Britain: the new El Salvador?
PM-in-waiting a crypto fan
When I first found out that the UK Treasury proposes to issue Non-Fungible Tokens (NFTs) as part of a general push to make Britain a world centre for crypto-currency, I assumed that this was a Boris Johnson stunt. The obvious model is El Salvador, where Johnson-style demagogue Nayib Bukele has made Bitcoin legal tender, with results ranging from disappointing to disastrous depending on who you read.
It turns out, however, that the source of the push is Rishi Sunak, until recently Chancellor of the Exchequer and now the favourite to become Prime Minister when Johnson leaves office. I don’t know anything about Sunak, but assumed on the basis of his job title that he would be a believer in “sound money”, hostile to, or at least sceptical of dodgy innovations like crypto.
I’m not fully on top of the issue yet, and would welcome clarifications from anyone better informed. It appears that Sunak is at least as confused as I am, and is pushing different, contradictory proposals.
The first to emerge, in 2021, was the idea of a central bank digital currency (CBDC). Such a development, would, in my view be kryptonite for crypto as it now exists, providing all the supposed benefits with none of the energy waste, scams and volatility we now observe. A CBDC would have radical implications which are still being discussed. In particular it, in effect, allow households and businesses to bank directly with the central bank, rather than holding digital deposits in existing banks. If successful enough, it could amount to nationalisation of the banking sector.
Unsurprisingly, banks and their advocates hate this idea. Here’s a critique from the Cato Institute, pointing to the likelihood that a CBDC would “give the central bank and the politicians that set its mandate the tools to much more easily manipulate economic activity.” https://www.cato.org/commentary/why-sunak-should-think-twice-about-central-bank-digital-currency pointing
It looks as if the predictable opposition of the UK financial sector has killed off the CBDC idea. Instead, Sunak has been pushing proposals to put the UK at the centre of the existing crypto market. Strikingly, it’s the dodgiest forms of crypto (NFTs and stablecoins, that are being pushed hardest.
As I’ve argued in the past, the fact that something as provably valueless as Bitcoin is now an accepted part of the financial system is evidence that any claims about the efficiency of financial markets are indefensible. The same can now be said about the idea that the UK Conservative party stands for sound economic management.
Crypto is based on the false presumption that money at base derives its value from something hard to create such as proof-of-work. Modern currencies are fiat currencies, which means that their value is determined purely by how much is in circulation and how much users believe their value is.
Inflation for example is driven by a combination of factors like sentiment and money supply. Not by the fact that there was a gold standard in the different past.
To create a new class of currency you either need to work with the classic methods of determining value or come up with something else that works. Not revert to a failed approach like a precious metal standard – if artificially implemented.