Cryptocurrencies: why there’s nothing behind them

A few days ago, we saw Facebook announce a new cryptocurrency. I thought that after that madness from that madman Maduro with the Petro, no one else in their right mind – other than a central bank – would issue yet another cryptocurrency. But I was obviously wrong.

I believe that ignorance on this issue runs so deep that neither the majority of supporters nor opponents can explain why they take one side or the other.

Blockchain technology, based on the principle of ‘distributed consensus’, offers something that no currency has yet achieved: its tamper-proof nature. There will always be someone who says, ‘until someone finds a way’, but it seems quite likely that by the time that happens – if it ever does – our great-grandchildren will already be long gone.

For those who are not aware, ‘distributed consensus’ means that the validity of the currency we use to make payments at any given time is not validated by the person to whom we hand it over – as is currently the case – but by a vast network of computers, which do so in an unquestionable manner; something that will never happen with current paper money.

The real problem with today’s virtual currencies lies in their volatility. To give just one example, in the space of just 13 months, Bitcoin’s value fell from $13,800 to just $3,501 – a loss of 75 per cent. And why? Well, no one has a convincing answer.

Instability undermines one of the basic principles of any economy: saving. Nobody wants to hold a currency whose value fluctuates against other currencies in the way it does at present. The ultimate cause of this instability lies in the fact that the issuer is either unknown or not sufficiently solvent.

Money, when all is said and done, is nothing more than an easily divisible medium of exchange. In other words, it is the asset we use to buy and sell other assets, whether physical or virtual.

However, for this asset to be recognised as such an intermediary medium of exchange – or, as it is commonly known, money – it must fulfil a number of conditions.

Firstly, it must be issued by a body of recognised prestige and financial soundness. Secondly, it must provide sufficient legal certainty; that is to say, it must be recognised by the state authorities to the extent that they agree to resolve disputes concerning it. And thirdly, but no less importantly, it must be backed by a guarantee of last resort; that is to say, if necessary, the issuer or owner of the money must be able to issue new currency to replace or cover the existing one.

Well, today’s virtual currencies do not possess any of the three characteristics mentioned above, which has a significant impact on their stability and, consequently, on their status as money.

Supporters of the current virtual currencies defend them on the grounds that they are not regulated by the authorities, but it is precisely that regulation which provides legal certainty. We go out onto the street and cross the road because there’s a traffic light, and, curiously, cars do stop at it; but if they don’t, the police turn up and a judge might even send the offender to prison. Society is built on rules, and without them, it wouldn’t just be like the jungle – it would be far worse. After all, even in the jungle itself, there are rules. If you fall asleep near a tiger, it will certainly eat you.

But to the critics I would say: why not make the most of this wonderful technology? Indeed, central banks will end up issuing virtual currencies sooner rather than later. Virtual currencies based on blockchain technology and issued by reputable bodies such as central banks will provide the international monetary system with security mechanisms never seen before.

To begin with, the tax authorities will be able to ascertain not only exactly how much money each person has in their possession, but also its exact source, which will drastically reduce the illicit exchange of money.

Ultimately, blockchain technology will bring to the system exactly the opposite of what it has become famous for.