Dr. Daniele D’Alvia, Module Convener of Comparative Law at Birkbeck College, University of London and Associate Research Fellow at IALS and the European Banking Institute
Dr Daniele D’Alvia, from Birkbeck’s Law Department, explains the root philosophies behind cryptocurrency, the meaning behind ‘stablecoins’, and how the cryptocurrency dream turned into a beast that ate its own tail.
In old times if you put £1 under your mattress, you knew you could get back £1 when you went looking for it. Today, thanks to regulations developed over centuries, if you deposit £1 with a bank, you know that you can get it back, even if a bank does more with it than lock it in a vault. One major criticism of cryptocurrencies is their volatility, specifically their inability to keep their value stable. Bitcoin is a perfect example. After the price of Bitcoin peaked during its first bubble – at $1,137 on 29 November 2013 – it dropped by 84% to $183 just over a year later, on 14 January 2015. This trend repeated four years later with a cumulative drop of 83%, and happened again in November 2021.
Now, a branch of cryptocurrencies called stablecoins are trying to back up their promise of being more stable, by replicating the equivalent of a digital vault. In brief, to maintain their value, stablecoins are usually pegged to a fiat currency – government-issued currency that is not backed by a commodity such as gold. Most modern paper currencies, such as the US dollar or the Euro, are fiat currencies. To do this, stablecoins such as Tether maintain a reserve of cash or cash-equivalent assets whose value theoretically matches the total value of the stablecoin in circulation. Translated in loose terms, when a user pays Tether $1 for a token, that money is supposed to be held in Tether’s bank accounts, but the reality can be more complex.
As such, stablecoins are meant to address the major criticisms of cryptocurrency in two ways. First allowing crypto owners to conduct transactions without having to take volatility and sudden value changes into account and also offering a safe haven for their holdings, protected from the devaluations of the crypto market. But despite being attached to fiat currencies, stablecoins are not risk-free. TerraUSD (an algorithmic stablecoin), also known as UST, and its sister token, Luna, crashed in May 2022, sending their prices to near zero.
These examples are based on a central idea that sees money as ‘portable power’. Money is a tool that is supposed to be easily and readily exchanged, making bartering with multiple goods and services unnecessary; allow economic exchanges to be conducted over long periods of time and distance; help provide calculation and valuation for goods and services
To perform those functions, money must be portable, reliable, interchangeable, durable, affordable, and available. However, money is only worth only what someone is willing to give you for it; currencies in general are based on faith. Therefore, the value of money is not solely based on saleability (i.e., the material from which it is made), but is instead attached to a specific quality that attracts the lust of generations: power in terms of acceptance as a medium of exchange.
It’s common knowledge that many supporters of cryptocurrencies are compelled by the idea of decentralisation. Unlike fiat currency that is controlled by a central bank, cryptocurrencies are processed through something known as distributed ledger technology, so they are not manged by any one entity. The whole point of cryptocurrencies is to avoid government control, and as such a decentralised sovereign cryptocurrency cannot exist. For a country’s currency to be accepted internationally, it must be carefully controlled by the country, in order for other nations to trust the currency. Cryptocurrencies are not money because they lack an official issuer and do not function like a normal means of payment. Cryptocurrencies can therefore be seen more as a form of financial asset that can be used as a speculative investment tool rather than actual currency.
It is ironic that cryptocurrencies started as a libertarian dream to free money from the arm of the state, namely central banks and tax authorities. They were the ‘Great Pretender’, but perhaps they have been pretending too much, as the recent collapse of TerraUSD has shown. Now, with the inevitable rise of Central Bank Digital Currencies (CBDCs), a digital equivalent of fiat currencies issued by a central banks, it looks like cryptocurrency may in fact serve to empower these centralised systems that Bitcoin’s investors originally wanted to circumvent.
To this end, CBDCs are a necessary alternative for private cryptocurrency schemes because I firmly believe that the value of money strictly depends on the power of its issuing authority, otherwise law and order would simply disappear, and anarchism would inevitably prevail.
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