Category: Finance
Are bitcoins and other cryptocurrencies real currencies? They are essentially a product of a utopian world in which money would no longer be national but universal, valid in all countries and for everyone, and able to be transferred completely securely and without cost.
This currency would require no intermediaries and its value could not be manipulated by governments or central banks. It would be subject to private, decentralised management. It would guarantee the anonymity of transactions and its guardian would not be a central bank but an algorithm, supposedly infallible. In short, a form of anarcho-capitalism.
In the 1970s Friedrich Hayek and the Austrian school advocated the denationalisation of money by doing away with “the monopoly of government supplying money and to allow private enterprise to supply the public”. In some ways, the development of cryptocurrencies could be fulfilling this wish.
Gold as a counterparty
The first banking currencies were issued in quantities that were necessarily multiples of bank assets in precious metals, gold and silver. They circulated and were regulated freely by supply and demand, without state or centralised intervention.
The currency was subsequently issued not as a proportion of assets in gold or silver but consistent with the development of the economy. Money is thus created from credit. And loans make deposits. In other words, it is still the banks that create money.
This system is supervised by an institutional authority, the central bank, as there is no longer a self-regulation mechanism based on the convertibility of each currency into gold or silver.
Central banks were created following the serious financial crises of the late 19th century and the repeated bankruptcies of banks issuing money backed by gold or precious metals. By harmonising the currency sector and playing the role of lender of last resort, central banks created the possibility of stability and demonstrated the usefulness of institutions and rules.
Hyperspeculative assets
Cryptocurrencies have no counterparty, be it gold or silver, or the needs of the economy, since they are issued by private individuals according to arbitrarily set rules. Consequently, we are seeing a huge increase in private “currencies”, today totalling over 1,600! It is fairly clear that if everyone can create “currencies” from scratch, none of these currencies can earn the universal trust necessary to acquire the true status of currency.
Furthermore, if the economic system were to rely solely on these private currencies with no constraints on issuance, then it would quite simply no longer work, as there would no longer be any monetary constraints.
Rather than currencies, then, cryptocurrencies are financial assets at best. And for all the reasons set out above, their value is extremely unstable. A dip in confidence is enough to trigger a drastic slide in their value. Conversely, when their value rises, more and more people buy them, pushing up their price with no apparent limit and “in a vacuum”. This leads to speculative bubbles that may burst at any moment.
Cryptocurrencies at heart are hyperspeculative assets, as created by the financial world from time to time when it completely loses sight of the real economy.
That said, while these pseudo-currencies do not contribute to the common good (in the words of Jean Tirole), the encryption technology on which they are based, i.e. the blockchain, undoubtedly has a bright future and initial coin offerings (ICOs), under extremely strict conditions, are a project-financing method that broadens the range of possibilities. These last should not be confused with cryptocurrencies themselves, which are merely the product of a potentially dangerous utopia.
Please find my point of view, published in Les Echos “The arnacho-capitalist utopia of cryptocurrencies”
Bitcoin and other cryptocurrencies are essentially a product of a utopian world in which money would no longer be national but universal, valid in all countries and for everyone, and able to be transferred completely securely and without cost. This currency would pass through intermediaries, and its value could not be manipulated by governments or central banks. It would be subject to private, decentralised management. It would guarantee the anonymity of transactions, and its guardian would not be a central bank but an algorithm, a supposedly infallible IT programme. And, at a push, it would be possible for everyone to launch their own project to create a private currency, outside of controls and regulation.
It is a libertarian utopia that abrogates the role of the state, institutions, banks… what a dream!
I will try to demonstrate that it is precisely a utopia and that it cannot work in this way.
This analysis is based on monetary theory.
We must first ask ourselves if these cryptocurrencies are appropriately named and if they are really currencies. Going back in history, we find the hypotheses of Friedrich Hayek and the Austrian School, who, in 1976, called for the denationalisation of money, “to take from government the monopoly of issuing money and hand it over to private industry”. In some ways, the development of cryptocurrencies could be fulfilling this wish.
However, bitcoin is not a currency in the classic sense of the term. It is not a unit of account, or a medium accepted everywhere (in fact by very few merchants) to exchange value, and is extremely volatile. But nevertheless, it is a form of private money, without a central bank, as it is exchanged between the members of the “clubs” that hold it. It is created by a private issuer who benefits from it. Because, remember, when someone creates a private currency in the form of a cryptocurrency, as the issuer, they receive a very small percentage of the amounts issued.
We must also question the nature of the counterparty of the currency created. Another look at the history books shows us why cryptocurrencies are intrinsically unstable and why they are not currencies. In the 19th and then at the end of the 20th century, two schools of thought came into conflict, that of the Currency school and that of the Banking school. The Currency school considers that quantities of currency must be based on holdings of precious metals, either gold or silver. These are private currencies, issued by banks. They circulate and are regulated freely by supply and demand, without state or centralised intervention. The convertibility of currencies into gold or silver in fact penalises the banks if they issue too much, and, reciprocally, their results are weighed down if they do not issue enough.
For its part, the Banking school considers that the best counterparty for the currency is not gold or silver, but economic development. Money is created from credit. Today, loans make deposits. In other words, it is still the banks that create money, but they do so depending on demand for credit, thus mainly the needs of the economy. And this system must be regulated by an institutional authority, since it is not self-regulated by the convertibility of each currency into gold or silver. Regulation is therefore the task of an external organisation, the central bank, which has a number of instruments to influence, as much as it can, the quantity of credit distributed by the banks.
In both cases, there is a point of reference, whether it is the needs of the economy and central bank policy, or precious metals. In addition, the Banking school implies that there is a unification of the value of each private bank currency by the necessary conversion to prices fixed in the currency issued by the central bank. The currency area is thus homogenised and the quantity of currency issued regulated by central bank policy.
The debate between these two way of thinking is in practice outdated, because central banks were not created on the bizarre whim of a bureaucrat who wanted to create administrations to control currencies and individuals, but quite simply as a response to a series of extremely serious financial crises that occurred at the end of the 19th and the beginning of the 20th centuries, owing to repeat bankruptcies of banks, while they were issuing currencies convertible against gold and silver. Without a central bank to homogenise a currency area, these currencies could carry different values depending on the degree of confidence accorded to each issuing bank. Until confidence completely disappeared, as did the bank itself, though a series of cumulative processes. . By homogenising the currency area and playing the role of lender of last resort, the central bank has thus created the possibility of stability, thereby preventing the recurrence of financial crises or considerably dampening the effects of such crises on the real economy.
Moving on to our argument, all this explains why cryptocurrencies are not really currencies. They have no basis. They do not have as a counterparty gold or silver, or the needs of the economy, since they are issued by private individuals depending on rules set arbitrarily by these individuals and without any objective reference outside the cryptocurrency system itself.
In addition, newly-created “currencies” have proliferated (more than 1,600 cryptocurrencies!), which we can clearly see is unrealistic, because it is not in any way linked to the development of the real economy. To be a currency, economic players must have confidence in the currency issued and accept it as a discharge payment method, i.e. as a means of definitively releasing the debtor from his debt to a creditor or supplier. We can see that if everyone can create a currency from scratch, without counterparty or external regulation, none of these “currencies” can win the necessary confidence from everyone to acquire the real status of currency. In addition, if everyone could issue its own currency, no monetary constraint would therefore be possible and the system could not work.
I would not therefore say that it was a currency, but at best a financial asset. And, for all the reasons set out above, a cryptocurrency’s value is extremely unstable. A fall in confidence is enough to trigger a drastic slide in the value of this type of currency, or conversely, when its value rises, more and more people buy it, pushing up its price without a visible limit and “in a vacuum”. We are then faced with wild speculation, speculative bubbles that can balloon and burst at any time.
In conclusion, it is therefore at best a financial asset, but an asset that has no basis. We therefore bet on the value of this currency, through supply and demand alone, with no other reference point than the confidence that we have in future supply and demand, and without any objective reference point relating to the value of a company or economic development. In this case, we are in a purely self-referential situation. It is therefore in essence a hyper-speculative asset, as is created from time to time in the financial world, completely detached from the real economy.
Institutions exist precisely because they respond to a need for regulation to avoid this type of chaos and crisis. It is undoubtedly not the time to try and destroy them.
In conclusion, I would like to recall the words of a columnist from the Financial Times, who said that the way economists have paid no attention to cryptocurrencies is only equalled by the way in which cryptocurrency enthusiasts do not care about the economy. Finally, as Jean Tirole highlights, while blockchain is useful, cryptocurrencies do not contribute to the common good.
Corporation are beginning to be redefined in France, and with it, governance is as well. Shareholders remain at the centre of governance. Proper compensation for risks requires acknowledging their essential role. The question is knowing how to better integrate the interests of the other stakeholders in the company alongside them.
For a long time, this question was not raised. At Wendel, Renault, Michelin, etc. shareholders and board members were the same people, and often families. The original family capitalism did not have problems with governance by construction. But, to help them grow, companies opened up their capital, and through the stock market, offered shareholders the ability to sell their shares for liquid assets. The shareholder base became disparate, and its power over board members became diluted.
In the post-war era, managerial capitalism became the most prevalent practice. Board members were emancipated from shareholders and controlled the company on the basis of their “technical” knowledge. This created a technocracy. The interests of the two parties were no longer aligned. Board members sought corporate growth and continuity, inserting employees into organisational pyramids. But this configuration did not always lead to the best efficiency or profitability, creating conglomerates that were often heavy and lacking in agility, which too often neglected shareholder interests.
In the 1980s, alongside financial globalisation, shareholders reminded board members of their existence and of the priority of maximising wealth. This change translated into the creation of committees (audit, compensation and appointment, strategy, etc.) and the development of incentive mechanisms (bonuses, stock options, etc.), to align the interests of the board members with those of the shareholders. A whole series of indicators was imposed (return on equity, distribution rate, etc.), in the same way the doctrine of value creation was developed. And if results were not achieved, shareholders allowed “raids” that organised offensive power takeovers to optimise value, sometimes by cutting out previously established groups. In parallel, these various compensation tools based on the growth of corporate value promoted innovation by allowing “start-ups” to recruit talent that shared in the company’s risks when salaries alone were not enough to tempt them.
But shareholder capitalism rapidly reached its limits. Because expected financial yields seemed guaranteed, speculation often outweighed reasonable gambles. To meet minimum short-term profitability standards (15%, regardless of the activity sector and risk-free interest rate, in the 1990s and 2000s), many companies bought back their shares to strengthen their securities and/or increase their leverage ratio. Board member income experienced growth that was difficult to justify. In 1965, the average income of a CEO of a major American group was 44 times that of a worker. In 2000, it was 300 times the lowest salaries. Even more serious, in the face of expected yields that were disconnected from reality, we saw the appearance of unethical creative accounting: Enron, WorldCom, Parmalat and others even more recently. In some respects, subprimes and their consequences stem from the same phenomenon.
The crises of 2000-2003 and 2007-2009 resulted directly or indirectly from this, along with their shares of very significant economic and social costs.
Hence the need to address a new age in governance, that of true cooperative capitalism that is able to put the company’s clients, employees, and the environment, in particular, back alongside shareholders, in a model better adapted to ongoing commercial, behavioural, ethical, managerial, and technological revolutions.
Shareholders must always hold a central place as principals for board members. This is because, in theory, they assume the risk without any certainty of future yield. The practice has made shareholders partly protected against negative changes in the business context by partially spreading the risk to other corporate stakeholders: to employees, for whom variability of compensation or employment has increased; and to sub-contractors, whose margins for negotiation with their ordering customers have significantly weakened. Sometimes clients are also balancing items, through the lower product safety or accelerated obsolescence imposed on them. The climate is also affected by corporate choices.
Therefore, it must be possible to take better consideration of these stakeholders within a balanced governance framework, as they also share in the company’s risk, and because over the long term a company is responsible to all of them. Regulatory methods that help achieve the best compromises among them must guarantee sustainable and profitable development for the company.
For this reason, by the fact that their clients are owners and elected members of the boards of administration, by their decentralised model that strengthens close relationships not only with the clients they serve, but also with the territories in which they operate in symbiosis, and lastly by the attention and role they give to employees without sacrificing any of efficiency, cooperative or mutual banks represent an interesting possible form for redefining the company with expanded governance. It is up to them to take advantage of new technologies that would help further strengthen the validity of their model and modernity.
It is up to each type of company, listed, private, or cooperative, large or small, to reinvent the definition of the company and its governance, to make it a real cooperative organisation. The future of our open economies and democratic societies also depends upon this
