Cryptocurrency does not represent much

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The cryptocurrency lobby plans to spend tens of millions of dollars this year to help its top holders convert their holdings into real money. They are looking for a way to turn their crypto straw into gold. Lawmakers and regulators should ignore the hype.

Urging America to “be on the cutting edge of innovation,” crypto enthusiasts are touting blockchain innovation. And it is true that blockchains achieve bookkeeping without an accountant and allow individuals to transact anonymously and quickly. But the innovation pretty much stops there.

Compare the functioning of the crypto ecosystem with our current regulated financial system. Cryptocurrencies such as bitcoin are analogous to depositing money. Like regulated banks, crypto operations create digital money. Each cryptocurrency can be identified with its blockchain, a simple bank register with its own unit of account. Stablecoins function similarly to federal funds as an “in-house currency” that allows crypto deposits to move between crypto banks and provides an exchange rate to real US dollars.

What has been dubbed “decentralized finance” relies on the ability of cryptocurrency holders to lend their balances to borrowers. Since these loans do not involve the creation of new funds, as in the case of regulated bank loans, these transactions are more like debt financing with a bond, as the Securities and Exchange has rightly argued. Commission in an acrimonious exchange with Coinbase over its Lend product project.

In other words, the crypto ecosystem merely mirrors, electronically and anonymously, the most rudimentary components of the regulated financial system. The putative gains are quickly dissipated by the crypto’s many weaknesses. The convertibility of stablecoins like Tether to dollars at par is questionable. People cannot assess credit risk the way banks can. As currently constructed, the crypto ecosystem lacks accountability and legal recourse, so there is little basis for trust. And the basic operations of Bitcoin, for example, require enough electricity to power an industrialized nation.

The industry recognizes that these weaknesses are potentially deadly. But the crypto lobby is looking beyond simple regulation towards a regime that ensures the convertibility of stablecoins into US dollars. While proposals are still emerging, measures such as giving crypto exchanges access to interbank clearings or extending Federal Deposit Insurance Corporation coverage to stablecoin balances would facilitate convertibility and effectively monetize crypto.

Crypto enthusiasts say their view of the financial future is necessary to counter apocalyptic outcomes, such as hyperinflation and social collapse. Anything is possible, but if governments lose their ability to enforce property rights and provide security, we will have more problems than money. As for the extremely rare phenomenon of hyperinflation, no major economy is crazy enough to play with it.

Unlike fiat money created by bank loans, which is tied to the real economy, cryptocurrencies are independent of economic value. Treating crypto as real wealth on par with labor income and real investment returns would grant enormous purchasing power to people who have done nothing to increase the productive capacity of the economy. Monetizing crypto would mean legalizing counterfeit currency. Granting crypto traders access to the core of the regulated financial system would be catastrophic.

Maybe it’s time to call Rumpelstiltskin by name.

Mr. Hanke is a professor of applied economics at Johns Hopkins University. Mr. Sekerke is a Fellow of the Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise.

Journal editorial report: The best and worst of the week from Kim Strassel, Mene Ukueberuwa, Mary O’Grady and Dan Henninger. Images: AFP/Getty Images Composition: Mark Kelly

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Appeared in the print edition of January 25, 2022.

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