Foreword
This study is first and foremost an inventory of the current situation. Numerous reports have addressed the weight of cryptocurrencies in international relations. Our aim here is to provide a broad, synthetic overview of most of the interrelated economic, financial, social, political and geopolitical issues at stake. Based on this analysis, we have reported on the most widely accepted propositions, while considering the impact of Donald Trump’s return to the White House on the cryptocurrency universe. We have also attempted to report on the foundations of the authorities’ political decision and to highlight their own dilemmas.
Thus, the issues we pose are as follows:
- Is it possible to make an overall assessment of the risks associated with the development of these cryptocurrencies?
- What are the ambitions for cryptocurrencies in the MAGA project?
In the first part, we look back at the points of convergence between the American and crypto communities. Indeed, the liberal culture and the utopia of a currency escaping state control are key factors in understanding the development of virtual currencies across the Atlantic. Nevertheless, we’re going to problematize this myth by demonstrating that, in truth, cryptos, and Bitcoin in particular, offer nothing more than pseudo-anonymity.
In the second part, we outline the risks and limitations associated with cryptocurrencies. Firstly, societal, with mental health issues at stake through the risk of speculation and addiction to quick profits. Then there’s the risk of destabilizing financial markets through the high structural volatility of Bitcoin’s value, or the mimetic and sheep-like behaviors that inflate the value of Dogecoin, for example. We can add the growing integration and interconnection between cryptoactives and the traditional financial system, which is a matter of concern for public authorities. Beyond a certain level of exposure, a crisis in the cryptoasset sector would mechanically spread to the wider financial system, with profound consequences for the economy in general, such as credit contraction phenomena. Another risk we highlight is the fragility of Bitcoin’s industrial architecture, which entails reliability and resilience risks for exchange platforms.
In a third section, we report on the international financial order in the age of cryptocurrencies. We explain how Bitcoin and other cryptocurrencies are unlikely to pose a challenge to the dollar’s status as a reserve currency. Although the Bitcoin market is large, it remains small compared to dollar-dominated bond or money markets. As monetary and bond assets are dependent on the currency’s interest rates, this makes cryptos difficult to dissociate from the national currency, which therefore remains predominant. We should also add that Bitcoin’s volatility is another almost insurmountable reason for its widespread adoption as a reserve asset. Finally, abandoning the supremacy of the dollar in favor of Bitcoin or any other cryptocurrency would be counterproductive for the leaders of the United States of America. We also discuss how Bitcoin could counter a BRICS digital currency with its liberal model in opposition to the digital yuan controlled by a Chinese central bank.
Recommendations
While it’s true that cryptocurrencies represent a currency of the future, there are still risks to be taken into account that are linked to their development, and right from the start. That’s what the recommendations in this report aim to do.
- Insufficient or inadequate regulation of cryptoassets is considered to be the main risk factor. Indeed, cryptocurrencies are currently being used for illicit activities such as money laundering, terrorist financing and circumvention of international sanctions, beyond the control of governments. In addition, the growing integration and interconnection between cryptoassets and the traditional financial system is a source of concern for public authorities. Beyond a certain level of exposure and without sufficient regulation, a crisis in the cryptoasset sector would mechanically spill over into the wider financial system, with far-reaching consequences for the economy in general (‘echo chamber’ effect). It is therefore essential to establish a clear and effective regulatory framework for the development of cryptocurrencies. Of course, there is a delicate balance to be struck between data protection and confidentiality versus private interests and those of public agencies. The US Securities and Exchange Commission (SEC) has made it clear that bitcoin does not meet the criteria to qualify as a “security” according to the Howey Test, a legal test based on several criteria, one of the most important of which is the expectation of profit from the efforts of others. Bitcoin, being completely decentralised, does not meet this criterion. As it is not considered a security (unlike stocks and bonds), it is ipso facto less regulated and more complex to regulate. In particular, it is virtually impossible to identify a single entity that could be responsible for regulation, as transactions are verified by a network of participants (miners) spread across the globe, making the coordination and enforcement of rules complex.
- As for private actors, they will have to adapt to the greater influence of cryptocurrencies in the global economy. International credit rating agencies could increase the extent to which their ratings take into account the exposure of a country’s banks to cryptoassets, whether through direct investments, loans to companies in the sector, or the collection of money invested in exchange-traded funds (ETFs) composed of cryptocurrencies.
- The social risks and addictions specific to these cryptoassets need to be prevented, and the psychological mechanisms involved, such as FOMO (fear of missing out) and the addiction to fast money, need to be identified and understood. Public policies to prevent these risks seem essential.
- Bitcoin should not be developed to “compete” with the US dollar. The use of a financial asset for geopolitical purposes could very quickly undermine its value in the absence of an underlying value or majority use for the settlement of international commercial transactions. In this respect, bitcoin’s scalability remains a major issue, i.e. its ability to evolve and the capacity of its network to handle an increase in demand and workload without degrading performance.
- Trump’s political plans for “business and finance intelligence” require more in-depth studies of sequencing, financing and overall economic cost. In particular, financing large strategic reserves of bitcoin could have a significant inflationary cost, especially in the current context. Although it was rarely the sole cause, it is important to remember that most of the great empires of the past collapsed as a result of excessive debt and money creation, combined with inflation and currency depreciation.
