During a hearing on the development of central bank-backed digital currency (CBDC), U.S. Senator Elizabeth Warren lashed out on digital assets, criticizing their roles in facilitating scams, pollution, and ransomware attacks.
Cryptos are lousy and volatile
Warren began her statement by calling cryptocurrencies a “fourth-rate alternative to real currency.” According to her, they represent “a lousy way to buy and sell things,” “a lousy investment,” and “a haven for illegal activity.” She explained:
Unlike the dollar, their value fluctuates wildly depending on the whims of speculative day traders. In just the last two months, the value of Dogecoin increased by more than tenfold and then declined by 60%. That may work for speculators, and fly-by-night investors, but not for regular people looking for a regular source of value to get paid in and to use for day-to-day spending.
Warren’s disapproval does not end with Bitcoin or Dogecoin. She believes that most cryptocurrencies are extremely volatile, and as such, they are not fit to be used as a medium of exchange. Furthermore, she cites the lack of consumer protection laws in the sector, which often leaves victims of scams with little to no legal recourse.
She also zeroed in on stablecoins, asking Columbia Law professor Lev Menand whether they are indeed stable and could serve as a reliable alternative to CBDCs. Menand is response voiced his skepticism, noting that “[stablecoins] are dangerous to both their users, and as they grow, to the broader financial system.”
For Menand, storing wealth in stablecoins could become dangerous if people begin to lose their confidence in an asset. This could result in a mass exodus and “The people who are slow to get out could be left with significant losses,” he explained.
Cryptos are used for illicit financing
Commenting on how cryptocurrencies facilitate illegal activity, Warren referenced the recent ransomware attacks on Colonial Pipeline and JBS. In both cases, the attackers demanded crypto payments.
Every hack that is successfully paid off with a cryptocurrency becomes an advertisement for more hackers to try more cyberattacks.
Warren’s concerns appear to highlight the differences between the benefits of crypto as articulated by its supporters, and the reality of how the technology is currently being used. She believes that “crypto’s promises haven’t come to pass.”
Cryptos are bad for the environment
Warren’s final argument bothered around Bitcoin’s environmental impact, a narrative that has become the most common critique of the leading digital asset.
“Many cryptocurrencies are created through “proof-of-work” mining that involves using computers to solve useless mathematical puzzles in exchange for newly minted cryptocurrency tokens. Such mining has devastating consequences for the climate. Some crypto mining is set up near coal plants, spewing out filth in return for a chance to harvest a few cryptocoins.
Rightfully so, Bitcoin has come under a lot of fire for its high energy consumption, which is typically drawn from fossil fuels. The issue was recently brought to the limelight by Tesla’s CEO Elon Musk following an announcement that his company was ditching Bitcoin as a payment option due to environmental concerns. Since then, a few countries, particularly China and Iran, have moved to ban crypto mining activities.
Are her points valid?
While Warren may be right about Bitcoin’s volatility, its use as a tool for illicit activities does not hold a lot of water.
In January, Treasury Secretary Janet Yellen voiced similar sentiments. However, this was debunked with hard data.
Data from Chainalysis gave an insight into the percentage of crypto transactions that went into criminal financing in 2019 and 2020. In 2019, about 2.1% of all crypto transactions had links to criminal activity. This was roughly $21.4 billion in transaction volumes. By 2020, this figure had dropped to a mere 0.34%, which represents about $10 billion of the entire crypto transactional volume in 2020. On the flip side, the UN estimates that between 2% and 5% of global GDP, which is between $1.6 trillion and $4 trillion, is used for illicit financing and laundered every year. Put succinctly, criminal activities involving fiat currencies are 160 times more than the crypto industry.
Speaking of Bitcoin’s volatility, the senator’s arguments are very valid. In mid-May, Bitcoin set a new all-time high of nearly $65,000 after several months of sustaining its Bull Run. However, less than two weeks after surpassing $60k, the market crashed by nearly 50%. Although Bitcoin’s volatility makes it unfit as an everyday means of payments, some proponents have hyped its viability as a store of value.
Warren is also right about her concerns over Bitcoin’s energy usage. If Bitcoin were a country, it would be the 33rd largest energy user in the world. An argument in favor of Bitcoin claims that the digital asset consumes less than the traditional banking and gold mining industries. Furthermore, supporters of the cryptocurrency are taking significant steps to transition to renewable energy sources. With this in view, Warren’s concern on this subject may soon become non-existent.
In conclusion, some proponents believe that the war against Bitcoin and cryptos is more of a supremacy battle than its actual utility as a medium of exchange. Billionaire Ray Dalio, for instance, has consistently warned investors that governments in trying to retain their monopoly over money will ban Bitcoin.