Are Private Digital Tokens On Their Way Out?

In the aftermath of crypto winter regulators are busy cleaning up after crypto excesses and outright fraud. Bitcoin took a big hit and has now recovered to more than half of its 2021 peak. Nevertheless, there are now predictions that private digital tokens are on their way out. This comes from a central bank official in Singapore. He says that private crypto tokens have failed the fundamental tests of financial services. Meanwhile, he says that stablecoins backed by hard currencies and government digital currencies will become important in the larger financial system.

What Are Currencies For?

Long ago barter was the only way that goods and services were exchanged. Around five thousand years ago coins made from valuable metals like gold and silver were first used. It was not until around 1500 BC that minted money had dates on it. Coins became a common means of exchange because they were portable, durable, and had inherent value. Besides that, kings and other leaders could control how many coins were minted (the money supply). This beat other forms of wealth like cattle as coins were easier to store, transport, and protect. An essential aspect of this “new invention” was that the currency maintained its value over time unlike cows that wandered off, got sick, or were stolen. Thus one of the tests of a currency is that it has a reliable value.

Where Do You Put Your Life Savings?

Anyone who thought that putting their life savings into Bitcoin on November 21, 2021 was sorely disappointed when the digital token fell to lower and lower price plateaus throughout 2022. Anyone who put their life savings into Bitcoin on December 30, 2022 is currently very happy. The problem is that Bitcoin works better for speculation than it appears to work for long term saving. Many people invest in the stock market. They put their money into exchange traded funds that track the S&P 500. They are under no illusion that their shares in the ETF are a currency. Rather they are a relatively stable and generally profitable form of investing. Although traders buy and sell volatile stocks, they do not leave their money in these assets. They attempt to time the market and then get out. They hold their assets between trades as cash or cash equivalents such as US treasuries or bank CDs. For long term appreciation, they buy shares of Apple or Microsoft.

What Is the Value of a Stablecoin?

Stablecoins backed by the US dollar, yen, or euro are excellent ways to hold assets while doing business in decentralized finance. Although the underlying dollar, yen, or euro may vary in value over time the amount of volatility is nowhere near that of Bitcoin or other private crypto tokens. This is why folks like the Singapore central bank official say that properly managed and backed stablecoins will survive as part of the financial system. They fulfill the role of a currency in the financial world. Likewise, digital currencies issued by governments and backed by their currencies will play the same role. A problem with governmental digital currencies is that they might hurt banks and even pose a threat to the whole banking system. Nevertheless, if this form of currency comes into general use it will work the same as a national currency and not be a speculative asset.

Who Will Regulate Cryptocurrencies?

As regulators ramp up pressure on the crypto world, we are seeing some being treated like stocks or other securities. Others are being treated like commodities like gold, oil, or coffee. Any and all of these may provide profitable investment opportunities. It does not mean that they are currencies. Who ends up regulating a given digital token will tell us where it falls in the scheme of things. Currently it would appear that only dollar backed stablecoins will emerge as true currencies.

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