There’s a ‘fatal’ flaw in cryptocurrencies which means they can never be real currencies

LONDON — Cryptocurrencies like bitcoin and ether will never become true currencies because of a series of “fatal” flaws, a senior economist at the Swiss banking giant UBS says.

At a roundtable discussion attended by Business Insider on Thursday, Paul Donovan, the global chief economist at UBS’s wealth management arm, tore into the argument that cryptocurrencies could eventually replace fiat currencies like the pound and the dollar.

“The problem that cryptocurrencies face is that they fail the two key metrics of what makes a currency a currency,” Donovan said. “A currency has to be a widely used medium of exchange. Cryptocurrencies are never going to achieve that. Period.”

One of the main reasons for this, Donovan said, has to do with taxation and the inability to use cryptocurrencies to settle tax liabilities.

“The reason I’m so definite about this is that if you look in the OECD, on average, 34% of all economic activity is taxed,” he said, using the abbreviation for the Organisation for Economic Co-operation and Development. “Governments are not likely to accept cryptocurrencies that they do not control” to settle taxes.

He continued: “Cryptocurrencies that they do not control will not be accepted by governments for tax payments. You are therefore removing one of the main sources of demand for a currency. One of the key issues, whenever we talk about monetary economics, is that the money supply should never, ever, ever be considered in isolation.

“Money supply needs to be considered against money demand. If you do not have the ability to use cryptocurrencies for the largest single transaction in the economy, then it will never be a majority medium of exchange.”

Using the example of the 1,000-year-old jiaozi — widely believed to be the first paper currency — Donovan pointed out what he saw as fatal flaws in the current crypto market.

“If you’re interested in historical parallels, the 10th- or 11th-century kingdom of Sichuan introduced a paper currency,” he said. “It was an enormous success initially because the kingdom of Sichuan insisted that people pay their taxes using paper currency. As a result, there was an enormous demand, and initially, the paper currency kept its value.

“Unfortunately, there weren’t any economists in the kingdom of Sichuan, and they just kept printing the stuff, and then money supply exceeded demand, and it all went horribly wrong.” […]

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