If crypto is incorporated into Australia’s financial system, we will be lucky to avoid contagious collapse
@SmilingGecko
John Quiggin
As soon as people decide that crypto is valueless, it will be – but in the next few years, exposure of traditional institutions will likely run into the hundreds of billions
Tue 31 Dec 2024 11.01 AEDT
The real problem is that crypto is essentially worthless. A typical crypto asset, such as a bitcoin, is a certification that the producer has performed a complex, but uninteresting, mathematical calculation (roughly, finding an input to a complicated function which produces an output near enough to zero). No one can make any use of this.
By contrast, other assets, including those used as currency, have value either because they are useful or desirable in themselves (like gold and silver) or because a government is willing to accept them as payment for tax obligations, like fiat currency. Stocks and corporate bonds represent a claim on the earnings and assets of the companies that issue them. And so on. Unless the Trump administration decides to treat bitcoin in the same way as US dollars (the idea has been proposed!), none of these applies to crypto.
What this means is that, as soon as people decide that crypto is valueless it will become so. As holders seek to cash out, the price will fall, producing more sales, with no stable floor above zero.
At this point, it might reasonably be objected that critics (like me) have been calling crypto worthless ever since its introduction in 2009, and yet its price has soared spectacularly. It’s worth observing that the relatively simple Ponzi scheme operated by the late Bernie Madoff ran for at least 17 years, with the sum involved growing into tens of billions of dollars. He was only exposed by the GFC.
In previous downturns in the crypto market, the loss in value has affected owners of crypto who are unwilling or unable to “Hold On for Dear Life”, but had no effect on the mainstream financial sector. By contrast, in the next few years, the exposure of traditional institutions is likely to run into the hundreds of billions, perhaps trillions. Mortgages will increasingly be secured against crypto collateral and serviced by the (hoped-for) profits from crypto speculation. Loans to crypto exchanges, which have been restricted in the past, will be allowed and encouraged, creating more opportunities for contagious collapse.
An obvious starting point for a crash would be a failure of one of the crucial, but opaque, “stablecoins”, which are designed to trade at a fixed price of one US dollar, and to facilitate the conversion of crypto into fiat currency. Tether, the leading stablecoin, claims assets of over $100bn, but has never produced more than a vague account of what those assets are. Chalmers’ statement includes a promise of legislation for “payment stablecoin” reforms, but it is hard to see how Australia can regulate a global firm like Tether.
A combination of good luck and good management, in which Jim Chalmers played a prominent role, helped Australia avoid most of the consequences of the GFC. If crypto is allowed to play a prominent role in our financial system, we will be counting entirely on luck to avoid a future disaster.
John Quiggin is a professor at the University of Queensland’s school of economics
