10 Oct Boards should be cautious of cryptocurrencies’ failed promises

Cryptocurrencies promised a freer marketplace but this quickly turned to greed and government control, says Andrew Kakabadse, Professor of Leadership and Governance at Henley Business School, and Dr Reeves Knyght, Chairman of the Board of Directors at Minerva Lending Plc.

Cryptocurrencies have failed to deliver on their original promise to radically transform equity futures and create a freer marketplace, and boards need to ensure organisations are prepared for unforeseen exposure to economic, technological and security concerns.

Bitcoin, the first cryptocurrency, emerged 15 years ago on the back of the global financial crisis and rapidly established itself as a central pillar of the new digital technology movement.

Indeed, the founders and backers of numerous cryptocurrencies proudly announced their intent to provide an alternative medium of exchange, using innovative, techno-based decentralised organisations to fuel dreams of revolutionary change.

These ideals were further championed as techno counter-cultural movements, seeking non-hierarchical and self-organised models of society that could positively disrupt traditional market capitalist corporations.

Enthusiasts viewed these technologies as powerful tools to challenge conventional governance models.

However, In February 2023 the UK Treasury set out proposals to regulate the crypto industry, including new rules to govern the issuance, trading and lending of crypto tokens — digital representations of assets — in an effort to safeguard customer funds.

Crypto exchanges would be required to comply with rules governing traditional financial services, including having to ringfence customers’ money in case of insolvency, and ensure due diligence and monitoring of assets listed on their platform.

The government’s measures follow a period of turmoil across the sector, with a number of lenders and exchanges, including FTX and Voyager Digital, experiencing difficulties over the past year, seeing the price of crypto spiral along with investor confidence.

Crypto today

The reality of cryptocurrency today is that its adoption has been primarily driven by speculative investment and the desire for a quick buck, rather than any idealistic visions set forth by its early developers.

In fact, the price of cryptos is unrelated to more normal economic measures, such as yield curves, or consumer or investment data relating to particular asset classes. Price is largely determined by speculation and the entire system has become little more than an exercise in random guesswork.

Crypto users have been compared to gambling addicts owing to their ‘variable ratio reinforcement patterns.’ Psychologists have determined that gambling is like a drug in that its proponents feel they are always a step ahead of the game. This all smacks of the illusion of beating the casino at its own game, but worse.

WhatsApp groups can and do fuel rumours which determine whether a price will skyrocket up or down and so crypto retail investors are, in fact, simply gambling with their money.

Alternative coins emerging

Despite early founders’ expectations not being met, Bitcoin has paved the way for the emergence of a group of crypto currencies known as alternative coins, or altcoins. Notable examples of this include Litecoin, which aims to speed up transaction processing, and Ripple, designed for smoother interbank transactions.

There is little doubt that Bitcoin and other crypto currencies have induced changes in social habits and regardless of their speculative nature, these new currencies are being progressively co-opted by mainstream financial, technological and governmental institutions worldwide.

The most notable among these is the emergence of Central Bank Digital Currencies (CBDCs). These cryptocurrencies, backed by an increasing number of central banks, now represent the coinage of a group of select countries, such as the Digital Yuan in China and the e-Krona in Sweden. However, to date, only the Bahamas, Jamaica, and Nigeria claim to possess fully functional CBDCs.

CBDCs are governments’ efforts to integrate blockchain into their mainstream financial systems and also represent the incorporation of Bitcoin and associated technologies by the very institutions they were meant to challenge.

Is the future of crypto fixed?

Boards need to ask the key questions:

• What are the realistic uses of cryptocurrencies for the organisation?
• Is there an effective system in place to model, manage and balance the costs of risks and opportunities?
• How might extreme changes in valuations or volumes impact the strategy?
• What are the legal guidelines and how will the organisation respond to new regulatory considerations?
• Has management given proper consideration to the global nature of cryptocurrencies?
• Is the organisation prepared to react to unexpected cryptocurrencies exposure?

There is nothing certain about the future of cryptocurrency in the current environment, but be aware, all of the aforementioned issues are emerging now.

Commercial banks will ultimately no longer issue paper currency. This has already become the norm in Sweden, the first country to become fully digital. Australia plans to announce it will no longer issue traditional currency and plans to become cashless by the end of 2024. India and Brazil intend to launch CBDCs in 2024, followed shortly thereafter by the UAE, Saudi Arabia, Iran, Vietnam, Norway and the US among others.