The financial industry has long had a weird relationship with the cryptocurrency industry. The former was launched thousands of years ago; the latter just over a decade ago. Maybe that is one of the reasons for this uncomfortable interconnection.
In my experience, we in the financial industry started with financial markets saying cryptocurrencies didn’t matter; then we said that the underlying technology — namely blockchain — mattered, but the currencies didn’t. Then we moved on to say we understand this, but it needs to be regulated and managed by us. And we have been proven right.
The cryptocurrency markets imploded in 2022… or did they?
In my opinion, the cryptocurrency markets exploded in 2020. Valuations and investments ballooned, and probably much of this was down to Covid-19 lockdowns. But the cryptocurrency markets weren’t alone. The same happened with fintech valuations and ‘big tech’ firms. All technology markets exploded in market cap in 2020, and now they’ve all imploded.
Here to stay
Does this mean there’s nothing of value here?
Not at all, and this is what surprises me about most banks. Having rejected cryptocurrencies for years, many banks have moved into custodial services and trading in such currencies in the past few years. This was due to pressure from clients and media, and it means that we are now living in a world where, whether you like it or not, cryptocurrencies are here to stay.
The question, however, is in what form?
My personal belief is that they will take a hybrid form. I have argued for a few years that a global network demands a global currency — that much is obvious. The question is what type of currency is best suited for this.
Interestingly, the nub of the matter was delivered by Bob Diamond, former CEO of Barclays Bank and current CEO and founder of Atlas Merchant Capital. He is also an incredibly astute investor and banker. So, his recent interview in the Financial Times (January 10), stating that digital currencies are the way forward, should have everyone sitting up and paying attention.
“I can’t think of anyone who doesn’t believe that in the future, a digital version of the dollar for institutional and corporate use isn’t going to happen and be far more efficient,” he said.
This is a key endorsement of where we are going, but note: it is not an endorsement of a particular currency. It is an endorsement that we will have a digital currency in our future. My question to Mr Diamond is this: why the dollar?
Will that be the dominant currency of the network and the future, or will it be the euro or yuan? Or will it be something else like… uh-oh, bitcoin?
Time to merge
Now, knowing The Banker’s audience, I’m very aware how much we hate bitcoin. However, there is an emerging view that cryptocurrencies need to merge with fiat currencies, which is the core of my argument. If you could have a central bank digital currency merged with a cryptocurrency, what would that mean?
So, when travelling around Europe you have a digital euro; in the US, you have a digital dollar; and in China, you use a digital yuan. Then you go onto the network and you use a global coin. How is a global coin regulated and managed? Well, the answer is that it’s obviously a global coin regulated and managed by global business with a global basket of governmentally regulated currencies. In other words, the bitcoin of the future is centrally regulated but decentrally operated. Sound confusing? Not really.
The core of the answer to where we are going, as endorsed and explained by Mr Diamond and more, is that we will have a digital currency for institutional and corporate use. Where I disagree with Mr Diamond et al is that it will not be a digital dollar. It will be a hybrid currency of dollars, yuan and euros, managed in an integrated way as a global currency through integration in a basket of decentralised currencies, such as bitcoin and ether.
The final question is then: how will you offer custodial and transaction services in a basket of currencies that are both centralised and decentralised?
