The unprecedented flows into and returns from the asset class, the UK Financial Conduct Authority (FCA) issued a warning to investors on 11 January 2021 that they could lose some or all of their money investing in bitcoin. The FCA is concerned that: consumers may not be protected from money laundering given the incomplete regulatory framework for crypto assets; the price volatility puts consumers at risk of extreme losses; the complexity of the products, particularly with crypto-derivatives, make it difficult for consumers to fully understand the risks; and there may be liquidity issues when trying to convert crypto back to cash.
Next frontier for crypto is central bank digital currencies. Sovereigns are already positioning to create digital fiat as crypto begins to challenge bank issued currency. In fact, crypto does particularly well in those countries with macro headwinds. This is the point really, in economics there has long been the concept of “money illusion”. If you believe that fiat money is real or well-governed, you clearly haven’t thought through quantitative easing properly or spoken to any Zimbabweans and Argentinians lately. Some magic internet blockchain money may just give central banks the challenge they need to start thinking about ways in which they could make money as a public good more efficient. The announcement that the UK is to investigate creating its own “Britcoin” alongside the efforts towards digital yuan and euro, means the crypto and blockchain are here to stay.