Tyler Cowen, an economist and professor at George Mason University, has suggested that the major use cases of cryptocurrencies are mutually exclusive. He argues that cryptos can be either important instruments for hedging inflation or useful forms of payment, but not both.
The threat regulation
The professor adds that despite popular claims by some that bitcoin will replace the US dollar as the world’s reserve currency, the digital asset remains too volatile to serve this purpose.
Write in an opinion piece, the economist admits that “there is a demand for a non-intermediary, direct payment method, and crypto can fulfill that function.” However, Cowen, whose piece begins focusing on stablecoins, explains that while these may seem appealing to users who want to “transfer something in dollars but with crypto-like features,” they still come with risks. Cowen expands on this view:
First, the stablecoin peg to the dollar could one day be broken, an old problem with pegged exchange rates that Milton Friedman often warned about. Second, to the extent that stablecoins and other crypto assets become an important part of the financial system, they will receive more regulatory attention.
Cowen believes that governments such as those in the US have already shown that they are against “a financial system that is developing beyond the reach of regulators.” Consequently, these governments will respond to the rise of stablecoins by imposing restrictions or regulations that will “limit many of their advantages over the traditional banking industry.”
Crypto Tax Evasion
Likewise, Cowen agrees that “crypto assets such as bitcoin or ether” can be useful in hedging against inflation or as “speculative vehicles”. However, he states that “you probably wouldn’t want to use them (BTC and ETH) as your primary purchasing tool. Bitcoin and ether can only be used for “a modest portion of your purchases.” However, for large purchases, Cowen cautions:
It’s too risky to make them the bulk of your checking and savings accounts. The dollar, euro or, for that matter, the Mexican peso are nowhere near as volatile.
Finally, in an effort to support his position on cryptocurrencies, Cowen reiterates the claim that people are drawn to digital currencies because they want to avoid paying taxes. Cowen warns that such “crypto tax evasion is better suited as a marginal than as a mainstream enterprise.”
The economist ends his op-ed by pointing out that “the more utopian scenarios for crypto, whether proponents realize it or not, rely on the idea that crypto remains marginal and mainstream at the same time. That will be a tough trick to pull off. “
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