Will cryptocurrencies really shape the future?
Institutional Communication Service
21 March 2022
We have heard for a few years that cryptocurrencies are the future. For example, in recent days, the City of Lugano has announced its collaboration with the cryptocurrency company Tether to turn Lugano into the "European capital of cryptocurrencies", allowing citizens to pay taxes, fees, goods and city services with virtual currencies. We asked Antonio Mele, Professor of Finance at USI, to answer some questions about the pros and cons of cryptocurrencies.
Professor Mele, what are your thoughts on the world of cryptocurrencies?
I am not aware of the details regarding this collaboration and therefore I prefer to abstain from providing any comments on this initiative. Cryptocurrencies are an alternative method of payment to those we are all familiar with. However, I do not believe that cryptocurrencies have the potential to shake up our future lives. Economic development and the progress of nations happen through human creativity and genius. I have never heard of an industrial revolution occurring merely due to tools that facilitate commercial transactions. What is simply needed is a well-tested and stable payments system. Unfortunately, cryptocurrencies do not seem to display such properties.
What is not convincing about cryptocurrencies?
Their inherent volatility. Any means of payment needs to be as stable as possible. Let us picture a family that receives one or more salaries in Swiss francs but at the same time has taken out a mortgage in bitcoins. The outgoings of this family would be significantly affected by trends in the market value of bitcoins. The problem is that these trends are notoriously erratic due to the obvious absence of an authority able to stabilize this market. The importance of monetary stability is acknowledged in the Constitution of the Swiss Confederation, which, in its Article 99, entrusts the Swiss National Bank (SNB) to conduct monetary policy in the country's interests. A central authority such as the SNB contributes to the stability of the Swiss franc precisely because it manages the process of monetary creation while being inspired by the cyclical behavior of inflation or deflation. By comparison, cryptocurrencies amount to a decentralised "currency". An algorithm determines their creation process, and their value is subject to violent fluctuations due to market trends that cannot be managed in the same way as the SNB manages the mechanisms that ensure the stability of the Swiss franc. The stability of the payment system has a public utility that it is hard to give up willingly. At this stage, I am not yet convinced by the so-called stablecoins (cryptocurrencies that are pegged to other fiat currencies such as the US dollar or the Swiss Franc). Adopting stablecoins as a means of payment would require more specific regulation, which for now is far from even being envisioned.
Are there aspects, in your opinion, that also need to be valued on an ethical level?
Some cryptocurrencies enable individuals to interact in a way that the identity of the contracting parties remains obfuscated. Cryptocurrencies with these properties may then encourage transactions tied to criminal activities and/or the laundering of illicit assets. It is a contradiction to encourage the use of means of payment that facilitate activities considered unlawful by our legal system.
Where does this "unsafe" model come from?
Market manipulation. The concept is straightforward. In the cryptocurrency market, there are agents, sometimes hard to identify, who buy or sell large amounts of currencies to influence prices and obtain short-term profits that are completely de-linked from the real economy. Such frequent episodes of manipulation expose a potential cryptocurrency user to the risk of enormous losses. This model is also fragile because it is frequently exposed to bubbles or speculative enthusiasm.
Are there any attempts to regulate its use?
I view very favourably the progress resulting from the adoption of blockchain technologies in financial, administration and commercial applications. The central banks themselves will sooner or later issue digital money. My concerns regard the adoption of decentralised cryptocurrencies as a means of payment. We have seen initiatives to finance small companies through digital tokens. If properly regulated, this market could have given small businesses access to innovative funding channels. Regulation is a must because it enables investors to take decisions with the most accurate information possible. The market for digital token will continue to require as much regulatory attention as it is currently required in any sphere of the financial markets.