The dark side of digital money
G7 Issue

The dark side of digital money

The G7 leaders at their Hiroshima Summit are positioned to strengthen the evolution of decentralised finance based on the blockchain through coordinated action

Decentralised finance is the most recent technological evolution of the financial industry. It relies on blockchain technology, which is a distributed ledger where encrypted, anonymous, peer-to-peer trades are registered. Fungible and non-fungible tokens are traded globally on blockchains, and cryptocurrencies are among the most popular fungible ones. Cryptos are means of exchange in the blockchain, and are not legal money. Their main benefits are to democratise trades and reduce the costs of trading. However, blockchain trades are anonymous, unregulated and thus very risky – speculation and money laundering fuel crypto exchanges, with no supervision or insurance system of any sort. 

According to the International Monetary Fund, the market value of crypto transactions reached $3 trillion in 2021, thanks to substantial improvements in blockchain technology, but fell far below $1 trillion in 2022, due to the collapse of large intermediaries. The blockchain has certain technological barriers to entry that force most (unsophisticated) users to trade via intermediaries and exchanges, which are unregulated. The concentration of trades in these intermediaries exacerbated the speed of the fall in 2022. According to most authorities, such collapses do not harm financial stability, because they are limited to the crypto trading system. Nonetheless, they cannot be ignored.

Who is trading crypto?

There is one question that G7 leaders should ask when they meet at their Hiroshima Summit: Who trades crypto and other tokens in the blockchain? According to surveys of crypto users, the typical investor is male, born between 1989 and 2000, interested in information technology, seeking high risk and high returns in his investment decisions, and with a mid to low degree of financial literacy. Crypto investors tend to be overconfident in their investment strategies and overestimate the returns and underestimate the risks. There is no consumer or investor protection in the blockchain system, which constitutes a weakness for policymakers and regulators. Young investors who concentrate their wealth in high-risk assets and do not differentiate their portfolios can suffer disproportionately in the long run. 

Although the size of losses in crypto might appear small in relative terms, the consequent loss of confidence in the public system and the absence of ordered market conditions can destabilise the financial system in the long run. Japan’s 2023 G7 presidency can thus be a valuable opportunity, as Prime Minister Fumio Kishida says, for “the next generation and beyond, the youth and children, to turn their attention to global issues and take action”. 

Philosophically, the blockchain revolution, pushed forward by the so-called cypherpunk movement, was based on individual freedom, no state control and decentralised trading. This last part of the story has failed to come true: today, most trades are centralised via intermediaries, stifling the free spirit of blockchain.

Some central banks are introducing digital currencies, which will work together with the legal money they already issue. The central bank digital currency is a counterpart to their legal money – not a cryptocurrency – and it can help to restore the confidence of crypto investors, who might prefer buying legal money, guaranteed by a large institution, instead of private money with no guarantee.

Innovations in Gaming

Cryptocurrencies have spurred innovations in various industries, including gaming. The concept of Crypto Casinos has emerged, leveraging blockchain technology to offer a transparent and decentralized gaming experience. These platforms provide players with increased security, anonymity, and provably fair games, contributing to the diverse applications of cryptocurrencies.

Cryptocurrency in Online Casinos

Beyond traditional financial applications, cryptocurrencies have found a unique niche in the entertainment sector, notably in the form of Crypto Casinos. These platforms allow users to engage in gambling activities using various cryptocurrencies. The decentralized nature of transactions ensures heightened security and transparency, mitigating concerns related to fraud and unfair practices. Moreover, Crypto Casinos often introduce unique gaming experiences that capitalize on the capabilities of blockchain technology, shaping a new frontier in online entertainment.For those seeking a deeper understanding of cryptocurrency and its diverse applications, view the full report. Uncover the evolving landscape of digital currencies and their impact on various industries.

Coordination among G7 members

G7 leaders in Hiroshima should strengthen the technological evolution based on the blockchain, and coordinate their actions. Financial stability in the global system can be achieved by sound regulation, supervision and oversight of the intermediaries and exchanges of fungible and non-fungible tokens, in line with the principle ‘same activity, same risk, same regulation’. The comparative advantages of regulating intermediaries and exchanges exceed the costs of failures; most G7 members are converging on this approach, following the 2022 recommendations of the Financial Stability Board.

Italy is home to the first bank, founded in 1492. Its historical leadership should be confirmed in 2024, when Prime Minister Giorgia Meloni will hold the G7 presidency. After years of global political crises, cooperation needs to be strengthened, in particular, by reducing the sources of financial instability such as uncontrolled trades via large intermediaries.