Cryptopia or Fiatland?

The world of Cryptopia Concerns about the potential for political manipulation of fiat currencies did not begin with the demise of the Gold Standard. Recent quantitative easing, negative interest rates and de-monetization have reinforced such worries. Detractors also highlight practical complaints relating to speed, costs, errors and friction, as well as market structures that they believe stifle innovation. Cryptopians embrace an alternative monetary system where value is based on computer code rather than recourse to a central authority or other expressions of wealth. Cryptocurrencies are limited in supply and provide economic incentives for honest participation. Their underlying blockchain technology enables peer- to-peer interactions over a robust and tamper-resistant network. There is complete freedom, anonymity and privacy – and no need for users to trust each other or a centralised authority. Moreover, sending money is as easy as sending an email. A new Fiatland As stewards of fiat currencies, national governments create vital payments infrastructure (such as Real Time Gross Settlment systems (RTGS) and Automated Clearing House (ACH)), promote competition, and protect retail customers through regulation. There are also international structures that advance similar aims, such as global card schemes that facilitate global acceptance, instant payments, and consumer finance. Similarly, SWIFT acts as a global standards body in international payments, trade, securities and foreign exchange and provides a secure global network supporting correspondent banking. Fiatlanders point out that these systems continually evolve as a result of competition, regulation and technological change. There are national regulatory frameworks for non-banks to operate e-money schemes, for example, while several countries are forcing banks to open services to fintechs. Indeed, fintechs – along with challenger banks – are creating completely new services. Internationally, the The direction of travel is clear: payments are becoming real time and visible end-to-end. Integration is becoming seamless via application programming interfaces (APIs). recent SWIFT gpi initiative introduces global end-to-end tracking of payments. The direction of travel is clear: “fiat currency” payments are becoming real time and visible end-to-end. Integration is becoming seamless via application programming interfaces (APIs). Crucially, these innovations strengthen, rather than undermine, the fiat currency system and its role in the social contract between government and the people. Is Cryptopia possible? Cryptopia is a radical break from today’s environment. To gain mass adoption as a unit of account, medium of exchange and store of value, certain conditions will need to be present, including: • Slow improvements to the fiat system that fail to address issues such as unbanked people, increasing dissatisfaction with the status quo. • Cryptopian systems will need to overcome problems such as low number of transactions per second and heavy electricity consumption. • Cryptopian systems will need to offer superior functionality compared to Fiat 2.0 alternatives like faster payment schemes. • Cryptopian systems must prove they do not just replace one set of costs and intermediation with another (such as the cost of intermediation by centralised crypto-exchanges). • There needs to be alignment beween Cryptopians and users rather than a focus on getting rich quickly based on token bubbles. • Governments would need to cede control over the monopoly over money and articulate a new social contract where they have less control of the economy. • Governments would need to liberalise their approach to privacy such that economic actors can transact peer-to- peer anonymously and privately.