Economic Turmoil: The Chances and Challenges for Blockchain and Crypto
Fears of recession. Political uncertainty. Hyperinflation. What are the chances and challenges for crypto and blockchain during the current economic turmoil?
Everywhere you look these days, there’s turbulence in the economy. A bitter trade war is seeing the United States and China slap ever-increasing tariffs on goods on a tit-for-tat basis. Over in the United Kingdom, never-ending uncertainty shrouds Brexit, with politicians in Westminster and Brussels at an impasse over the country’s imminent departure from the European Union.
A shock election result in Argentina caused the peso to crash, while hyperinflation in Zimbabwe and Venezuela means everyday essentials are dramatically rising in price on a daily basis. On top of all that, protests continue in Hong Kong amid concerns about interference from the Chinese mainland.
And this is just a snapshot of what’s happening in the global economy at the moment. It’s little wonder that fears of a recession are growing. The services sector represents 80% of gross domestic product in the U.K., and at the start of September, a closely watched survey suggested growth had slowed to a crawl in July. Given that Britain’s economy contracted in the second quarter, another three months of decline would officially signal that a downturn has begun. Stateside, investors were spooked by an inverted yield curve, where short-term Treasury bonds yield more than long-term bonds. This indicator has successfully predicted every U.S. recession for almost 60 years.
Here’s the question: With the global economy in such disarray, is there an opportunity for cryptocurrencies and blockchain to save the day? In this article, we’re going to look at the chances and challenges facing the industry right now — as well as how this technology is already making an impact.
Crypto and blockchain: The chances
First, let’s take a look at the positives for crypto and blockchain — for, after years in the wilderness, some central banks are beginning to explore how the sector can enhance their economies. Back in August, the U.S. Federal Reserve unveiled plans to release a real-time payments and settlements service that would enable funds to be transferred quickly and around the clock, including weekends. Ripple Labs was also elected to the central bank’s Faster Payments Task Force Steering Committee — a milestone that shows financial institutions are in listening mode.
There have also been positive murmurings from organizations that have, until now, been skeptical about crypto’s potential. The European Central Bank (ECB) has barely hidden its cynicism about the industry in the past, maintaining that Bitcoin (BTC) is not a real currency and crypto doesn’t factor into the real economy. But in a sign that a changing of the guard could result in softening attitudes, the nominee to be the next ECB president — Christine Lagarde, the current head of the International Monetary Fund — has said central banks should be open to cryptocurrencies and the wider social benefits they could bring.
Elsewhere, there is increasing evidence that BTC has been relied on as a safe haven during times of economic turmoil. Financial analysts have maintained that retail investors are relying on the dominant cryptocurrency as a hedge against the turbulence caused by the U.S.-China trade war — prompting some to describe Bitcoin as “digital gold.” Telling evidence of this came in the middle of August, as BTC prices tumbled by more than 7% when tensions between the two economic superpowers appeared to ease.
This sentiment has also been spreading from retailers to everyday consumers. The political uncertainty in Hong Kong has seen some protesters turn to cryptocurrency so they don’t leave a trail of payments for the government to investigate. A spike in demand there led to locals paying a premium of about $300 per Bitcoin when compared with exchanges elsewhere. Premiums of $420 were seen when Mauricio Macri suffered a shocking defeat in Argentina’s presidential elections. And in Venezuela, records for Bitcoin trading volumes are continuously being broken because of its weakening national currency.
Crypto and blockchain: The challenges
As with most things in life, there are always two sides to the story. Focusing on the positives for crypto and blockchain would be neglecting some very real and pressing challenges facing the industry — challenges that extend beyond scalability and security. It has been well-documented that many blockchain networks struggle to compete with the capacity of traditional financial giants, and it is undeniable that repeated hacks have dented consumer confidence and stymied mainstream adoption. Although it is incumbent on the industry to find solutions to these very real problems, there are other issues that lie firmly out of their control.
Critics argue that fragmentation — the current existence of thousands of competing cryptocurrencies and countless blockchains — means the industry struggles to work in unison and speak with a single voice. This has been coupled with a disjointed approach to regulation, with nations around the world taking contradictory stances on crypto’s legality, meaning startups are free to operate in some jurisdictions but banned in others. Whereas a new coin might be welcomed with open arms in Japan, the simple act of owning crypto in India could potentially result in jail time.