For the last several years, the market for cryptocurrencies maintained a polarizing yet prominent presence in the eyes of governments, businesses and the public. Following its enormous crash in May of 2022, however, the crypto market has largely vanished from the public eye. Despite the recent trend in market valuation and public sentiment, cryptocurrencies — though flawed in their current state — provide undeniable benefits, such as greater financial inclusion and enhanced security. Government regulation and broader public acceptance will allow cryptocurrencies to cement their rightful place in our economy’s future.
The world’s first decentralized cryptocurrency, Bitcoin, was unveiled in 2009. Bitcoin spearheaded the creation of a new market that utilized cutting-edge innovations in digital technology and blockchains, promising a new era for finance and currency. Come 2019, the crypto market seemed to be going nowhere but up. Granted, there were ebbs and flows, but the general forecast of the crypto market seemed overwhelmingly positive. Throughout 2020 and 2021, the crypto market saw an exponential rise in popularity as it blazed through a number of milestones: The total market capitalization of all cryptocurrencies peaked at a staggering $3 trillion, El Salvador became the first nation to adopt Bitcoin as legal tender and new creations such as the metaverse — an immersive environment of virtual reality — and decentralized finance — the use of new decentralized technologies to bypass central financial intermediaries — were developed on the foundations of the crypto market.
This year, however, saw a sharp downturn in crypto’s prospects. Starting in January, there was a tremendous fall in the valuation of top cryptocurrencies. Bitcoin fell from a dizzying peak of a market price of over $67,000 in November 2021 to around $20,000 for the past several months. Ether, the flagship cryptocurrency of popular decentralized blockchain technology Ethereum, mirrored Bitcoin’s plunge, falling from over $4,700 in November to just over $1,000 today. Of course, one cannot exclude the collapse of TerraUSD, a widely used algorithmic stablecoin that was pegged to the dollar. Investors around the world suffered mammoth losses; El Salvador lost more than $60 million on its Bitcoin gamble, worsening already declining economic growth and a growing deficit. This dramatic crash begged the question: Is crypto really the future?
The crash reminded us all that cryptocurrencies, as innovative and futuristic as they may be, are still highly volatile. It is indisputable that crypto is more widely accepted: Universities and large businesses accepting crypto as a form of payment and central banks discussing the merits of central bank digital currencies are just two examples. Yet, cryptocurrencies still seem unable to shake off the perception of being volatile investments. When the price of Luna — the stabilizing counterpart to TerraUSD that hit a market capitalization of over $40 billion earlier this year — fell to essentially zero due to algorithmic failure, it reinforced this perception.
Nonetheless, cryptocurrencies must still be the future, as they offer just too many benefits to write off. By bypassing banks and other centralized financial authorities, cryptocurrencies offer greater financial inclusion and accessibility — anyone with a device can create a cryptocurrency wallet in a matter of seconds, without the need for an ID or good credit scores. Due to the decentralized nature of the blockchain, crypto offers enhanced security and privacy. Lower transaction costs are yet another benefit. While you may be required to shell out a hefty sum for wire transfers facilitated by banks, you can transfer money across the world in seconds for a fraction of the cost using crypto.
What is needed more than ever is for cryptocurrencies to be recognized as formal means of exchange among everyday consumers. How should this be done? For one, governments should regulate the crypto space. Not only will regulation help limit massive failures such as the downfall of Terra, but they also show the government’s acknowledgment of cryptocurrencies and their potential role in our world. While regulation may stifle innovation in an extremely fast-moving space like crypto, it will also protect investors and build trust. Through regulation, crypto would obtain the implicit backing of the government, something that is desperately needed to alter crypto’s reputation of unpredictability.
The issuance of central bank digital currencies by the world’s central banks is a key move that will also be essential for preserving the future of crypto. CBDCs are digital equivalents of a nation’s currency. Although CBDCs are not the same as cryptocurrencies — cryptocurrencies tend to be decentralized, whereas CBDCs are centrally administered — they offer many of the same benefits, including bolstering financial inclusion, lowering transaction costs and digitalizing the economy. Despite growing interest in CBDCs, the Federal Reserve remains reluctant to embrace digital currency due to risks of financial instability and weaker efficacy of monetary policy. Though their concerns are well founded, the nation’s policymakers must understand that issuing CBDCs will not only modernize and optimize the nation’s economy, but also act as a stepping stone for broader public acceptance of the crypto space.
Despite the hiccups that the market has experienced this year, cryptocurrencies are the future. What is needed more than ever, however, is government regulation. The government’s stamp of approval on cryptocurrencies will institutionalize the crypto world. The acceptance and usage of the crypto space by governments in the form of digital currencies will cement this process. When people begin to see cryptocurrencies permeate the formal economy, the crypto space will emerge from the shadows, casting away a blanket of volatility and risk.
