Frances Coppola: Join the Financial System, or Fight It


This was an extraordinary year. There has not been a pandemic of this magnitude in a century. And although far fewer people have died from COVID-19 than in the “Spanish flu” of 1918-19, the economic damage is likely far worse. Governments closed large swaths of their economies to prevent the virus from spreading and took out loans to support businesses that couldn’t trade and people who couldn’t work. Central banks cut interest rates to the bone and poured money into financial markets to stave off a deflationary collapse. There are no more returns on capital towards the end of 2020 and fears of inflation are rising. So it’s no surprise that 2020 will end with a cryptocurrency boom.

In 2020, the fate of cryptocurrencies was largely determined by the central banks. When the financial markets collapsed in March, cryptocurrencies fell even more than traditional asset classes. Bitcoiners want us to believe that the halving in May contributed to the rebound in Bitcoin price. However, the fact is that cryptocurrencies recovered when central banks poured money into the financial markets. Continued infusions of fiat money caused the prices of all assets to spike, and cryptocurrencies were no exception.

This post is part of CoinDesk’s 2020 Year in Review – a collection of posts, essays, and interviews about the year in Crypto and beyond. Frances Coppola, a CoinDesk columnist, is a freelance banking, finance, and business speaker and writer. Her book “The Case for People’s Quantitative Easing” explains how modern money creation and quantitative easing work and advocates “helicopter money” to help economies out of recession.

Central bank injections of fiat money in particular have fueled the rise and proliferation of stablecoins, which are tying the crypto ecosystem ever closer to the existing financial system. All of the fiat money had to go somewhere, and thanks to the central banks’ zero and negative interest rate policies, the return on conventional assets is next to nonexistent. So why not flutter the crypto markets while having the option to get back into fiat quickly if everything goes wrong? Stable coins may be more smoke and mirrors than a real safety net, but they seem to give a growing number of people the confidence to trade cryptocurrencies.

The crash in March also showed that, contrary to the hopes of Bitcoiners, institutional investors do not regard Bitcoin as a “safe good”. They dumped bitcoin and poured their money into traditional safe havens – dollars, yen and Swiss francs. And Bitcoin’s rebound since then has followed the rise in stocks and corporate bonds pretty closely, albeit with slightly more volatility. Despite all the money pressures from the central bank, investors do not see inflation as their main risk, or if they do, they do not see Bitcoin as a good hedge against inflation. They are buying bitcoin and other established cryptocurrencies as high-risk assets to spice up their yield-hungry portfolios.

In the crypto world, Bitcoin is now firmly established as the most important “secure good” for secured DeFi loans, alongside ether and certain stable coins. Depending on your point of view, Bitcoin and Ether are either stand-alone high-risk, high-yielding assets or secure collateral for high-risk, high-yielding loans and advances.

If the cryptocurrency community chooses to adapt, the cryptocurrency can find widespread adoption – but at the price that it will eventually be incorporated into the financial system it is intended to replace.

This fork reflects the gap between those for whom the crypto world is “home” and those for whom it is an unknown sea full of bloodthirsty monsters. Even seasoned crypto investors can find crypto markets terrifying: it is not surprising that traditional investors have so far been reluctant to do more than dip their toes.

But that doesn’t mean that traditional finance isn’t interested in cryptocurrencies. On the contrary, cryptocurrencies are becoming the high-yielding asset of choice for many institutional investors. And as cryptocurrencies become easier to buy, hold, and trade, more and more ordinary people are investing in them too.

Indeed, the ease with which retail investors can purchase cryptocurrency using credit cards is worrying: credit cards are debt, and cryptocurrency trading is a high risk activity by all standards. In the past, every time there was a debt-fueled cryptocurrency bubble, people were broken. And as I write, the cryptocurrency is bubbling again.

When crypto bubbles appear, regulators wake up. This extraordinary year ends with news that the Financial Crimes Enforcement Network (FinCEN) wants to end anonymity for transfers from crypto exchanges to private wallets. The idea seems to be to balance crypto with traditional banking.

See also: Frances Coppola: Banks are toast, but Crypto has lost its soul

It is arguably unfair that traditional banks have to meet strict customer / anti-money laundering (KYC / AML) requirements that crypto exchanges do not know about. Crypto enthusiasts would no doubt reply that the solution is to end the KYC / AML requirements and not impose them on the people transferring coins to their own private crypto wallets. However, the introduction of this new rule could make cryptocurrencies more attractive to large institutional investors.

And therein lies the dilemma for the cryptocurrency. We could say it’s at a fork in the road. Will the community choose to stick to the rules of the existing financial system? Or will it reject these rules, break the ties that bind it to the existing system, and become a parallel financial system, setting its own rules and operating largely outside of existing law?

If the cryptocurrency community chooses to adapt, the cryptocurrency can find widespread adoption – but at the price that it will eventually be incorporated into the financial system it is intended to replace.

However, if the cryptocurrency community chooses to split, the path eventually leads to direct conflict with those whose job it is to enforce the existing laws. Who will win?