If two preceding factors to making cryptocurrency work is widespread violence and economic peril, it’s probably not a good idea that we move in that direction.
Though El Salvador went down the path, I am still skeptical
By, Matthew Fraser, Editor in Chief
Every year something is announced that is supposed to turn the world on its head and bring us closer to the future. From technological innovations in electric vehicles, to screen technologies like organic light-emitting diodes (OLED), something somewhere is being heralded as the soon-to-be future of the planet. In some ways, all of these products really do bring us further into the future envisioned in sci-fi. The advent of the smartphone truly did bring the world forwards into a new era, while advancing humanity’s steps towards digital integration. However, some innovations are more speculative and centre around nearly incomprehensible mathematics and ideas.
Such is the state of cryptocurrency. Though it has been discussed ad nauseam over the past decade, crypto has yet to cross over into being the world changer that it was announced to be. It is often looked at incredulously by the wider population and many of its most ardent supporters are viewed as nerds or castigated as unwashed, basement-dwelling “crypto-bros.” But could a single or even multiple cryptocurrencies see a massive increase in popularity, driving it towards global use and upsetting the current financial pecking order? I’m sorry to inform all the crypto enthusiasts of the world (washed or unwashed) that this is extraordinarily unlikely.
Now, the savvier reader may point at El Salvador as a potential indicator of cryptos real-world application. Indeed, in early September, the small Central American country announced that it would be adopting Bitcoin as a legal tender. It seemed to some of the blockchain’s most ardent believers that this one small step would reverberate and create a giant leap forward towards independence from the traditional financial world. Though the people of El Salvador did not express such outward enthusiasm, the underlying logic behind the move was reasonably sound.
For one, El Salvador had already long abandoned its own currency in order to do the majority of its legal tender in American dollars. This had the effect of further devaluing the Salvadorean Colón while also increasing the countries reliance on the US. As their currency was no longer printed and minted by their own government (America would never allow another country to print US dollars and risk massive devaluation), they had to constantly purchase US dollars on the global market. This was easier as roughly 2.5 million El Salvadorans live and work in the United States and send money home in the form of remittances. According to Reuters, these remittances make up nearly one-quarter of the countries GDP at six billion dollars. Through happenstance, the country was literally able to use its ex-pat community to funnel much need currency back to the country.
However, there was a slight issue with this circumstance. For one, sending money internationally always incurs a transaction fee via bank or credit union charges. In this way, the El Salvadorean community was losing millions of dollars in fees per year. Bitcoin provided a way to solve this. By using Bitcoins, a Salvadorean abroad who had converted their money already could transfer money online at a much lower rate than what was charged in banks. But does that mean that this transfer could work for the rest of the world?
For starters, El Salvador had to be unfortunately poor while plagued by violence (though it has been decreasing) and corruption for there to be enough flexibility to even attempt this. Foreign investor confidence was so low that it was possible to take this risk without losing investors, simply because they had so few to begin with. It’s also not an exaggeration to say that the El Salvadorean economic system was in dire straits before they switched to the US dollar and was deeply troubled before they added Bitcoin. If a preceding factor to making cryptocurrency work is widespread violence and economic peril, it’s probably not a good idea that we move in that direction.
But there are other reasons as to why the cryptocurrency is unlikely to fell the global giant that is our current financial system. Simply put, the widespread adoption of cryptocurrency is hampered by barriers to entry and the comparative unattractiveness of the new money substitute. Cryptocurrency is plagued namely by three things: volatility, lack of common use or adoption and ultimate control.
The first thing that hinders the adoption of Bitcoin or any other cryptocurrency is the fact that it is not widely adopted and is frankly, not that attractive for adoption. There has to be a good reason for the common person to get into crypto for it to gain traction in the public sphere. For instance, it is important to ask why your local supermarket or grocery store would adopt bitcoin in addition to or in lieu of the current Canadian dollar? After that, you have to ask yourself what the likelihood of your landlord adopting bitcoin is. This is an important problem to consider as there is little point in holding a currency that you can’t spend anywhere because no one has adopted it. Even though crypto is tremendously popular within its circle of adherents, it is not at all popular with the wider public and therefore has limited use.
This leads us to consider how widely adopted these currencies are. If you can’t pay your rent in Bitcoin because your landlord can’t pay their mortgage in it, it hurts the potential for you to adopt that currency. Even if one would argue that you can hold bitcoins and then trade or sell it for another currency, the question becomes, why would the average person go through this trade process when they could just hold the most widely accepted currency to begin with? If you must do a separate transaction before you can go buy yourself some Starbucks, you’re likely going to avoid either the Starbucks or the thing that is forcing you to have this other, unnecessary transaction.
Next is the volatility of these cryptocurrencies. Though some are certainly more stable than others, they are all on average less stable than the US or Canadian dollars. The presence of stability is important because it promotes market confidence. Let’s say that someone works at a bakery and their hourly wage is $16; at the end of every shift, they know how much money they made, and they have approximate knowledge of how that will be valued today, tomorrow and next year. Even if a larger than normal amount of inflation were to occur, they would still be relatively secure in how much money they had and how useful it would be.
Now let’s say that this same person working at the same bakery is now being paid in Bitcoin. Let’s say that their hourly wage is one 56th of a coin. Given that the value of Bitcoin has swung in the tens of percent in a single day, it would not be impossible for someone’s daily wage to be six percent higher on Tuesday than it was on Monday, but eight percent lower on Friday than it was on Monday. Given the widespread anger and dissatisfaction with even a two percent annual inflation, it’s hard to imagine people being confident in trading in crypto let alone holding their entire life savings in it.
Finally, there is the argument about control. Many crypto supporters claim that crypto can free the population from domestic banks, government treasuries and the IMF or world bank, yet the people who are most likely to control the majority of cryptocurrencies are going to be the phenomenally wealthy corporate heads and a few innovators. In a sense, this would make our current world into even more of an oligopoly (an economy run by the wealthy for their benefit) than it currently is. A currently poor Amazon warehouse worker does not have the ability to gain a large number of coins through mining given the expense of the necessary equipment; a poor person in El Salvador may be able to use a smartphone and an app-based e-wallet but that does not put them in a position to gain crypto-based wealth and prevent them from being exploited by the new financial overlords and exploiters. Whether it’s the internet infrastructure that underlies access or the actual ability to generate crypto for oneself, the working class and the global poor are already cut out of the race and cannot hope to catch up to the Elon Musk’s or even the average ‘crypto bros’ of the world. This reality nips the altruistic argument for crypto in the bud.
With all that being said, I don’t think cryptocurrencies will decrease in popularity at all. I think they will become strange wealth-gathering tools that are heavily favoured by an overwhelmingly young and male fanbase. They may change the world in the sense that they make a few people fantastically wealthy, and they go on to implement change, but I doubt anyone will be paying for their next haircut in Ethereum. At least not in Canada.