Recent times have been no good to crypto
by Jerry Haar
With the collapse of cryptocurrency exchange FTX, those three letters will be removed from the arena that serves as home to the Miami Heat basketball team and a popular venue for musical events. While many local politicians and business leaders have been promoting Miami as a hub for fintech, including cryptocurrency, their unbridled enthusiasm can impede due diligence on firms like FTX that seek to promote branding.
In this instance it is not just about FTX, which new CEO John Ray asserts is really “just old-fashioned embezzlement,” but a case of the financial instrument itself – cryptocurrency.
The verdict is still out on cryptocurrency, a digital currency that exists only electronically. The advantages of crypto are compelling: protection from inflation; secure and private; self-governed; and cost-effective for transactions.
The negatives are significant, however: crypto can be used for illegal transactions such as drug trafficking and money laundering; adverse effects of coin mining on the environment (enormous amounts of energy required); susceptibility to hacks; and no refund or cancellation policy. Recent times have not been good to crypto. Digital currencies have lost over $2 trillion during the past year. In the second week of November alone, crypto fell 21 percent.
Big companies are not bullish on cryptocurrency, cases in point being Tesla (will no longer accept it for payment) and Facebook/Meta (sold its crypto intellectual property and assets). While individuals should be free to invest in any financial instrument they choose, entire nations should not.
Yet that is precisely what El Salvador has done, becoming the first country in the world to use Bitcoin as a legal tender in 2021. A careful examination of El Salvador’s experiment with cryptocurrency should give one reason to pause. President Bukele launched a virtual wallet named “Chivo” (meaning “awesome” in Spanish) and paid people $30 to download the app and use it. But so far only 20 percent have – no surprise, since one in three Salvadorans lacks access to a mobile phone with internet. As for businesses, only 20 percent accept the digital currency.
El Salvador’s experiment with cryptocurrency has cost the country $375 million so far, a sizeable loss for a GDP of $60 billion. Not to be deterred, President Bukele is keen on building a “Bitcoin City” near the country’s Conchagua volcano. Those who champion cryptocurrency as legal national tender regard it as a tool to reform financial services, making them more inclusive and accessible.
The IMF, World Bank, and central banks, on the other hand, argue that crypto can facilitate money laundering, undermine capital controls, and expose citizens to major price volatility. Besides crypto’s negative impact on macroeconomic stability, financial integrity, and consumer protection, the adoption of crypto as a national currency would make it impossible to estimate tax revenue. To quote Harvard economist Jeffrey Frankel: “Cryptocurrencies are backed neither by reserves nor by the reputation of a well-established institution such as a government, private bank, or trusted corporation.” Todd Baker, a financial services executive and Columbia Business School fellow is more concise and harsher, asserting: “Crypto is money without a purpose.”
Miami has been masterful in promoting the city as a global business and finance hub, not just a tourism and leisure destination. Within the financial realm, crypto is “hot” at the moment, joining derivatives (such as options and warrants, forwards, and futures) in the portfolio of financial instruments. But entire nations such as El Salvador that speculate on crypto, substituting it or placing it alongside their national currencies, can create collateral damage. Impacts can include distress sales of real estate, shuttered businesses, defaults on bank loans, and repatriation of capital to meet obligations in their home countries. The Latin warning “caveat emptor” (buyer beware) is meant for consumers. Nations that consider banking their treasuries on speculative instruments should heed the warning, as well.
Jerry Haar is a professor of international business at Florida International University and a fellow of the Woodrow Wilson International Center for Scholars and the Council on Competitiveness, both in Washington, D.C. He is also a board member of the World Trade Center Miami.
