The last few weeks have been turbulent in the crypto world. We have seen huge drops in crypto assets like bitcoin. Additionally, the major cryptocurrencies (or stablecoins) have lost parity with the dollar. It is not the first time this has happened, but now there is concern about the potential contagion to the rest of the economy.
The volatility of digital assets should not, in principle, worry us too much. They are non-transparent private financial assets. They do not offer any return, beyond the potential capital gain, if any. Their possible revaluation is based on the promise that the algorithms with which they are produced guarantee their scarcity. It is, therefore, the speculative asset par excellence: it has zero use value and all the return generated comes from the possible sale at a higher price than what was paid at the time of purchase.
Cryptocurrencies are also privately issued digital assets, like crypto assets, but they are based on the promise that each token, or digital voucher, can be exchanged at par, at any time, for legal tender. For example, the dollar. Cryptocurrencies are also not useful beyond the crypto world and do not give any return. They are the digital vehicles used to buy and sell crypto assets without resorting to conventional currencies.
What happens in the crypto world should matter to us for at least three reasons. The first is the growing weight that these assets have in our economy. Investments in crypto assets already amount to more than 1.5 trillion dollars, despite the sharp drop they have just suffered. They are a small but relevant part of the global financial system.
Second, the interrelationship between the crypto world and the conventional world is increasing. Crypto assets are part of the portfolios of some institutional investors. Likewise, financial products are already being offered for the indirect acquisition of these assets through debt. This leverage, when it is high, means that a problem in the cryptoactive market is transmitted to the financial system.
Finally, cryptocurrencies ensure that they are convertible into legal tender currencies. However, its size is already very significant. If confidence in a cryptocurrency collapsed and such a conversion were to be made effective quickly, significant disturbances could be generated in the money markets.
To guarantee the stability of the international financial system, it is urgent to advance in a proportionate regulation of the crypto world. Not to cut off the wings of promising innovations, such as the blockchain technology that is at the base of crypto assets, but to ensure that these innovations truly add value to our economy and are not simply an unproductive source of speculation and financial instability.
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