Reacting to Crisis: Cryptocurrency Has Always Been About Resilience

July 7, 2020 0 Comments

Even as we begin to reopen the economy, it’s clear we still need to take steps to minimize the economic consequences of the Covid-19 pandemic. But the hard truth is that tradeoffs are inevitable, economic shocks are not temporary, and the impact of the decisions we make today will be felt for years to come.

With the dust now beginning to settle, I believe the pandemic will ultimately impact cryptocurrencies, as both a technology and a financial instrument, in three key ways:

  1. Government distribution of money will change
  2. Cryptocurrencies will be tested as an asset class
  3. Decentralization and resilience will become more important

Together, these three factors could set the stage for a more cryptocurrency-friendly world, spurring more favorable government policies and increased adoption.

Monetary innovation can be a lifeboat

Policymakers did not hesitate to immediately enact strong economic interventions in response to Covid-19. With unprecedented amounts of unemployment claims in the U.S. and Europe, nothing short of an extraordinary fiscal and monetary stimulus will be enough. At the very least, governments need to meet citizens’ basic needs, prop up demand, and keep markets functioning. However, determining the optimal amount of support, distributing funds, and ensuring they are spent productively comes with challenges. We will inevitably need to address failings in these areas, creating opportunities for cryptocurrencies, particularly in distribution. 

One of those failings: 1,600 companies providing loan services are brokering the U.S. stimulus package to small businesses, with mixed results thus far. While small business loans in the U.S. were meant to go live on April 3rd, many major banks did not immediately start processing applications due to a lack of information and guidance from government agencies. Many citizens’ relief payments also did not arrive on time. Countries like Spain started looking at ways to implement Universal Basic Income to support the economy and protect their citizens, but they are finding difficulties around implementation. Some of the challenges stem from regulatory barriers but others are simply technical. How can a state directly give monetary resources to people securely and efficiently? 

Universal Basic Income and other direct welfare programs present a new use case for a Central Bank-issued digital currency that can disintermediate the banks from these emergency initiatives, as well as other government loans and grants. France is taking applications for digitally issued currency that is interchangeable for other assets to speed up settlement and boost flexibility for retail payments. In the U.S., the ‘digital dollar’ was close to making it into the stimulus bill for the same purposes. While Central Bank-issued digital currencies are not cryptocurrencies, they enable  the market to learn the value of disintermediation and create easily interchangeable virtual assets. 

Drilling down on what differentiates cryptocurrency as an asset class

Bitcoin enjoyed its rise as an asset class against a 10-year bull market with unprecedented low interest rates, with investors viewing Bitcoin as an alternative asset with uncorrelated returns. As Bitcoin has matured, that thesis has strengthened. Policies of Central Banks and governments have led to more investable dollars chasing fewer opportunities. With fears of inflation or failure to adequately meet the needs of the economy, investors may look to cryptocurrencies as a  hedge to respond to this crisis. Noted hedge fund pioneer Paul Tudor Jones revealed recently that he’s pursuing just such a strategy, while JPMorgan’s decision to bank cryptocurrency exchanges for the first time indicates they may be expecting everyday investors to do the same. 

Cryptocurrencies form the only truly global marketplace available to retail and institutional investors around the world, which is particularly important for consumers in emerging markets with unstable currencies. Debt crises, quantitative easing, and resulting currency wars have left people around the world searching for alternative stores of value, despite Bitcoin’s volatility. And with much of cryptocurrency trading concentrated in countries like Japan, China and South Korea, we anticipate cryptocurrency markets to reflect some of the strength of these Asian economies following the crisis. Investors may be looking to global markets for returns when domestic outlooks are not as strong. 

Cryptocurrencies’ strength as an asset class relies on the underlying utility for the technology, clear benefits for payments, and development of further applications. Investors are looking for real world examples where cryptocurrencies show resilience in these times, from fundraising for the Red Cross in Italy to funding bug bounty programs.

Decentralizing our economy

Over the past several weeks, the internet has become the connective tissue for everything, from our devices to our relationships with  colleagues, friends and families. With everyone working remotely and many needing to entertain children, spikes in internet traffic have led companies like Netflix and YouTube to decrease their video bit rate for Europe to ensure  adequate support. This will continue to test the internet’s backbone, introducing the need for protocols that move us towards more resilient, decentralized alternatives with systems of incentives to support them. Mesh networking, prediction markets for misinformation, and novel ways to fund global initiatives from mask production to art will continue to grow in necessity. 

As advocates point out, cryptocurrencies are used in ways that transcend national boundaries, but their utility as a decentralizing force extends down to the local level too. Local neighborhoods have created funds to help workers from bars and restaurants and open source ventilator projects have popped up overnight. Businesses and projects will need to find ways to raise capital for initiatives that may fail, but reimagining capital formation requires open systems that can express ownership and fundraising in transparent ways to protect consumers and allow new markets to form.   

Cryptocurrencies let people transact in ways previously unimaginable. By creating alternative ownership structures for local businesses, earning an income for providing services all over the world, or seamlessly paying or receiving money for bandwidth or storage, builders in the cryptocurrency industry have a unique opportunity to change behaviors and grow the resilience of our global economy against threats like the one we are currently facing. We are still in a public health crisis today, but our focus must be on what structures will endure future threats.

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