Is bitcoin about to become legitimate? Could it soon be printed with portraits of global heroes (Einstein on the 100 bitcoin bill, Marie Curie on the 1,000)? Could we soon buy a paper or a cup of coffee with it down the high street? That remains a long way off, surely. But Nayib Bukele, president of “plucky El Salvador”, as my colleague Simon Calder would call it, has announced that bitcoin will become legal tender – a first for any sovereign state.
Central banks, including the Bank of England, have recently started taking cryptocurrencies more seriously. Elon Musk says he’s invested in it – and you can even buy a Tesla with some kinds. Even so, I can’t help but feel uneasy; cryptocurrency seems a lot like a speculative bubble.
Like the rare tulip trade in the 1600s when speculation about the flowers caused prices to skyrocket, the cryptocurrency business in the 2020s is a popular craze powered by gossip and rumours. And if it becomes a widely accepted form of payment, it could evolve into something much more like a popular international currency (analogous to the IMF’s government-backed Special Drawing Rights), and you could have a bank account for it. But if people and governments start to trust it, then it will become more like conventional currency – with unknowable consequences.
Cryptocurrency has always been an odd sort of “money”. Until now, it’s mostly been used as a volatile means of saving, rather than for exchange. But it could be, though. Money is what money does, and provided people trust it, then it will work like a currency. Economic history is full of examples of human ingenuity taking over when conventional currencies broke down. And if I lived in El Salvador or any other country where the local currency has proved unreliable – Argentina, Zimbabwe, and the Democratic Republic of Congo being recent examples – I’d be more receptive to the idea of a new, voluntary alternative currency.
We shouldn’t get too snobby about “dodgy” currencies. The value of the pound, for example, defended by the governor of the Bank of England and the British state, has been humiliated by inflation. A basket of consumer goods that cost £100 in 1970 would now cost you £1,584; or, put another way, your 1970 pound is worth all of six pence today. Even if you’d put it in the building society it would have lost almost all its value.
The banking crisis of 2008 demonstrated that conventional money in regulated banks can too disappear overnight once trust in the institutions evaporates and there’s a run. But will cryptocurrency one day be able to inflict the same kind of damage? Maybe – and it could be worse, and faster. It’s all about choice, really. The Salvadorans can now choose between bitcoin or the US dollar (the national currency, the colon, collapsed in 2001).
Meanwhile in the UK, until recently, most of us had no option but to use, accept and save in our own national currency. You couldn’t even take more than £40 out of the country without official permission (until as late as 1979). Now, we have more choice and can have a euro or Swiss franc denominated bank account, invest in alternative assets (not just property) and, indeed, punt on cryptocurrencies. If you think bitcoin is too unstable, you can just switch to another cryptocurrency.
There are risks of owning cryptocurrency – political and financial – to individuals, which need to be managed. They take their chances. But more worrying is the risk to the financial system if there were to be a collapse in cryptocurrency – a run on bitcoin for example, where everyone tries to convert it back to dollars, and so on. What then? Donald Trump called bitcoin a “scam” against the dollar, a kind of unfair competition, which is missing the point.
The point is that officialdom can do nothing much about it except take precautions and warn people about the risks. The latest Chinese crackdown on bitcoin does seem to have dented its value, but in the long run, people usually find ways around such restrictions, and it will only push cryptocurrency further underground.
So at this early stage, a crypto crash seems possible. There’s probably very little regulators can do about a virtual currency that acts beyond the law, which is both its charm and, possibly, its curse. It will be interesting to see how plucky El Salvador fares.