What are cryptocurrencies for anyway?

What are cryptocurrencies used for? I posed this question to some of my former colleagues at the University of South Florida School of Finance. All I got in return were questioning looks, implying that they don’t see any inherent value they add to the economy. The standard answer I get from some lay people is that it is a digital currency that is beyond government control (in their view, the great and the bad).

A lot of my finances are digital. My bank account is a digital currency. I use it to pay all my bills online without incurring any fees and my pension payments are deposited there electronically. My credit cards are a digital line of credit, which I can use for all kinds of transactions inexpensively because credit card providers charge the seller a transaction fee, which is passed on to me in the form of a small higher price than I would pay for my purchases. Debit cards are a digital currency allowing payment from your bank account without incurring fees.

I use PayPal for transactions which has the added benefit of protecting my credit card and bank account from scammers looking to steal my identity. And you have Venmo and other digital trading platforms around the world.

According to The Economist, Brazil has launched a payment system called Pix, which allows consumers and merchants to send and receive money via a QR code, without having to share details of their wallet, provider fintech or their bank. He was wildly successful. India’s Unified Payments Interface and other similar systems, many in African countries, have also grown in popularity.

But it’s digital, not crypto. So why do some people believe in cryptocurrencies? Why invent a currency outside the jurisdiction of the government and the Federal Reserve Bank? It’s a horrible idea. There must be central control of the money supply to prevent and control speculative excesses. This is reminiscent of the collapse of the shadow banking system during the 2008 financial crisis, which deepened the economic downturn.

Shadow banking consisted of financial intermediaries that created credit throughout the financial system, outside of regulatory oversight and without the insurance protection offered by the FDIC. So when the proverbial “poop” hit the economic spectrum, the lack of insurance protection exacerbated the downturn as there was a run on deposits in the shadow banking system, which could not be honored. as liquidity has dried up, as is usually the case when a major economic downturn is imminent. Essentially, investors couldn’t withdraw their money, which further exacerbated the lack of confidence in the financial sector of the economy, worsening the downturn.

Economist Paul Krugman estimates that while the inflation rate is in the upper numbers for most citizens, it is well over 100% for people who have their money in cryptocurrencies due to their collapse in value. .

Cryptocurrency proponents are asking for patience, saying it’s a relatively new form of payment that is experiencing growing pains. Oh good? Bitcoin, the most popular of them, has been around since 2009. It refuses to grow and act as a mature and responsible currency. Why can’t I pay for groceries at Publix or other stores with Bitcoin? Because sellers don’t trust that they will maintain their value.

Cryptocurrencies are valuable to those who engage in nefarious and illegal activities because they can hide their transactions from the law. So, is this a good reason to have a parallel currency? Do you know the answer.

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A recent article by some of my former colleagues in information systems opined that “value generators” in crypto markets are working hard to capture the value of blockchain-based technologies and business models. To do what exactly, I ask, wondering what function cannot already be fulfilled by the existing mediums of exchange and transaction modalities.

It must facilitate transactions more efficiently and/or at lower cost, and/or create a superior system of checks and balances to reduce risk. There may be situations where using cryptocurrencies makes economic sense, but at the moment I suspect they are rare.

Proponents should provide compelling examples of such activities in plain English and spare us the technical gibberish. I know others who are asking the same question.

Murad Antia, now retired, taught finance at the University of South Florida’s Muma College of Business.