I magine that you make a salary of $100,000 a year. After taxes and various living expenses, you manage to save $10,000 of that original figure. You tuck that sum into a savings account that steadily accrues interest. You feel like you are making financial progress. Suddenly, the socio-political situation in the country where you live nosedives. Month after month, your original $10,000 dwindles in value as runaway inflation dashes your financial dreams. After a year of turmoil, a little over half of your savings remains. Almost $5,000 in value seemingly evaporates into thin air.
You feel powerless. Despite your hard work, you cannot get ahead. That’s the experience of those living in countries with inflationary currencies like Argentina, where the annual inflation rate broke 50% in July of this year. As a result, the Argentine peso is a game of currency hot potato. To escape this devaluation, people seek refuge in a more stable home: the US dollar.
Demand for the dollar in Argentina is so high that, in the most recently available estimate, one-fifteenth of all physical U.S. dollars were in Argentina. According to the Federal Reserve, there is a little over two trillion U.S. dollars in circulation worldwide, meaning that Argentines may hold over $136 billion—a mind-boggling amount of cash to be concentrated in a single foreign country.
One of the ways to acquire physical dollars in Argentina mirrors the pre-legalization process for acquiring weed in the US: you text your “weed guy.” He shows up and sells you an illicit drug, which you store somewhere in your home. In Argentina, you text your “dollar guy.” The dollar guy shows up, sells you illicit USD cash for pesos, and you store that cash somewhere secret in your home, which is often referred to as “under the mattress.” This analog approach to stable savings comes with a good amount of risk: your home becomes a target for theft, you could lose your life savings in a fire, and you, by attempting to protect your savings and family’s future, are performing an illegal activity.
To address this risk, those who face significant devaluation of their local currency are switching from physical USD to a new, digital alternative: cryptocurrency. Cryptocurrencies are new internet networks that power online finance. Many cryptocurrencies are run by a decentralized group of computers around the world, much like the email network. The most popular of which is Bitcoin, a digital alternative to gold that is highly volatile and not backed by anything other than its code and cryptography.
But a new form of cryptocurrency—USD stablecoins—has grown to overtake Bitcoin volume and usage. Each USD stablecoin token is equal to one US dollar and maintains a stable value as a result. Regulated financial institutions like Circle—a US-based company that operates a stablecoin called USDC—back each token with a US dollar held in a US bank account and allow you to redeem each token for a regular US dollar.
Like Bitcoin, USD stablecoins are globally available, can move freely between accounts, and can be traded for any other cryptocurrency. These tokens’ accessibility and stability make them great vehicles for escaping inflation, and using cryptocurrency—or “crypto” for short—as a tool to solve pervasive problems like inflation is becoming more and more common. Stablecoins in Argentina are just one example of the equitable financial access that crypto can unlock for the rest of the world.
Flush with Flaws
And yet, that’s not the impression you’d get of crypto when reading the headlines. Those headlines are not wrong; crypto is flush with flaws. Cryptocurrency exchanges have been hacked to the tune of nineteen billion USD so far, losing users’ funds due to the irreversible nature of cryptocurrency transactions. Scam projects like Bitconnect and Onecoin defrauded investors of a combined six billion USD using multilevel marketing schemes packaged as cryptocurrencies. The technology used to validate transactions for many cryptocurrencies—”proof of work”—uses more electricity than some countries. Cryptocurrency has been used as the payment mechanism in ransomware attacks, like the Colonial Pipeline hack, which caused a rush on gasoline in the American South in spring of 2021.
All that said, we are still in the early days. The first cryptocurrency, Bitcoin, was created just twelve years ago and wasn’t widely known until 2017. As with crypto, most nascent technologies came with their fair share of early concerns.
The telephone was at first written off due to its low sound quality and inability to work over long distances. An internal memo at Western Union stated, “This ‘telephone’ has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us.” But they and other communication companies underestimated the rate of technological improvement that would follow: better microphones, better speakers, and better wiring infrastructure to carry the sound data.
Similarly, the first computers were seen as too expensive, too large, and not widely applicable—a hobbyist toy for the wealthy. Even Kevin Olson, the founder of computer manufacturer Digital Equipment Corporation, wrote off the concept of a personal computer, saying, “There is no reason anyone would want a computer in their home.” But the technology soon improved, costs dropped, and what was built on top of computers was otherwise unimaginable. Word processing, digital spreadsheets, and games opened up massive new industries and productivity gains.
Almost thirty years after the invention of the personal computer came the internet. At first, the internet was for niche forums and had no clear purpose. The dot-com bubble was seen as a cash grab where investors speculatively bought internet-related stocks at any valuation. Today, the internet has transformed media, music, entertainment, and commerce. Even Wikipedia was considered untrustworthy not that long ago by many teachers who advised against it as a source. Now, according to studies by Nature and the Wikimedia Foundation, Wikipedia is of a similar quality to its predecessor, Britannica. Through an army of connected contributors, Wikipedia has managed to organize the world’s knowledge into a reputable resource.
Even though these new technologies seemed unfeasible, irrational, and toylike in their infancy, we as a society explored their possibilities. Despite the new problems that came with these breakthroughs, we searched for more compelling use cases that could significantly improve the human condition. Today the same hunt is still on, but for what crypto makes possible.
Global Financial Access
Beyond access to a stable store of value like USD stablecoins in Argentina, developers are bringing standard financial services—like savings accounts and assorted investment apps—to the crypto ecosystem, making these products more accessible to people around the world who wouldn’t otherwise have access to them.
For example, PoolTogether is a crypto app that provides a lottery-based savings account. Each stablecoin saved on PoolTogether acts as an entry ticket into a lottery for the interest earned that week across all depositors. This project reimagines the predatory nature of gambling service providers, offering an alternative way to save money with a globally accessible financial product.
Another crypto app called Compound allows anyone to take out a loan for about three percent APR at time of writing. By cutting out middlemen, Compound allows you to earn about three percent APY (at time of writing) on money deposited into it. This significantly beats traditional banking interest rates like the Marcus product by Goldman Sachs with a current APY of half a percent.
Or take Uniswap, which provides a decentralized exchange app where anyone anywhere can invest in any token. This trading happens 24/7, and NASDAQ, Robinhood, or any other financial institution cannot shut you out or control what you trade.
All these services are decentralized and unstoppable apps that run on crypto networks. Because there is no central organization offering these services, there’s no legal entity to regulate. This ability for a developer to write code, upload that code to a crypto network, and quickly create a globally accessible financial product without an army of lawyers, expensive licensing fees, and all the requisite back office operations means that financial access can grow faster and these lower costs can be passed on to users as lower fees.
That said, the above decentralized tools and their like are difficult to use and confusing to understand. Some cryptocurrency networks where financial tools like the ones described above are often overwhelmed due to high demand for these services and limited transaction capacity, causing the cost of a transaction (ten to one hundred USD) to price out many around the world who are excluded from the financial system. However, just as corporations and governments built the infrastructure to scale the telephone and the internet, the online communities around crypto are self-organizing to provide the education and build the improvements necessary to scale networks and meet the demand of the world while keeping transaction fees and energy usage low.
New Public Infrastructure
While still searching for purpose, crypto is becoming what the internet is today: public infrastructure. The internet created instant and global access to knowledge and communication. Crypto, too, will create instant and global access to financial services. The internet powered movements like the Arab Spring that were historically difficult to organize due to dictatorial control of communication. Now, crypto is enabling people to circumnavigate bad actors like corrupt governments and expensive middlemen to plug into the basic financial services that we take for granted in the US. Compound and Uniswap are also commoditizing previously gated financial services, letting anyone take out a loan or make an investment without having to go through special brokers.
Thanks to the internet, digital communication is commoditized in the form of email; no corporation has privileged access to the email network. Because most of traditional finance is online, Wall Street’s power is in the digital world more than the physical. And, because crypto is digitally native, we can now truly occupy Wall Street and decentralize what they control: money.
This is why crypto matters.
All views expressed above are solely my opinion, do not reflect the opinions of my employer, and should not be taken as investment advice.