Growth is a goal that’s worth achieving, in most cases, and
the current economic paradigm favors it. But when central banks start
undermining their fiat economies and crypto companies begin to mimic
financial institutions in its name, growth becomes an end in itself with
self-destructive tendencies. Deutsche Bank’s head of strategy Jim Reid
recently noted that when central banks are so aggressive, Bitcoin starts
to look more attractive, while whistleblower Edward Snowden warned the
crypto community that the next big bank is not what the world needs. Are
they right?
While Aiming for Growth, Interest Rate Cuts Inflate Bubbles
Measures to generate and sustain growth, artificially and regardless
of the consequences, have become a key policy, widely implemented
through interest rate cuts and quantitative easing. Other considerations
usually come a distant second, but as crisis after crisis has
historically shown, that’s not necessarily the best approach for
governments. Expansion, at the expense of basic values, is not the best
option for businesses either.
Chasing growth regardless of anything often leads to compromising
important principles. When the states do it, they usually distort market
economy, resuscitate companies that under normal circumstances would
simply go bankrupt, and create bubbles bound to burst at some point in
the future. When businesses do it, they sometimes undermine their own
industry for the sake of short-term survival or gains.
Since the 2008 financial crisis, catalyzing and maintaining economic
growth has been the focus of many political efforts. Governments and
central banks on both sides of the Atlantic have applied an old recipe,
cutting interest rates to unprecedented levels. On the backdrop of
continuing macroeconomic uncertainty and tensions in international trade
relations, it has so far failed to stimulate significant investment and
GDP expansion, even when countries like Sweden and Japan went to below
zero rates.
With continuing pressure from Donald Trump’s administration,
expectations have been growing that a new interest rate cut may be
announced in the United States. Maintaining that his institution is
independent from the president’s administration in Washington, the
Chairman of the Federal Reserve Jerome H. Powell revealed last week that
the central bank is weighing whether another rate reduction will be
necessary.
Expectations for Rate Reduction Push Bitcoin Prices Up
During a public address on Tuesday, Powell admitted the case for a
new cut has strengthened, citing reemerging economic “crosscurrents,”
increasing uncertainty with regards to slowing global trade flows and
decreasing manufacturing indicators, all of which lead to renewed
concerns about the prospects for the global economy. For now, the Fed is
trying to properly asses if these uncertainties will continue to affect
the overall outlook and warrant a policy change.
It is believed among mainstream economists that low interest rates
stimulate inflation, credit, and consumption. It’s worth noting,
however, that inflation in the U.S. hasn’t reached and held the 2%
target announced by the Federal Reserve back in 2012. The indicator has
been estimated at 1.5% for the year that ended April 2019. With
persistent economic uncertainty, interest rates tending to zero have not
catalyzed investment significantly. Instead, what these policies have
mostly “achieved” is to inflate new bubbles. Property prices in many
regions have skyrocketed in the last few years.
Besides, not all bankers believe further rate cuts are helping the
traditional economic and financial system. According to Jim Reid, global
head of thematic research and credit strategy at Deutsche Bank, central
banks have been overreacting. On Wednesday, commenting on Powell’s
speech at a Council on Foreign Relations event in New York for CNBC,
Reid noted BTC’s recent spike of 180% since April, stating:
If central banks are going to be this aggressive, then alternative currencies do start to become a bit more attractive.
Meanwhile, the Deputy Governor of the Central Bank of Russia, Vasily
Pozdyshev, came out with another warning to the current financial
system. During an international conference devoted to deposit insurance
and bank liquidity, Pozdyshev said the development of digital financial
technologies, including cryptocurrencies, may negatively affect the
financial condition of traditional banks. In his words, regulators
cannot afford a failure to respond to the growth of the fintech industry
and the use of new technologies by large companies as this creates a
threat to the banking sector.
The high-level representative of the Russian central bank believes
2019 is a turning point in the development of financial technology in
the banking industry. “This year, the so-called bigtechs are seriously
attacking the traditional banking model,” he stressed, elaborating:
A significant amount of small deposits will indeed go out of the
deposit insurance system … I fully assume this may worsen the financial
situation of banks and increase the likelihood of bankruptcy. No one has
yet estimated the consequences.
What bankers like Reid and Pozdyshev are afraid of is that on one
hand, failed government macroeconomic policies are pushing more people
away from the banking system and towards alternative digital currencies.
And on the other, that big tech corporations will take advantage of
this trend at the expense of traditional financial institutions. These fears, echoed by politicians as well, were exacerbated significantly by the announcement of Facebook’s planned coin.
Snowden Slams Crypto Companies for Trying to Be Banks
Many, including Deutsche Bank’s Jim Reid, rightfully see the release
of Libra’s whitepaper as another major reason for the latest crypto
jump. And while the return to prices held over a year ago is definitely a
positive sign, it’s worrisome that the interest of the general public
towards decentralized cryptocurrencies is returning at a much slower
pace. According to Google Trends,
‘Bitcoin’ searches are now at their highest for the year but still less
than a third of the level reached back in December, 2017.
Although at this stage Libra looks more like a threat to government
issued fiat currencies, as it does not share the permissionless and
decentralized nature of most cryptocurrencies, certain developments
within the industry might change that assertion. With more regulations,
development of traditional-style crypto banking services and increasing
efforts of major players to become part of the financial mainstream,
some of the core strengths of cryptocurrencies are being ignored. At the
same time, Binance and Shapeshift have already indicated their
intentions to list Libra, even before it’s been minted.
In a video address during the recent Bitcoin 2019 conference, former
NSA analyst Edward Snowden noted that he considers the lack of privacy
to be an existential threat to Bitcoin. Speaking about regulations in
the crypto space, he commented on the excessive expectations of
authorities and insisted that platforms such as cryptocurrency exchanges
should defend the privacy of their users instead of exposing them,
closing their accounts and freezing their funds.
The famous whistleblower shared his disapproval of how established
crypto companies have consented to comply with government requirements
regarding the collection of personal data which moves them closer to the
status quo. He also criticized the big players for not lobbying hard
enough for more favorable jurisdictions that would allow them to operate
without interference. In his words, they are instead trying to fit in
the current model and be the next big bank, while the world doesn’t need
more banks.
Instead of exploiting the advantages of cryptocurrencies, many
wannabe banks in the crypto industry have started offering more
custodial and centralized banking services and products like crypto
deposits, for example. The levels of compliance with various regulations
sometimes far exceed the standards applied by ordinary banks. Seeking
short-term survival, approval from authorities or growth as an end in
itself, some platforms have compromised basic principles of the crypto
ecosphere such as private peer-to-peer interaction. Thankfully, alternatives have emerged.
Do you think the crypto industry should focus on
providing services that build on the unique features of cryptocurrencies
instead of trying to fit in the traditional financial system? Share
your thoughts on the subject in the comments section below.
OP-ed disclaimer: This is an Op-ed
article. The opinions expressed in this article are the author’s own.
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