Bitcoin was
created (by a person or group that remains unidentified to this day) as
a way to conduct transactions without the intervention of a trusted third party, such as a central bank or financial institution.
It has no intrinsic value and is not backed by anything. Bitcoin devotees will tell you that, like gold, its value comes from its scarcity—Bitcoin’s computer algorithm mandates a
fixed cap of 21 million digital coins (nearly
19 million have been created so far). But scarcity by itself can hardly be a source of value. Bitcoin investors seem to be relying on the greater fool theory—all you need to profit from an investment is to find someone willing to buy the asset at an even higher price.
Facebook plans to issue its own cryptocurrency called
Diem intended to make digital payments easier. Unlike Bitcoin, Diem would be fully backed by reserves of U.S. dollars or other major currencies, ensuring stable value. But, as with its other ostensibly high-minded initiatives, Facebook can hardly be trusted to put the public’s welfare above its own. The prospect of multinational corporations one day issuing their own unbacked cryptocurrencies worldwide is deeply disquieting. Such currencies won’t threaten the U.S. dollar, but could wipe out the currencies of smaller and less developed countries.
These developments and the possibilities created by the new technologies have spurred central banks to consider issuing digital versions of their own currencies.
China,
Japan, and
Sweden are already conducting trials of their digital currencies.
Ironically, rather than truly democratizing finance, some of these innovations may exacerbate inequality. Unequal financial literacy and digital access might result in sophisticated investors garnering the benefits while the less well off, dazzled by new technologies, take on risks they do not fully comprehend. Computer algorithms could worsen entrenched racial and other biases in credit scoring and financial decisions, rather than reducing them. The ubiquity of digital payments could also destroy any remaining vestiges of privacy in our day-to-day lives.
