The world’s most popular cryptocurrency has reached a new mind-boggling high in 2021, crossing $48K (about RUR 3.5 mio) on February 9. This kind of performance predictably aroused the interest of retail investors who are increasingly looking for better returns amid the progressing decline of bank interest rates. The problem is quite relevant for Russia, which is experiencing a true stock trading boom with private investors moving into stocks, as 10 mio new investors have registered with the Moscow Exchange. The participants in the discussion on The Future of Bitcoin (held as part of the Wise Men Online series at the Financial University) have discussed crypto investment and the risks it poses to retail investors and even entire countries. Check out the highlights of the discussion below.
Private fiat money
Anatoly Aksakov, Chairman of the State Duma Committee on the Financial Market, highlighted the risks associated with investing in cryptocurrencies. He also reminded the audience that the bitcoin exchange rate cannot grow indefinitely. In the meantime, large investors are trying to profit on it by investing impressive funds in cryptocurrency. One example is Elon Musk, whose Tesla has bought a $1.5 bln worth of bitcoins.
“Elon Musk has spurred on the interest in bitcoin, and now he can sell what he had bought with a profit. Large players can make good money by fueling interest in this currency, and this is what they’re doing, as far as I can see,” Anatoly Aksakov said.
“Bitcoin is a private currency, neither backed by any physical commodity nor supported by an issuing authority. It is not legal tender in any jurisdiction, so sooner or later, this game should be over,” Aksakov added.
Moreover, he did not rule out that the emergence of cryptocurrencies had to do with some government agency (in the United States, for example), which needed to test the instrument.
Settlements, not savings
The world’s most popular cryptocurrency, the bitcoin, cannot be a store of value. And yet, it is this role that cryptocurrencies are claiming strongly today. According to Artem Genkin, Doctor of Economics, Professor, President of the NPO “Center for Protection of Bank Clients and Investors,” the fate of bitcoin has looked very promising since its emergence around 2010.
“For almost eight years, bitcoin has been a particularly convenient payment tool for certain types of transactions involving specific products. You could benefit from speedy transactions and low costs, anonymity or all these things at the same time. That was what made bitcoin so popular,” Artem Genkin comments.
However, there has been a U-turn since January. This year started with a sharp surge in the exchange rate of the biggest cryptocurrency and bitcoin’s market cap has soared above $1.3 trillion. Right now, bitcoin is trying to become a hoarding asset although it still lacks public trust to become one.
“Cryptocurrencies have become mainstream, so to speak. But that still doesn’t make them worth being a hoarding asset. Bitcoin lacks some unconditional factors of trust which, in its case, just don’t and can’t exist by default,” Artem Genkin notes.
He also stressed that the bitcoin exchange rate can’t grow indefinitely and retracement is inevitable at some point.
Shortage of strong assets
Nevertheless, investors, including retail investors, are interested in cryptocurrencies for a good reason. There are more conventional assets on the market with rather questionable unconditional reliability. According to Viktor Dostov, Board Chairman of the Association of E-Currency and Money Transfer Market Members, experts are skeptical about bitcoin as a savings instrument; however, there is also a shortage of unquestionable alternatives. Even gold is not saving the day.
“The amount of derivative instruments circulating around gold on the market, including options, principal protected notes and futures, is many times bigger than the physical amount of this metal.”
One could certainly buy gold coins but it would not be a way to invest significant funds.
“In the context of the stock market, bitcoin requires the same approach as stocks. It is a gamble, a lottery. If this is what you gravitate towards, why not invest — as long as it is not your last money. You might win, you might lose; in this sense bitcoin is not better or worse than most other assets,” Viktor Dostov said.
To regulate or to prohibit?
At the same time, cryptocurrencies, or more specifically, operations with them, could become a source of additional tax revenue. According to Artem Genkin, it can be made possible using a transparent taxation of transactions that use bitcoin as a payment tool. True, there is a serious problem of adjusting the cryptocurrency exchange rate to the conversion rate (as in the case with freely convertible currencies), but it is still doable. Maybe, Artem Genkin adds, the circulation of cryptocurrencies should be subject to a tax similar to the Tobin tax.
“It would be best both for the sector and the state to adopt a pragmatic approach that comprises three elements: legalization, fiscalization and protection of the rights of various investors from risks related to this kind of assets,” Artem Genkin said.
According to Viktor Dostov, the biggest problem with crypto transactions is the compliance with legislation to combat money laundering and financing of terrorism. However, if transaction participants are identified as far the state is concerned, some circulation could be allowed. On the other hand, there are not many options for spending bitcoins.
The law On Digital Financial Assets does not prohibit people from owning cryptocurrencies and conducting transactions with them, but does not allow for using them to pay for goods and services in Russia. In the meanwhile,
“This is not a payment tool anymore. The cryptocurrency has become a tool of investing and saving,” Anatoly Aksakov said.
Protecting retail investors
The growing bitcoin exchange rate creates risks for mass retail investors and calls for protection of their market activities. Otherwise there is a real risk that numerous deceived crypto investors will appear, as it has already happened in the banking sector. Artem Genkin believes that if this issue is not addressed and the risks related to crypto investments are not eliminated, this forecast may come true. Apparently, it is necessary to counteract openly unscrupulous market participants at the state level with the involvement of the law enforcement system. Information space also requires particular attention, in a good way – and the government could address this issue as well.
Efforts should also be taken to improve financial awareness and literacy.
Obviously, helping everyone is simply not possible, and there will always be people who will lose their money in a street shell game; yet, according to Viktor Dostov, boosting the process is doable — and the more so as efforts are already underway regarding the security market and various financial instruments, with the set of measures aimed at protecting interests of private investors to be expanded. For instance, a draft law has been submitted to the State Duma that obliges financial institutions to provide information on potential risks of investment assets, including to unqualified investors.
Cryptocurrencies create risks not solely for mass investors, including those in Russia. With the developing cryptocurrency market, cryptocurrencies are becoming an increasingly relevant factor for global instability; they are creating challenges for central banks as well as for monetary and credit policies of the worlds’ major economies, Artem Genkin emphasizes.
According to him, the digital asset is drawing inevitable attention from speculators, who can mobilize efforts by small investors for their own benefit, including through social engineering mechanisms. In such circumstances, it cannot be ruled out that the cryptocurrency market will attract part of the finances that US President Joe Biden‘s administration plans to allocate for supporting the economy (nearly $2 trn). This is just one of several possible scenarios. We can only imagine shocks that may result from such a capital flow, a prime example being transformations that followed the implementation of the Marshall Plan and introduction of the so-called Eurodollar in the European market, a currency totally detached from the traditional issuer, the expert notes.
“Cryptocurrencies are in fact ‘wandering’ money, a factor for global instability which will be a threat to central banks as well as to monetary and credit policies of the worlds’ major economies. It is not about their ‘criminal essence’ but about laws that rule such macroeconomic processes,” Artem Genkin concludes.
By Olga Blinova