In the last decade, certain assets known generally as “virtual currencies” or “cryptocurrencies” have proliferated throughout the world, among which bitcoin is the most prominent example. They are elements that aim to invigorate and modernize the financial system in the coming years, but to assess their validity as an investment alternative or their use as a means of payment, it is necessary to keep in mind the multiple risks they generate.
Because, in effect, they are not backed by a central bank or other authorities. They cannot be considered as a means of payment, as their circulation is very limited. Their value fluctuates strongly, so they cannot be considered a good store of value or a stable unit of account. Their prices are formed in the absence of effective mechanisms that prevent their manipulation, unlike what happens in regulated securities markets. They are not covered by customer protection mechanisms, such as the Deposit Guarantee Fund or the Investor Guarantee Fund. There is no framework in the European Union that regulates them, and that provides guarantees and protection similar to those applicable to financial products. Many of these cryptocurrencies lack the necessary liquidity to be able to undo an investment without suffering significant losses. Its cross-border nature means that the resolution of any conflict is very costly, in addition to being outside the scope of the Spanish authorities. In addition, experience shows that the lack of information and its highly speculative nature leave investors very unprotected against possible fraud, scams or theft.
Cryptocurrencies have been increasingly successful over the last decade, mainly due to the extraordinary quantitative expansion of the money supply and the low and even negative interest rates recorded in recent years; In this environment, many cryptocurrencies have proven to be financial assets capable of acting as a store of value in the face of the devaluation of official money suffered in many countries, protecting the savings of those who have invested in them, although they do not really serve to buy something concrete and tangible. in the market.
However, in recent months it has been observed how these currencies are suffering a severe correction in their value. After reaching record prices, the change in the economic outlook and the return to a certain financial normalization with expectations of interest rate hikes in the markets, seem to have changed the market dynamics of these digital assets. If from the beginning of 2020 to November 2021 its value multiplied by 13.4, so far in 2022 its value has fallen by almost two thirds. Thus, the market value of the world's top 500 cryptocurrencies has plummeted from a high of $3.2 trillion in November 2021 to $1 trillion today.
Although it is difficult to make predictions about the future evolution of these assets, what these falls do seem to have highlighted is their limited ability to become safe-haven assets against inflation, as well as their limited ability to withstand currency changes.
«The European institutions, and in particular the European Central Bank, have pronounced themselves in favor of cash, its values and its benefits for society»
Given this phenomenon, it is important to highlight how financial education is essential for the management and operation of cryptocurrencies and the new digital finances; especially given the high exposure of youth to these assets. If the percentage of Spaniards who have invested in cryptocurrencies is estimated at 12%, this percentage is much higher, almost double, among young people. One reason may be the special difficulties they have in accessing the labor market, which is why they are attracted by the apparent high returns on these investments and by their belief that they know this type of technology more thoroughly than their elders. However, recent events show how the lack of financial culture is generating large losses in their investments.
Faced with this type of asset, which in most cases has a high speculative component, it is important to highlight the role and advantages of cash. The European institutions, and in particular the European Central Bank, have declared themselves in favor of cash, its values and its benefits for society. And in particular for social inclusion and access to basic services, calling for legislation that harmonizes the acceptance of cash at a European level.
The aggressive digitization of payment methods has generated a major alarm regarding the financial and economic exclusion of large layers of the population. For all these reasons, it is necessary to alert public institutions to the risks and irreversible consequences for the economy and society of the limitation of cash. This would bring with it social risks due to growing financial exclusion, as well as risks of territorial disintegration that especially affect rural areas; security risks, as industries or areas may be left unprotected against cyberattacks or network outages; lack of alternative means of payment in emergency situations; and economic risks, in those cases, sectors and areas where cash is essential for the development of commercial and commercial activity.
For this reason, the legislative provision that came into force on May 28, by which businesses and public administrations have the obligation to accept cash as a means of payment, with non-compliance being subject to a fine, deserves a special mention. of a Decree Law that partially modifies the Consumer and User Protection Law and that reflects common practices in Europe and the United States. Something to keep in mind for "bitcoin" worshipers.
Javier Rupérez is president of Denaria