OP-ED

by Matthew Lombardi

The Hill Times
December 20, 2017

A well-worn political idiom, popularized by former U.S. President Ronald Reagan, holds that citizens ‘vote with their feet’. Put simply, unhappy citizens will abandon unfavourable conditions whenever and wherever possible. A good marketer recognizes that the business world is not immune from this dynamic—consumers vote with their wallets.

In an era of unprecedented technological disruption punctuated by breathtaking failures of institutional transparency, most recently the Equifax data breach,  trust in civic society continues to erode. The 2017 edition of the Trust Barometer, a worldwide measure of citizen trust in business, government, NGOs and media conducted for nearly two decades by global marketing consultancy Edelman, has revealed the largest ever drop in trust in the mainstream institutions that make up the core of the post-WWII global economic order.

In the face of rapidly declining institutional trust, citizens and consumers alike are voting with their feet and wallets, moving billions of dollars in value outside of the monetary system in the form of private digital assets known as cryptocurrencies.

Cryptocurrency: A private currency built on the premise of peer-to-peer trust

Cryptocurrencies exist outside traditional financial institutions entirely, residing on an internet-based platform known the blockchain. The blockchain is a digital ledger built on the premise that data secured by cryptographic code and verified on a decentralized peer-to-peer network is more secure than any institution in tracking transactions of any kind, most notably payments. Bitcoin, one of thousands of private currencies built on the blockchain, has emerged as the most ubiquitous early use of blockchain technology, and its proponents cite the establishment of security between trading parties as its major selling point. Units of the currency can be purchased through online web brokers, or ‘mined’—earned by dedicating mass amounts of computing power towards solving cryptographic puzzles, a task that is now only profitable for the most specialized operators.

Bitcoin, as of this writing, is worth greater than $260 billion (U.S. dollars), larger than the industrial giant General Electric and the majority of companies listed on the S&P 500. While its status as a currency is in dispute, what is clear is that bitcoin is the first asset class to have emerged entirely outside of the purview of mainstream investment and commercial banks.

Private currencies threaten central monetary authorities

Bitcoin and its ilk do not just threaten established financial advisors at a loss to explain to clients how they are left sitting on the sidelines of the top-performing asset class of 2017. It more critically threatens the highest stewards of the monetary system itself: central banks, which are empowered by governments to issue their national currencies. The entire concept of money depends on central banks’ authority, with central bankers meticulously managing both the supply of money and the plumbing of the financial system, including how payments are processed.

The Financial Times, not usually prone to raising its hackles in the face of new financial trends, noted in a recent op-ed that central banks are rightly worried about their ability not only to monitor the payments system—raising concerns about cryptos contributing to criminal and terrorist financing—but also of losing outright control of the money supply.

Global governance under-equipped to monitor private currencies

It is too early to take stock of the impact of money fleeing the financial system for investment in cryptocurrency. Each month, more major companies proudly announce their acceptance of bitcoin payments, though these proclamations serve more as publicity-generators, as the currency has not yet stabilized to a point where it can be reliably used for purchasing goods and services. Instead, amateur investors have been speculating and earning—on paper at least—small fortunes as the currency has appreciated more than 15x over the past 11 months. The next income tax season will reveal whether or not these capital gains make their way back into the mainstream financial system.

In the interim, governments and regulators are spooked by the removal of money and potentially payments from the financial system. China has moved to ban new cryptocurrency launches outright, while Venezuela’s embattled dictatorship has moved in the decidedly opposite direction, announcing the creation of a national cryptocurrency called the Petro, backed by the country’s natural resources reserves. Financial regulators in the US and most western countries appear at a loss, wary of the fact that attempting to police currencies specifically designed to operate beyond their reach poses a special, if not insurmountable, set of challenges.

Using the blockchain to rebuild public trust

Global institutions of governance and finance are slowly learning that the cryptocurrency explosion is a symptom of worsening public trust. While bitcoin itself may or may not have a future beyond the current mania underwriting its rise, this widespread erosion of trust in institutions is an ever-evolving threat to the financial and political status quo. A potential bitcoin crash is unlikely to send citizens back into the arms of traditional financial institutions.

Forward-thinking institutions are starting to develop methods to use blockchains in response to bitcoin’s popularity, relying on the platform to help reduce errors and costs and increase the security of consumers’ transactions. The adoption of blockchain in the financial industry could prevent tens of billions in fraud each year, save the public time having to file claims with financial institutions, and ultimately help our institutions win back trust.

Matthew Lombardi is a fellow at the Canadian Global Affairs Institute. 

Image credit: Image credit: Flickr/DocChewbacca photograph