I do not fully understand the whole cryptocurrency phenomenon. And what I do not understand, I tend to fear. As a result, I have not jumped into the crypto market. My wife, on the other hand, has read the glowing descriptions of crypto benefits, and has taken the plunge.
I think that my wife is typical of millions of people around the world who are jumping into the crypto market without fully understanding it. I went looking for articles explaining crypto in more depth, and found an excellent piece by David Frum in today’s Atlantic: “How Crypto Could Trigger the Next Financial Crisis.”
Now most people understand that crypto is volatile, but that Stablecoin has been invented to erase some of that volatility. Another danger of crypto is that it is unregulated. We all know the frustration of dealing with the arcane regulations of banks, especially when dealing with currency exchange or foreign transfers. All that is avoided with crypto.
However, as in so many areas, lack of regulation leads to unscrupulous players taking advantage of the system. In the case of crypto, it is the money launderers who are having a field day, since they can transfer money around the world anonymously.
A big advantage of Stablecoin, especially in the US, is that the issuers’ assets are insured by the US Government. They can’t lose! But what that means is that when you deposit your money with a crypto issuer, they will invest your money, in order to make a profit. There is no ceiling on the risk involved in their investments, and the issuers are safe, because if their risky investment goes south, they will be reimbursed.
This situation reminds me exactly of the Savings-and-Loan crisis a few years back. Deposits in S&Ls were insured by the US Government, so the S&Ls made huge risky investments with their deposits. If they succeeded, they would make billions in profits, but if they failed – no problem – the government would bail them out. That’s precisely what happened, but when billions and billions of losses were incurred, the government’s Resolution Trust Fund couldn’t afford to pay off all the S&Ls. The S&Ls went bust, and local mom&pop investors lost their life savings.
That could happen with Stablecoin. If billions, even trillions of crypto dollars are invested in risky ways, the issuers, along with many banks, could go bankrupt.
Another thing that frightens me is that the regulation of financial instruments is done by politicians, including Donald Trump, who keeps taking actions to deregulate crypto. The fact that he is pushing crypto so strongly makes me suspect that he has some fishy way of making money for himself.
Would you trust this cryptocurrency?
Even without Trump, politicians around the world are not only corrupt, they are quite ignorant about many intricate financial matters. Crypto issuers and their lobbyists could easily sell a package of ‘regulations’ to the Dunning-Kruger politicians. I would not trust those regulations, because the issuers have already figured out ways to scam them.
In summary, I fear – no, I’m sure – that crypto will sooner or later crash bigtime, just like the Savings and Loan scandal and the Subprime Mortgage scandal. The process is always the same. Stupid politicians set up a system that looks good to voters and investors on the surface, while the smart boys figure out ways to game the system, rake off their billions, and bring the entire financial system crashing down, all without ever paying any penalty.