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Lex Megatrends. The Crypto Revolution. Anarchy has not conquered the UK despite the predictions of the Sex Pistols. But a version of it is gaining traction in finance worldwide. Cryptocurrencies such as Bitcoin have bedazzled investors and are entering the financial mainstream. Cryptos embody a core tenet of anarchism, co-operation in the absence of centralised authority.
The financial establishment is worried. In this video we predict where it may all end. The invention of Bitcoin in the noughties is credited to the pseudonymous Satoshi Nakamoto. He, or perhaps they, had the revolutionary idea of creating a decentralised currency. Bitcoin deals are recorded in a public distributed ledger, a database accessed and managed by multiple participants.
They verify transactions by solving cryptographic puzzles and are paid in Bitcoin. But Bitcoin is a flagship with flaws. Criminals favour the currency, which sometimes resembles a Ponzi scheme. It is polluting. It is volatile. And Bitcoin is too clumsy to be handy for everyday transactions.
Despite this, Bitcoin has done something truly remarkable. It has shown that a decentralised digital currency can suck in billions, thanks to healthy dissent, base greed, lofty idealism, and sheer fear of missing out. It was valued at over $1tn in late October, 2021. The crypto universe was valued at some $2.4tn. That compares with the UK GDP of $2.7tn.
Lex is still sceptical about Bitcoin's value. We don't like European bank stocks, or Brussels sprouts, either. But we believe digital assets will disrupt finance. Central banks fret that cryptos could destabilise financial systems. Bitcoin is 12 times more volatile than the S&P 500 index. A prolonged bear market could bring it down to earth with a bump. That would hurt leveraged investors most. Stablecoins pegged to official currencies would increase, rather than dampen risks, if assets and liabilities were mismatched.
Official currencies help governments stay in charge, alongside police and armies. Establishments fear cryptos will undermine their power, as well as financial stability. That is why China has launched a digital yuan for retail transactions. The European Union plans to introduce a digital euro. Europeans could end up depositing some of their cash with the ECB, or national central banks, such as the German Bundesbank.
Central bankers are too high and mighty to service retail customers. Commercial banks would do that for them, somehow. Digital euros or dollars or pounds wouldn't generate easy profits for banks, though. Funding costs would go up if their own deposits fell. In a crisis customers might leave them in droves.
Digital assets create opportunities for banks, too. Many are hiring teams of crypto experts to advise clients and their own senior management. Official regulation of digital assets will make their jobs easier. Eventually low-friction dealing in stocks and bonds, using public ledger technology, will hit profits for some but raise it for others.
Lex believes the financial establishment will struggle to assimilate digital assets. But assimilate them it will. Some cryptos will stay forever on the margins. But anarchism in finance, as in politics and music, is very vulnerable to sell-outs. As crypto bros take jobs in the City and on Wall Street the idealists may ask one another the question posed by Johnny Rotten of the Sex Pistols: "Ever get the feeling you've been cheated?"