Nigeria, where despite strict government regulation, the use of Bitcoin continues to grow, especially among young people and entrepreneurs. This is partly due to the ease of sending and receiving international payments, an essential feature in a country with a strong diaspora. Similarly, in Venezuela, where rampant inflation has eroded trust in the local currency, Bitcoin and other cryptocurrencies have become popular ways to store value and conduct daily transactions. Of course, crypto adoption in these regions is not without challenges. Price volatility, technological complexity and security issues are major concerns. However, solutions are emerging, such as the use of stablecoins linked to fiat currencies to reduce volatility, and educational initiatives to improve the understanding and secure management of digital assets.

Conclusion

In conclusion, cryptos, beyond their disruptive nature, have considerable potential to reshape fundamental aspects of our global economic system. Whether by challenging traditional monetary paradigms or by offering unexplored avenues of financial inclusion, they invite deep reflection on the future of the economy. However, to fully realize their potential, a balanced understanding of their advantages and disadvantages is crucial. It is therefore imperative for economists, regulators and policymakers to embrace both caution and open-mindedness in the face of this technological development. Cryptocurrencies are not just a financial innovation; they represent an opportunity to rethink fairness and accessibility in the global financial world.