Reviewing Safeguards Against the Crypto Rush

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In this file photo taken on October 9, 2021, workers set up a new row of Bitcoin mining machines at the Whinstone US Bitcoin mining facility in Rockdale, Texas. AFP PHOTO

FILIPINOS should be careful when investing in cryptocurrencies like Bitcoin. Likewise, the central bank should review its policies on cryptocurrencies and on decentralized finance or DeFi in general to protect consumers not only against scams, but also against bad investment decisions.

There has been so much hype about cryptocurrencies over the years. And our concern is precisely their growing popularity, even among Filipinos. Some may rush to invest without really understanding the concepts of these new instruments and the risks involved. For example, many may not realize that not all cryptocurrencies are Bitcoins, as there are over 6,000 more available.

If you think about it, the very concept of cryptocurrency seems troubling as it was designed to operate outside the formal financial system and beyond the control of government regulators. This alone should raise red flags given the problems of money laundering and various other illegal transactions by terrorists and criminals all over the world.

Another troubling feature is the anonymity of authorized buyers and sellers in the new system. This undermines the know-your-customer policy imposed by regulators, in part to prevent fraud and other crimes.

Of course, the idea behind these features was to simply facilitate transactions or more technically, peer-to-peer exchanges. But it’s not hard to imagine that anything beyond the reach of regulators could lure opportunists into the underworld.

More in government, and not just law enforcement, should be concerned with the integrity and stability of the Philippine financial system and the risks posed by cryptocurrencies and DeFi. It is a blockchain-based digital infrastructure ecosystem that appears to be emerging as a substitute for formal financial intermediaries like banks and brokerage houses. Blockchain, of course, is like a digital ledger that claims to be impregnable to hackers, which is part of its appeal.

Central banks, in our case the Bangko Sentral ng Pilipinas (BSP), play an essential role in any economy. They are responsible not only for economic growth and development, but also for balancing inflation and unemployment. Of course, many recognize central banks as regulators of the banking system and lenders of last resort, among others.

As such, policymakers and other authorities should protect BSP and its ability to function effectively. While it may be wrong to swim against the tide, so to speak, and resist technological advances, policies should also evolve at a pace that keeps pace with developments.

Financial literacy

Another concern is consumer protection, which applies to cryptocurrency investors and DeFi users. Certainly, they seem appealing to people looking to preserve or increase their wealth.

Due to their popularity, these technological advances have even spread to other sectors, notably the art world which now offers non-fungible or NFT tokens. They are minted on the blockchain in a process paid for with a cryptocurrency, usually Ethereum.

All of these ideas and terms sound fanciful; even mysterious. But they can also be scary.

The “crypto” rush evokes memories of an economic disaster a century ago. In the 1920s, Americans risked their savings to invest in a bull market, even though many misunderstood the intrinsic value and how the stock market actually works. They were simply drawn to the opportunity to make a fortune quickly. Of course, the US stock market collapsed later in the decade, and the impact was global.

Something similar could happen today. People are rushing to cryptocurrencies even though they have no intrinsic value and only have a cursory understanding. Like the investors of the 1920s, people today can hardly resist any possibility of getting rich in a short time.

Warren Buffett, arguably the best investor today, said the value of cryptocurrencies is largely based on demand from upcoming buyers. He describes it as a bubble although he didn’t use that term.

For its part, the BSP has issued statements and documents that raise public awareness about cryptocurrencies and blockchain. However, more can always be done. The best defense against losing money in cryptocurrencies and new technology related to them may be financial literacy.

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