Rather than replacing state-backed money, the US state and big finance are now engorged in cryptocurrencies as a new asset class.
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
“Bitcoin is a speculation and not an investment. Not regulated, not backed by any asset, only worth what someone is willing to pay.” — Matthew Stephenson
“It’s totally absolutely crazy, stupid gambling” — the late Charlie Munger, speaking in 2023.
“Cryptocurrencies are highly volatile and therefore not really useful stores of value and not backed by anything,… It’s more a speculative asset that’s essentially a substitute for gold rather than for the dollar. ” Federal Reserve Bank chair, Jay Powell
“Bitcoin, it just seems like a scam…. I don’t like it because it’s another currency competing against the dollar.” Donald Trump, June 2021.
It’s crypto week in the US. And the price of the leading cryptocurrency, Bitcoin, has hit a record $120,000 as the US Congress prepares to consider bills aimed at creating clearer regulatory frameworks for digital assets. In the next five days, US lawmakers will consider the Genius Act, the Digital Asset Market Clarity Act, and the Anti-CBDC Surveillance State Act. The aim is to make “America the crypto capital of the world”.
The US Senate has already approved the Genius Act, a bill that enables private companies to issue ‘stablecoins’. The Anti-CBDC Surveillance State Act would prohibit the Federal Reserve from issuing a central bank digital currency, thus ensuring all the private cryptocurrencies would not have to compete against a government one.
Where is all this leading to?
The rise of cryptocurrencies began over ten years ago after the end of the Great Recession. Cryptocurrencies are digital tokens that are ‘mined’ like gold, not physically but digitally on powerful computers using what are called ‘blockchain transactions’ completely divorced from central bank issuance or control.
For a long time, the price of cryptocurrencies in dollars swung violently, but overall, cryptocurrency prices in dollars have continued to rise (along with stock market prices in the US in particular) as a new form of financial ‘asset’ to speculate with. Increasingly, cryptocurrencies are becoming recognised financial assets. More than $11bn has flowed into global funds that track cryptocurrencies this year, taking total assets under management to $176bn, according to data from UK group CoinShares.
From the start, cryptocurrency craze has been riddled with fraud, criminality and corruption – the cases of which are too numerous to mention all. In an annual report last September, the FBI revealed that fraud related to crypto businesses soared in 2023 with Americans suffering $5.6bn in losses, a 45% jump from the previous year. Sam Bankman-Fried, who founded the now bankrupt FTX crypto exchange, was sentenced to 25 years in prison in March 2024 by a New York judge for milking customers out of $8bn. Last month, the US Securities and Exchange Commission charged Unicorn, an investment platform that promised cryptocurrencies backed by real estate, with a $100mn fraud that misled more than 5,000 investors.
The dream of the techno enthusiasts that cryptocurrencies would replace state-issued currencies like the dollar or the euro and so free individuals from the ‘heavy hand of state regulation’ in a new free world of money has never materialised. Instead, what has happened is that the mega financial institutions have taken over control of these currencies and are turning them into what they hope will be a highly profitable set of financial assets to suck in investors.
The epitomy of this approach is Donald Trump himself. Having previously condemned cryptocurrencies as a scam, Trump nowhas his own cryptocurrency and disclosed almost $60mn in income last year from one of his digital currency ventures. His wife Melania has her own digital currency too. These are called ‘meme’ coins, being related to internet memes, viral moments or current events. They have ranged from tokens representing a euthanised grey squirrel, a cartoon dog and a lewd joke. Dubious promoters of these coins proliferate. CoinMarketCap, the online platform and data provider, tracks around 16.9mn cryptocurrencies — but there are millions more, leaving suckers (sorry, investors) with a bewildering number to buy. This is consumer choice under capitalism at its best.
Crypto mogul Justin Sun has publicly flaunted a $100,000 Donald Trump-branded watch that he was awarded at a private dinner at Trump’s Virginia golf club. Sun had earned this for buying $20m of the crypto memecoin $Trump, ranking him first among 220 purchasers of the token who received dinner invitations. Trump’s much-hyped 22 May dinner and a White House tour the next day for 25 leading memecoin buyers were devised to spur sales of $Trump and wound up raking in about $148m, much of it courtesy of anonymous and foreign buyers.
Sun has invested $75m in another Trump crypto enterprise, World Liberty Financial (WLF) that Trump and his two older sons launched last fall and in which they boast a 60% stake. The company, described as a “digital asset bank”, allows users to borrow, lend and invest in cryptocurrencies. The US financial regulator SEC has now paused or ended 12 cases involving cryptocurrency fraud, including three Sun crypto companies that were charged with fraud by an SEC lawsuit in 2023. They had their cases ‘paused’ in February by the agency, citing the “public interest” (!).
Does ‘crypto week’ mean that state-issued currencies like the US dollar or euro are going to be usurped by private cryptocurrencies? What gives you the answer to that is two-fold: first, all cryptocurrencies are priced in dollars – the state-issued currency that everybody uses to buy things and services. Bitcoin or other crypto currencies have not replaced dollars (or euros) for the billions of daily transactions.
The other part of the answer is the emergence of stablecoins. A stablecoin is a crypto currency coin that is tied to an existing fiat currency, namely the US dollar, making it easy to switch (if expensively) between a crypto currency like bitcoin and an official currency like the dollar. Stablecoins are supposed to track real-world currencies and so play a central role in the stability of the broader crypto market by providing traders with a safe place to park their cash between making bets on volatile digital coins.
But that gives the game away. Stablecoins are an escape hatch out of cryptocurrencies back into ‘real money’ ie dollars or euros. Stablecoin companies can only do business as long as they have a coin that is backed by US dollar assets. These companies thus hold US dollar assets like treasury bills in order to meet any sale of their coins for dollars.
The problem here is that stablecoins are often not stable. The largest stablecoin company is Tether. Back in 2022, it was faced with a run on its coins when it emerged that it had only 4% of its assets in cash and the rest in risky commercial bills. It was able to get away with this because stablecoins were not regulated and subject to regulatory supervision or deposit insurance requirements. Now they are to be regulated. But the Genius Act “will not prevent sanctions evasion and other illicit activity and lets big tech giants like Elon Musk’s X issue their own private money – all without the guard rails needed to keep Americans safe from scams, junk fees or another financial crash,” said Senator Elizabeth Warren.
The cryptocraze shows no signs of ending. The big change now is that the cryptocurrency companies are racing to expand into traditional banking in the US, as they seek to capitalise on the crypto ‘free for all’ initiated by Donald Trump. The so-called Genius Act will tighten regulation of stablecoins and tie them more closely to US treasuries. Only regulated banks and some non-bank groups with licences will be able to issue stablecoins.
But this really means the end of ‘free private currencies’. “It’s . . . a 180 turn from where a lot of these crypto companies started, saying ‘we don’t need banks, we don’t need laws, we’re above it all’,” said Max Bonici, partner at law firm Davis Wright Tremaine. “Now they’re saying ‘regulate us’. And the big boys are moving in. Large banks, including Bank of America, are seeking to issue their own stablecoins once US regulation is finalised.
Goldman Sachs says it expects the value of stablecoins in circulation to grow from $240bn to more than $1tn within three to five years. Citigroup includes in its total addressable market estimates $195tn of cross-border transfers and $1 quadrillion of flows sent via SWIFT. JPMorgan says it’s “in the realm of possibility” for stablecoins to take 10 per cent of the $22tn US M2 money supply, or $2trn in assets.
But optimism by the big financial institutions, backed by the US president and Congress, about stablecoins becoming huge is just selling their own book. In practice, there won’t be that much demand for stablecoins as they pay no interest so that their value can be eroded by inflation. Some banks are trying to get round that. JP Morgan says it is launching a so-called “deposit token” as an alternative to stablecoins — called JPMD. The bank says JPMD will eventually enable its institutional clients exclusively to send and receive money securely on a chain representation of a bank deposit, which will pay interest.
But again this shows that private cryptocurrencies are not money. JP Morgan’s tokens are just that, like gift vouchers or supermarket points that can be used by holders only within that company alone. They are not universally usable. Like stablecoins, they have to be turned into real money like dollars through another transaction. With bitcoin, your paper gain may look good, but cashing out and realising it is different. For any sizeable amount, you need to put the crypto in an ‘external wallet’. Then you pay a high transaction cost and are also immensely vulnerable to blockchain hackers and scammers.
In global trade and finance, it is hard to make goods and money transfer between parties at the same moment, which creates risk, delay and expense. But as Steven Kelly of Yale’s Program on Financial Stability points out, “When stablecoins purport to solve that, the problem is that supply chain payments now, and in the future, demand bank money.”
Stablecoins are not money. As the Bank for International Settlements put it: proper money “can be issued by different banks and accepted by all without hesitation. It does this because it is settled at par against a common safe asset (central bank reserves) provided by the central bank…..Deposit tokens don’t have this property now and it’s hard to see how that could change”.
Money is the universal form of value; and it must be seen as universal to become money. BIS: “The foundation of any monetary arrangement is the ability to settle payments at par, ie at full value. Common knowledge of the value of money has a shorthand – the “singleness of money” – where money can be issued by different banks and accepted by all without hesitation. It does this because it is settled at par against a common safe asset (central bank reserves) provided by the central bank, which has a mandate to act in the public interest.”
The state through a central bank guarantees the value of any state-issued currency with infinite liquidity to meet demand. That does not apply to private tokens like stablecoins, even if they are now to be brought under the regulatory powers of the state. At best, stablecoins become just another financial asset, like corporate bonds or bills, not cash that can be used universally.
Moreover, the BIS argues that “crypto lacks the scalability and coordination benefits of money. As the size of the ledger grows with the volume of transactions, it becomes harder to update it quickly. The cost of transacting with crypto increases with the volume of transactions and cryptoassets cannot scale without compromising security or their decentralised underpinning.”
Cryptocurrencies are vulnerable to corruption, fraud and money laundering; and as private tokens, they function at wildly varying exchange rates to state-issued money. As such, they will allow the large financial institutions to make huge profits with no visible gain in value for society.
Bitcoins and other crypto currencies increasingly move in step with the prices of other forms of fictitious capital. Recent studies and market analyses show that Bitcoin’s correlation with the S&P 500 has significantly increased over the past five years. Especially during macroeconomic crises—like COVID-19, inflation spikes, or monetary policy shifts—both assets have tended to move in tandem. For instance, the 30-day correlation between them has surpassed 70%, showing shared sensitivity to global risks and monetary decisions.
As such, any future instability in financial markets and any significant downturn in the so-called ‘real economy’ will hit the crypto market and its ‘stable’ coins hard.
This best-laid plan by mice and man, promises…..? Money from nothing, for nothing, backed by real material production, thanks to Marxism and its followers (The WEF, “By 2030, everybody will have no money and be happy”). Every economic entity roped in will pay for this phenomenal growth in money supply, vacuumed up by the system. The GFC, AGW and Covid, though massive financial scams, are a drop in the ocean compared to this development. It looks like an attempt to beat competing monetary systems which, naturally, are a hindrance to total western-based international high-finance global domination. There Is No Alternative. Well, maybe there is,… Brazil-India-Others bucking the system. Will China survive this?