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    Home»Cryptocurrency»Do cryptos have any rationale? – Opinion News
    Cryptocurrency

    Do cryptos have any rationale? – Opinion News

    August 23, 20245 Mins Read


    By Srinath Sridharan & Likhit Wagle

    Why do cryptocurrencies exist? Beyond the dissatisfaction with government responses to inflation and economic crises, which emerged notably after the global financial crisis, they reflect a limited distrust of traditional financial systems. Driven by a desire for financial autonomy and the belief in blockchain technology’s transformative potential, this movement continues to unfold, its long-term financial and existential sustainability still uncertain.

    Are cryptocurrencies a revolution or just speculative bubbles? Advocates see them as a store of value and a new asset class. Some believe decentralised technology will revolutionise finance, enabling cross-border payments and even charitable giving. Enthusiasts argue cryptocurrencies could democratise financial services and significantly advance inclusion.

    Despite regulatory resistance, cryptocurrencies continue to thrive. Recently, former President Donald Trump expressed support for Bitcoin at a crypto gathering, even suggesting it could become a strategic reserve if he returns to office. This is surprising, given that cryptocurrencies lack the stability of gold or cash. Bitcoin’s extreme volatility — rising from $11,000 in 2020 to over $60,000 in 2021 before sharply declining — highlights the risk. Currently, its price hovers around $70,000, indicating the challenges of considering it a reliable strategic asset.

    Despite almost no use case, what is the “social purpose” of cryptos? What is the economic reason for cryptos to exist? Human behaviour often gravitates towards the allure of novelty, even when practical use cases are absent.

    Investors know cryptos are private digital currencies, not endorsed by governments or central banks. They aren’t currencies because they can’t be widely exchanged for products and services. But even if they were, it wouldn’t make sense for most of us, as we invest in assets that at least can be purchased with currency, and sold for real currencies that have social acceptance. Also, the financial plumbing necessary to make buying and selling easy is absent. Furthermore, there are no rating agencies or instruments like credit default swaps. News like FTX bankruptcy or the socialising losses idea of WazirX do not help.

    What we do not hear often is this: one does not need cryptos to leverage blockchain or tokenisation in financial services or any other sector. Blockchain technology, the underlying framework for cryptos, offers a range of benefits like enhanced security, transparency, and efficiency that can be harnessed independently of digital currencies. Financial institutions have been using blockchain for secure and transparent transaction processing, reducing fraud and operational costs. Similarly, tokenisation—the process of converting assets into digital tokens—is being applied to a variety of sectors without relying on cryptocurrencies.

    The speculative nature of the crypto market often overshadows its underlying potential. Critics argue that cryptos have become more of a speculative asset than a functional currency. The regulatory environment too poses significant challenges. In India, the regulatory stance has oscillated between outright ban and cautious acceptance, reflecting the complexity of integrating cryptocurrencies into the financial system. Concerns about money laundering, tax evasion, and financing of illegal activities are legitimate and necessitate a balanced regulatory approach that safeguards innovation while protecting public interest.

    Is FOMO the main reason for putting money into cryptocurrencies? Probably yes. There seems to be a broader societal trend where individuals are eager to participate in what they perceive as lucrative opportunities, fearing they might miss out on potential gains.

    The limited acceptance by financial institutions and merchants restricts the practical utility of cryptos as both a medium of exchange and a store of value, raising questions about their long-term economic sustainability. Financial institutions, such as banks and payment processors, remain cautious about embracing them due to regulatory uncertainties, security concerns, and the potential for aiding illicit activities.

    Merchants face practical challenges to accepting cryptos as payment. The volatility of crypto assets makes it difficult for businesses to price their goods and services consistently. This discourages both merchants and consumers from using cryptocurrencies for everyday transactions. Besides, the lack of integration with traditional financial infrastructure means that converting crypto to fiat currency — a necessary step for most businesses — can be cumbersome and costly. The absence of seamless, cost-effective conversion mechanisms undermines the efficiency and convenience that cryptocurrencies are supposed to offer. This issue is compounded by high transaction fees and slower processing times than conventional payment methods.

    It’s not uncommon to see children trade sports cards today, just as it wasn’t unusual for societies to barter objects that now seem trivial or absurd. Since the dawn of civilisation, humanity has traded everything from shells and spices to gold and paper, each object reflecting a value that was acceptable then. Cryptocurrencies are merely the latest in this long line of evolving assets. The future of digital assets lies not just in their technology, but also in our collective belief in their value. They will test the boundaries of trust, redefine ownership, and reshape the very fabric of global finance.

    However, while the fans of these digital tokens focus on their potential worth, regulators must grapple with the evolving risks associated with digital assets and ensure society is shielded from the volatility of these speculative “objects as assets”. Cryptocurrencies lack an immediately identifiable economic function, as they neither produce goods nor services. Instead, their value is driven by narratives that sell the promise of a future potential, with the attraction of what could be rather than what is.

    (Srinath Sridharan & Likhit Wagle, Respectively, policy researcher and corporate advisor, and global financial services expert. Views expressed in the article are personal views of the authors.)





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