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The writer is president of Queens’ College, Cambridge and an adviser to Allianz and Gramercy
The time has come for more western governments to stop dismissing the crypto revolution as some mix of illicit payments schemes and reckless financial speculation.
Instead, they should be more open to embracing the innovations of crypto and channelling them in a better direction for finance, the economy and society at large.
At the same time, crypto supporters need to recognise the growing systemic consequences of the continuing and future disruptions, deepening their engagement on regulatory and energy issues. They need to shift away from a “zero-sum” mindset where their gains can only come from the losses of the established financial system.
Overall, the policy debate in western economies over crypto remains too narrow relative to the importance of the issues in play and excessively polarised, with participants speaking different languages. This has intensified the underlying tug of war between accelerating private sector adoption and government/central bank discomfort.
As the former steadily increases, we have started to see divergence in the western world on the cost-benefit of trying to channel the crypto revolution towards improving financial services, making things even more complicated.
In contrast, China is pressing ahead with a more forceful, unified top-down vision, setting the stage for transformational dynamics that have the potential to extend well beyond the country itself.
What happens next will have profound implications for financial services, monetary policy, investment outcomes, payment platforms and the configuration of global reserve currencies. It will also influence the control and use of big data, as well as China-US technological and economic competition.
Three on-the-ground developments show how things are shaping up.
First, the technologies driving the crypto revolution, including digitally-distributed ledgers of transactions known as blockchains, are becoming more disruptive to a financial industry that has remained for too long relatively inefficient and a source of excessive profits.
The combination of regulatory moats that deterred industry entrants and traditional customer inertia are no longer strong enough to discourage a tech-driven wave of competition.
Second, despite their instability, cryptocurrencies are gradually becoming a larger part of investor portfolios via allocations to two buckets — risk-mitigating assets that are an alternative at the margin to gold and some government bonds; and opportunistic bets on non-correlated assets.
Third, cryptocurrencies are also somewhat more prevalent in the payments ecosystem. It’s worrisome for illicit payments (think of the growing number of ransomware attacks) but more positive for remittance transfers, where too many traditional channels remain slow and expensive. But the broader evolution into global currencies continues to be undermined by price volatility, lack of broad trust and regulatory concerns.
The big question now in whether crypto disrupters and regulators in the West will succeed in converging on a more unified approach.
The onus here falls primarily on the crypto world, which risks repeating the mistake that Big Tech has made — pursuing narrow business objectives without realising that their desired success will make them systemically important.
They will not get far with governments and central banks without incorporating stronger anti-money laundering safeguards. They also have to respond to concern about a potential erosion of monetary policy tools.
The need for governments and central banks to be open-minded is made more urgent by what China is doing. Officials in Beijing have understood the transformational power of the crypto revolution and wish to co-opt it in a holistic and highly directed manner.
By doing so, it confronts the west with a challenge that goes beyond China being quicker to develop better payments systems and a central bank digital currency — all of which are likely to jump borders. It could also pose a new problem for the dollar’s reserve currency status, as well as providing China with more control over sensitive big data and closing what remains of the technological gap.
Absent a more co-operative approach, both sides of the crypto world in the west may find their future being determined by what a faster-moving China is doing and intends to do.