The Evolution Of Finance | Seeking Alpha

For several years, now, we have been wondering where the crypto-world was going to take us.

We tried to be patient by arguing that, given time, the system would work itself out and we would then come to understand where things were going.

Well, it seems as if “things” are moving far enough that we can get some picture of how this whole “digital” world is going to evolve.

Cryptocurrencies were to give the world a cheap, safe means of exchange, one that could serve as a store of value and, consequently, as a unit of exchange.

That has not been what has happened.

We have found out that cryptocurrencies do not perform well as a medium of exchange.

Serving as a means of exchange was the one key characteristic that would give cryptocurrencies a reason for existing, it would be the characteristic that provided the fundamental value to these payment tools.

Didn’t happen.

Cryptocurrencies, for several reasons, did not have the capabilities needed to compete with other, existing means of exchange. Thus, this idea moved into the background.

Secondly, cryptocurrencies were also seen to serve as a store of value. Initially, these currencies were seen, basically, as providing value as a means of payment that could also serve as a store of value.

However, if these currencies could not serve as a means of exchange, then where did they get their value? Just as a store of value?

Well, this didn’t work either, for investors in Bitcoin (BTC-USD) and other cryptocurrencies needed a substantial reason for putting their money in such an asset.

The reason investors found to put their monies into cryptoassets was that they could become objects of speculation.

The Federal Reserve provided support for this idea as it pumped billions of dollars into the financial system, large enough amounts of funds to create asset bubbles all over the place.

Cryptoassets became a target. The price of a Bitcoin rose, almost continuously for three years or so, as the price rose from below $10,000 to more than $67,000 in early November 2021.

The Fed began to tighten monetary policy and the value of Bitcoin plummeted. This past week, the value of Bitcoin was less than $19,000.

It is estimated that the total value of money invested in cryptocurrencies reached $3.2 trillion in early November 2021.

Currently, that value now hovers somewhere under $1.0 trillion.

Cryptocurrencies may be a store of value, but they are not a stable store of value. They were designated, primarily, as speculative assets.

And, for this reason, it was found that cryptocurrencies could not be used as a unit of account because of the volatility associated with their price stability.

So, as time has marched along, all the characteristics associated with a strong currency vanished and cryptoassets became just another “toy” to play around with.

Efforts To Correct

Efforts were made to make cryptocurrencies useful. One such effort was the creation of the stablecoin.

If cryptocurrencies were tied to something that was stable in value, like with the U.S. dollar, or, with some other conventional currency, then its value would become more stable and it might become more trustworthy for regular usage.

Note, however, that the credibility of the stablecoin is tied to the credibility of the unit of account of the currency, in the case of the United States, that is issued by the central bank.

This connection destroys the fundamental reason a lot of people supported Bitcoin and other cryptocurrencies in the first place. Libertarians liked the idea connected with Bitcoin and others that there was no central authority needed to establish the worth and value of the cryptoasset under review.

But, there are still more problems.

Creating a cryptocurrency or creating a stablecoin is not that difficult or that costly in today’s world. There are now more than 10,000 cryptocurrencies in the world, and analysts argue that the member could be as large as 1 billion.

There is little or no constraint to entry. Consequently, the world of crypto is fragmented and fragile. It can be hacked and easily misused.

In effect, what the efforts to correct the situation for cryptoassets are achieving just reinforces the need for rules and regulations of the industry in a way that is not dissimilar to the structure of the traditional banking system.

Money has evolved from coins, to notes, to entries in balance sheets, and to bits on computers.

One could argue that “bits on computers” were really “digital” in nature, and hence a part of the world of crypto that we are moving into.

But, what does it matter?

Digital, in one form or another, “is” the future.

The Future

The Federal Reserve System, I believe, is ready to evolve.

I believe that the Federal Reserve has been supporting a strong U.S. dollar as a part of its responsibility for maintaining the role of the dollar as the world’s primary reserve currency.

This, I believe, is the fundamental condition for defining what the next step of the existing regulatory system will be given the need to move on into the digital world.

Digital is the future.

Consequently, central banks must now take the lead in the development of central bank digital currencies (CBDCs) and in the “revolutionary restructure of monetary systems.”

The Federal Reserve must do this.

A key here is to create new functions for payment and settlement to a wider range of financial intermediaries than domestic commercial banks. This “new” payments system” will include decentralization as never seen before, and it could result in a decentralized financial system built upon platforms and is networked, internationally, in a way only dreamed of in the recent past.

Finally, the large commercial banks must play an integral role in this evolution.

Conclusion: this whole stage of evolution is not really about crypto. Crypto has just captured the headlines.

This whole stage of evolution is about technology and what the financial world can do with the technology that is becoming a reality. Crypto is just a part of this technology, and it is not really the most important part of it.

Remember, money is just information and the essence of history has been the growth and spread of information. We are just in the midst of the current transition.