Published in La Jaune & la Rouge, n° 792, February 2024,
Technological advances make financial transactions more efficient and should be welcomed. But governments turning a blind eye to bitcoin and initial coin offerings should not forget economic fundamentals; they would be well advised to protect their citizens and financial institutions from risky and potentially socially harmful developments.
The craze for crypto-currencies and their use as a store of value, a fund-raising vehicle or a tool for writing smart contracts continues unabated. The euro value of bitcoin in March 2024 fluctuated between €50,000 and €65,000, to be compared with €5,700 in March 2020 and … €300 in November 2015. What's more, and even if this mode of financing remains marginal, initial coin offerings (ICOs), whereby companies finance themselves by issuing tokens (cryptocurrency tokens newly minted for the occasion), have according to Wikipedia raised nearly $24 billion in funds from 2013 to 2023 (more than 8,000 initial coin offerings were launched during this period). Are cryptocurrencies a threat or an opportunity for our societies? The purpose of this article is to provide some thoughts from an economist on this phenomenon.
Stay alert!
To summarize simply what follows, my recommendation would be to remain alert to certain dangers associated with cryptocurrencies. On the one hand, while I see no problem with sophisticated players betting their own money on the cryptocurrency sector, individual investors need to be informed and fully aware of the underlying business model. On the other hand, any exposure to crypto-currencies by players likely to be bailed out by the state in the event of major losses (banks, insurance companies, regulated pension funds...) must be subject to substantial capital requirements, in relation to the significant risk associated with fluctuations in the value of crypto-currencies.
Blockchain
My skepticism doesn't concern blockchain, the technology behind Bitcoin. Admittedly, many technical problems associated with Web3 have yet to be resolved; for example, validation processes are still costly and security needs to be improved. Nevertheless, this distributed ledger technology is a welcome innovation, with useful applications such as the rapid and automatic execution of smart contracts and the storage of secure information on a public blockchain. This is how we could share our personal data, which we would transport from website to website in a space of trusted partners..
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