What is the Future of Crypto? Non-Sovereign Currencies
During the past couple of years, we have seen cryptocurrency adoption skyrocket. In the UK for instance, 6.2% of the population now holds cryptocurrency. However, they are still viewed by many as a purely speculative financial vehicle where the value of investments can move up or down by 10% in any normal week. This price volatility coupled with the occasional bad press due to scams and collapses of cryptocurrencies doesn’t help either.
Cryptocurrencies will one day live up to their name
Ultimately cryptocurrencies need to move beyond this phase to be taken seriously by the broader population, and I believe that a stage in this adoption will be the recognition of what the leading cryptocurrencies will become — non-sovereign currencies.
The concept of a non-sovereign currency requires a conceptual leap from what we have currently. We are all accustomed to currencies being tied to sovereignty that has authority over a state. A non-sovereign currency is not tied to a state, but instead to a network.
These types of currencies could be tied with a network state, as Balaji Srinivasan outlines in his book by the same title. However, I believe that non-sovereign currencies are a building block which may not be tied to a network state (I’ve previously written about network states).
What makes a non-sovereign currency distinct from a cryptocurrency is that it is not considered a speculative investment, but a relatively sound store of value. It will change in price compared with other currencies, but there will not be the price volatility we see currently in the cryptocurrency market.
They will also be treated as first-class currencies within our financial infrastructure. We have elements of this currently with cryptocurrencies. If we consider the two largest — bitcoin and Ether, you can:
- See their current prices against other currency pairs on Bloomberg
- Load prepay cards with them for spending
- Hold them in your Paypal account
However, what you cannot yet do is:
- Use cryptocurrencies as an alternative to cash for a typical purchase, you must go via an intermediary payment processor
- Convert cryptocurrencies into fiat currencies at the point of sale with a standard debit/credit card
- Have cryptocurrency holdings in a typical high-street bank account
- Use cryptocurrencies as collateral for traditional financial products such as bank loans
If cryptocurrencies were to become another native rail for spending and saving, it should be possible to use them in many of the same ways that we can use our dollars, pound sterling or euros today. This isn’t to say that they should replace these fiat currencies, but that they are as well recognised as the major fiat currencies.
Bitcoin’s market cap is over $420bn, Ether’s $210bn. For comparison, there is over $2tn, and over €1.5tn in circulation. Given these figures, the major cryptocurrencies are already formidable enough to be considered major currencies. The price volatility of cryptocurrencies isn’t the only barrier to their recognition as non-sovereign currencies. Even if their volatility was less extreme, sovereign nations need to recognise them as legitimate currencies which could be challenging given they have their own central bank-managed fiat currencies to protect.
This is certainly likely to face some challenges given the tightly regulated nature of the existing financial markets. There is a clear willingness to adopt the blockchain technology behind cryptocurrencies to create their own central bank digital currencies, but given the open and permissive nature of cryptocurrency networks, many states are less willing to adopt them at this point in time and are more willing to sanction applications built on top of them over embracing them.
Meta’s Diem experiment was fascinating in the context of a non-sovereign currency. They had planned to launch their currency built on a reserve of 50% United States dollar, 18% Euro, 14% Japanese yen, 11% Pound sterling and 7% Singapore dollar. Had this succeeded, it likely would have been the first digital currency to make inroads to being a true non-sovereign currency.
By using a number of major reserve currencies, they would have achieved price stability which is challenging for cryptocurrencies at the current time. However, given Meta was still reeling from its fake news scandals, the Diem initiative was not viewed in a favourable light by many which led to its demise.
It is feasible that another company or collective may wish to launch a digital currency in the future, but the odds of success are low. They will have to convince not just privacy advocates, but governments and corporate entities of the value of joining their network.
Part of the appeal underpinning the major cryptocurrencies is that they are decentralised with no entity able to exert undue influence on them. If they are majority controlled by a company, they are less so a non-sovereign currency and more a corporate currency which resembles too closely the control we’ve seen play out with the big success stories of the web.
There are smaller countries such as El Salvador which have adopted Bitcoin as their national currency, and there may well be more who wish to adopt a digital currency instead of the U.S. Dollar as their primary currency. However, I do not see any major global economic power doing this. Therefore one of them recognising a cryptocurrency as a non-sovereign currency in addition to their own sovereign one would be such a big deal. Hence, my belief is that it is a matter of time. If the Bitcoin and Ethereum networks continue to grow in a somewhat unencumbered manner, as their adoption becomes more widespread following their respective narratives of digital gold and the global settlement layer/computer, we will achieve greater price stability.
When we reach this point, given their market capitalization and adoption there will be a lot of demand to treat these currencies as any other major currencies. Whilst people won’t be going on holiday to visit Bitcoin Park or Ethereum World and spend their digital currencies as they would when they holiday in Europe, the number of online services that support them will be widespread.
Practically, these services will rely on layer 2 networks that use the primary network (Bitcoin/Ethereum) for settlement, but the point is their adoption will be widespread. This is the point where cryptocurrencies will have graduated into being non-sovereign currencies, which may appear a way off but it will likely happen sooner than many think. And will require a mental shift in the population in how they perceive currencies generally. These new currencies will no longer be tied to sovereignties, but virtual, internet-scale networks such as the Bitcoin and Ethereum networks which will be considered key parts of our global technology infrastructure.