Will cryptocurrencies trigger the new great financial crisis?

In 2022, around the time of the FTX crisis, I wrote a column on the risks posed by cryptocurrencies. The question I asked then was whether these assets had "any relation to the traditional role of the financial industry, which is to channel productive savings into productive investment? Or is it mainly about moving existing assets (real or virtual) in a closed cycle of financialization that largely benefits a small handful of wealthy traders? And if the latter, why do we continue to allow it? It seems to have little social use. "More than two years later, when Elon Musk just stonewalled the Consumer Financial Protection Bureau (CFPB)-which was investigating several cryptocurrency companies and digital payment apps-digital currencies will likely work their way much deeper into the mainstream financial system.The CFPB was the primary regulator of non-bank digital payment systems, and between the dismantling of that agency and the departure of Securities and Exchange Commission (SEC) director Gary Gensler (who tried and largely failed to regulate the sector), I'm betting that cryptocurrency-related fraud is going to proliferate.That could pose problems for the real world. While cryptocurrencies may not have inherent value, many experts - including Columbia University law professor Jeffrey Gordon - fear that as assets and liabilities are increasingly denominated in these assets, digital currencies will have a channel into the real economy. "Stablecoins (designed to give stability to the market) may fall below par," Gordon said. "We've seen this movie before, with prime money market funds." During the Great Financial Crisis many of these seemingly safe funds "broke the buck" (broke their parity with the dollar), returning less than their original value to investors.That can easily happen with stablecoins, but the effect would be compounded by the fact that if there is a liquidity crisis in cryptocurrencies, there is no lender of last resort. We would simply see a large amount of imaginary value disappear, leaving real-world collateral calls and funding shortfalls. This is concerning given the fact that people who invest in cryptocurrencies at the retail level tend to be younger and more financially vulnerable.I know that many people view these assets as a kind of digital gold, a hedge against a world where the dollar may devalue thanks to America's growing debt and deficit situation, not to mention Donald Trump's erratic economic policies. If you accept the idea that there are a finite number of cryptocurrencies available thanks to the efforts required to mine and track digital currencies on the blockchain, then you can see their rise as a harbinger of a post-dollar world.Certainly, the people who stand to benefit most from digital assets - such as Elon Musk, Mark Zuckerberg, Jack Dorsey and other Silicon Valley tech bros - believe that digital currencies are best suited to a more multipolar world. They are largely unregulated and therefore less subject to political forces (just look at how Trump is pressuring Federal Reserve Chairman Jerome Powell). Just as the big tech platforms demonstrate their power by removing users from social networks on occasion, cryptocurrencies can float above the politics of any nation state, which is (as we discussed in Swamp Notes last week) just the kind of post-government world the tech titans seek.Richard, I have several questions for you. The first is what is your general opinion on cryptocurrencies (and I realize it probably depends on the currency)? Second, do you think they are already taking hold in the real economy? Third, do you have an idea about whether Musk can make digital assets become a bigger part of the U.S. financial plumbing, and what the ramifications of that might be?Recommended reading-A few weeks ago I wrote in Financial Times about how the regulatory divide between blue states (Democrats) and red states (Republicans) is going to grow. We are starting to see one of the results of this, which is an exodus of big companies like Chevron from California-I was delighted with the Vanity Fair cover story on Harry and Meghan's failed attempts (at least so far) to become California-style business titans.In Financial Times, Emma Jacobs had an amusing take on Elon Musk and J. D. Vance's performative parenting (all working mothers must be rolling their eyes), and don't miss brilliant economist Daron Acemoglu's futuristic take on how historians might view the Trump era and America's prospects after it.Richard Waters respondsI used to think of cryptocurrencies as an extremely interesting technology in search of meaningful uses (establishing a shared view of reality without a central authority is a neat idea); however, I think we discovered which application trumps all others, at least for now: speculation.Cryptocurrencies have some utility (beyond money laundering and tax evasion), but they are not worth $3.2 trillion (the value of all coins in circulation, according to CoinMarketCap). To be sure, many bitcoin holders regard it as a form of digital gold, but who knows how long that will last: it is a social construct with little history. Stablecoins have a theoretical use as a more predictable form of digital currency, although, as you suggest, it is impossible to know how well they are backed, which rather undermines the purpose. Memecoins and NFTs will always have value to some people as digital collectibles, particularly as cultural or political signifiers. After saying that, the NFT bubble of a couple of years ago was crazy, and it's silly to believe that Trump's coins - in essence, collectible cards with images of the president - are worth $3.8 billion.The areas where I thought cryptocurrencies can begin to influence the broader digital economy haven't amounted to much. Decentralized finance is still just a way to circumvent financial regulation, as far as I know. And the idea that digital tokens will support a new generation of decentralized applications, from gaming to social networking (what's known as Web3), completely failed.As for Musk: like Trump, I think he's deeply intrigued, but I don't think either is a true believer. Musk loves the value of memes and the disruptive potential, but after he invested some of Tesla's extra cash in bitcoin a few years ago and the price fell, he quickly dumped three quarters of his stake. For Trump, it's a magic money tree (those Trump coins) and a matter of political expediency (it helped improve his standing among young people, and crypto money has become a major source of political donations).That's why I think Trump will do his best to be friendly to cryptocurrencies without doing too much to stir the waters. As you say, the SEC is likely to stick reverse in some stocks (hence the five-fold increase in Ripple since the election). But I wouldn't expect it to roll back completely: securities law will remain an important weapon against the most egregious scams. Trump may even make good on a promise to place a small portion of U.S. financial reserves in bitcoin, no doubt fueling another spike in price.This looks like a recipe for more speculation and, no doubt, more fraud. It will only become truly worrisome if it becomes systemically important - for example, if cryptocurrencies become intertwined with the banking system - but I think (hope) we are a long way from that. And as for whether the price of bitcoin will be lower when Trump leaves office than when he started, who the hell knows.