One thing in the past decade the academics failed to appreciate is the power of believing. In democracies like the United States, if the power of believing can be maintained long enough, a supporting structure from both the political and economic side will emerge. In every aspect, cryptocurrencies are moving along the right direction to establish themselves with such supporting structure despite scams and frauds associated around them.
The news of frauds (Polynetwork, IRON) and crackdowns at this point only strengthens the belief in the resilience of the system. People will point to these events and claim the robustness of the cryptocurrency systems. The centralized exchanges, centralized protocol maintainers / miners and the intentional light regulations (or no regulations at all) seems to be a stable triangle to maintain the cryptocurrency systems.
All these, makes it very interesting to contemplate what’s the exact endgame for cryptocurrency.
Many critics claim that the most risks for the cryptocurrencies come down to the slew of stablecoins that effectively set the price for other cryptocurrency assets. They suggest that the stablecoins such as USDT or USDC are backed by fractal reserves at the most. These fractal reserves are so small (less than 4% for USDT), the critics suspect that they will face liquidation crisis if a run of bank scenario happens.
Unfortunately, these critics failed to read the fine footprints of these said stablecoins. While you can exchange either USDT or USDC and with hundreds of alternative coins in decentralized exchanges, you cannot do so between USDT / USD pair or USDC / USD pair. It is these centralized exchanges that control how you can redeem these stablecoins into USD. Like countries with capital controls, the fixed exchange rate can be maintained indefinitely.
The endgame for cryptocurrency won’t be the crash of the stablecoins.
While the stablecoins cannot crash with absence of regulations, for the current slew of stablecoins, their power has been associated with the power of USD. It is possible to have a stablecoin to be associated with a basket of currencies, but that also means the said stablecoins will face not only the U.S. regulations, but regulations from the EU, China or Japan, depending on what is in the basket.
Paradoxically, stablecoins won’t crash, but can land to safety with the slide of the USD from its global reserve currency position. However, that won’t be good news to cryptocurrencies at large.
The academics largely got it wrong in the past decade regarding the cryptocurrencies because they failed to factor in the waning power of the United States. The U.S. has lost both willingness and political power to maintain absolute control globally. Its regulators moved too slowly to defend the USD’s global interests. Meanwhile, the internet moved from fear of creating any digital USD alternatives (e-gold) to that any individual can do ICO. Now, there is no willingness to regulate cryptocurrencies as long as the market is high and people make money.
The waning power of the United States is both a blessing and a curse to the cryptocurrencies.
At the moment, the cryptocurrencies need a powerful democracy that can maintain global hegemony. Without global hegemony, cryptocurrencies will face real issues with intermittent internet connectivities, difficulties of consensus convergence, widely-fluctuating exchange rates against commodities. With any form of government other than democracy, powerful authoritarian or dictatorial governments simply cannot tolerate the loss of capital control.
There could be alternative scenarios that cryptocurrencies succeed without the United States. Central operators need to grow to be powerful transnational entities that have controlling shares in commodities and other life essentials globally, potentially have their own enforcement militias to maintain such hegemony. This scenario has been explored in other anarchist’s readings extensively since the 1980s (or earlier). The problem, of course, is that such a transition of power takes time.
To believe in cryptocurrencies, you have to simultaneously believe that the U.S. power is waning and it can maintain global hegemony for an extended time. However paradoxical this proposition is, it increasingly seems to be a likely scenario for the next 15 years. Will this be the Goldilocks situation for cryptocurrencies? I don’t really know, and the readers, you have to make up your own mind.
Notes
What about KYC (“Know Your Customer”) rules?
If anything, this limits the number of centralized exchanges that can do stablecoin / USD pair. Limited number of centralized exchanges also means that it is easier to collude and fix pricing.
What about increasing regulations / self-regulations on USD?
The heavy regulations on USD (such as KYC rules mentioned prior) and recent news about self-regulations on USD (MasterCard / OnlyFans speculations) suggest the political willingness to regulate. However, USD is an easier target for politicians because no one else profits from USD other than the United States itself. Piling regulations on USD to “save our children” is an easy win in democracies. Piling regulations on cryptocurrencies because regular people make money on it (while the market is high) is a political suicide.
The imbalance of regulations against USD and the no regulations against stablecoins only reinforces the ability to do capital control from centralized exchanges. As long as these regulations exist in one form or another, it is much easier to accept the capital controls imposed by exchanges because you cannot do X with USD but can with stablecoins.
What about utility values of cryptocurrencies?
While there are utility values from cryptocurrencies, I am trying to explore alternative frameworks to assess based on power structures rather than the underlying utility values provided by a technology. This essay treats transition to cryptocurrencies as any other transitions: yes, there are utility values to motivate the transition in the first place. But ultimately, it is about people, especially people in power to make decisions on actions and inactions.
What can go wrong?
A lot. People can do stupid things. No amount of rosy scenario planning can prevent that.