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I’ve never quite understood why cryptocurrencies are worth anything. [footnote] Do you also question why gold has historically been worth so much more than its industrial and ornamental value?[/footnote] [footnote] Gold has 6 important attributes that make it suitable for use as money:

1. scarcity
2. durability
3. portability
4. uniformity
5. divisibility
6. fungibility (interchangability)

[/footnote] [footnote]Not all “cryptocurrencies” or crypto-assets are created equal, but Bitcoin has the advantage that it is:

1. much more portable (able to transfer a billion dollars worth of bitcoin electronically at low cost anywhere in the world that has internet),
2. more divisible
3. more verifiable (you can verify that you have authentic bitcoin and audit the supply)
4. decentralized: to prevent power from being concentrated
5. harder to steal, through the optional requirement that multiple signatures be used to  unlock it

[/footnote]

Of course, the untraceable [footnote]It’s not untraceable.  The FBI has know for a long time that Bitcoin can be traced.  That’s how the FBI caught their own agents stealing money from the Silk Road[/footnote] [footnote]The next thing you’re going to do is reverse yourself and argue is that, because it is traceable, that there is no privacy!  The truth is somewhere in between. [/footnote] [footnote]Cash is untraceable-ish.  Cash is more useful to money launderers than Bitcoin.  Do you want to ban cash?[/footnote] payments are worth a lot to ransomware hackers, cyber criminals and money launderers. But dollars, euros and yen are backed by nations’ respective treasuries.[footnote]How do government treasuries “back” currencies and create value?  The Zimbabwean dollar was backed by the “full faith and credit” of the Zimbabwean government and how much was that worth?[/footnote] [footnote]Most people believe the “full faith and credit” of the US government is on the decline and doesn’t inspire confidence. (just ask the Kurds and Afghanis about American credibility)[/footnote] [footnote]Some people would prefer a currency that is backed by math and game theory rather than politicians and technocrats.[/footnote] If someone invents a cryptocurrency, any value is based solely on convincing others it has value. But is it a usable means of exchange? International banking officials say cryptocurrencies [footnote]Why should we believe International banking officials.  The reason Bitcoin was created was out of disillusionment with these sort of people.[/footnote] such as bitcoin are speculative assets, not sustainable, usable money [footnote]To say that bitcoin is a “cryptocurrency” is a misnomer.  Bitcoin is too small to compete with the US dollar — only $1 trillion in market cap compared with $100 trillion +.  Just as micro cap stocks are more volatile than large cap stocks, Bitcoin is more volatile than the dollar. [/footnote] [footnote]It is better to call Bitcoin a “crypto asset” rather than “crypo currency”.  Right now Bitcoin functions as an emerging store of value like gold. Perhaps someday it will be large enough to stabilize, but until then its only competition to the dollar is with those who do not have access to banks and who value its comparable ease of use via the Lightning Network which runs on top of Bitcoin using products such as Strike.[/footnote].

Yet the epidemic of hugely disruptive ransomware attacks in recent months — on JBS Foods, a major meat processor; on Colonial Pipelines, our critical infrastructure, causing gasoline shortages for weeks; and on 1,000 or more U.S. businesses on July 4 — highlights the enormous risks. Moreover, hundreds of small towns, hospitals, school districts and small businesses have been hit by the ransomware epidemic — all enabled by cryptocurrencies.

How should governments respond? Besieged with cyberattacks, the Biden administration has been struggling with this question of cybersecurity with few clear answers. Cyber offense still seems to beat cyber defense.

As the eminent economic analyst Martin Wolf outlined in a recent Financial Times essay, the risks and chaos of a wild world of unstable private money is a libertarian fantasy. According to a recent Federal Reserve paper, there are already some 8,000 cryptocurrencies. It’s a new mom-and-pop cottage industry.[footnote]If in 1998 I told you there were some 8,000 dot-com companies, would you be justified in dismissing the sector?  Sure, many of them failed, which is a cautionary tale against concentrated investment in the sector, but a select group of those companies were innovative and are now powerhouses.[/footnote]

How should governments respond? Wolf argues that central banks (e.g., the U.S. Federal Reserve) should create their own official digital currencies — central bank digital currencies (CBDC) and make cryptocurrencies illegal. [footnote]If the government’s new digital currency is so good and crypto currencies currencies not worth anything then the government currency should be able to easily win on the merits, without criminalizing the competition[/footnote] [footnote]If you criminilize the competition that suggest to me that you fear the the public will oppose the new digital dollar or at least prefer a private alternative.[/footnote]

I’ve been asking the same question: Who needs cryptocurrencies? Apart from the nasty uses and wild speculative value swings, data mining to produce bitcoin is a serious environmental hazard, using huge amounts of electricity [footnote]YouTube uses more energy that Bitcoin.  It just depends on whether you think Bitcoin provides something useful and whether Bitcoin uses more energy that the current banking system.[/footnote]  [footnote]The unspoken truth that the Bankers and Political Establishment fail to acknowledge is that the creation and support for cryptocurrencies is directly attributable to the establishment’s failure and the public’s distrust of them. [/footnote] [footnote]How can you get an establishment technocrat or politician to see the value of something whose creation was inspired by their failure?  It is like getting a man to understand something when his salary depends upon his not understanding it. [/footnote] by rows and rows of computers.

Governments should guarantee safe, stable and usable money.[footnote]The whole reason why Bitcoin was created was because the creator thought the government couldn’t be relied upon to maintain the value of money.  The government may keep CPI low, but CPI is not a very good measure monetary debasement.[/footnote] Already, according to the Atlantic Council GeoEconomics Center’s CBDC Tracker, 81 countries representing 90 percent of world gross domestic product are at various stages of researching and exploring the adoption of digital currencies.

The four largest central banks — the European Central Bank, the Bank of England, the Bank of Japan and the U.S. Federal Reserve — are all exploring CBDCs, though the U.S. lags behind. Meanwhile, China is already digitizing its currency, the RMB, and allowing foreign visitors to use it for payments. Though China is still a long way from having an international reserve currency to rival the dollar, its digitized RMB is a step in that direction.

Nonetheless, caution is well advised, as there are important, complex issues that must be sorted out before launching an official digital currency. These issues include equity: Should the digital dollar be available to all or just used for certain business transactions? I would argue it must be for all.[footnote]I didn’t even know that people were considering not making it available for all.[/footnote] Should a U.S. CBDC augment cash or totally replace it, and would there be a transition period? Then there is the impact on private banks: Should individuals have bank accounts with the Fed rather than private banks? What should be the relation between private banks and the Fed with regard to currency? Should businesses have “digital wallets”? How would international payments work?

And not least, there is the question of privacy and surveillance. A digitized dollar would likely make it hard to dodge taxes with untraceable cash. But just how traceable would the public and Congress accept a CBDC to become? Would the fact of a CBDC making transactions safer, faster and cheaper be worth some trade-off? [footnote]He doesn’t say it directly, but what I hear is: “Would the fact of a CBDC making transactions safer, faster and cheaper be worth less privacy and more surveillance“.[/footnote]

Then there is the question of whether the world’s major powers would cooperate in outlawing cryptocurrencies — and reach agreement on rules and regulations of CBDCs. China, always with an eye on control, has indicated skepticism, if not disdain, toward cryptocurrencies. [footnote]Why does China have disdain for “cryptocurrencies”?  Is it because they “waste electricity” or does crypto have the potential to check China’s power over their population, including the ability to surveil, debase, and “cancel” individuals’ money.[/footnote] Indeed, that was one driver in Beijing’s swift move to digitize the RMB. This could be an area of U.S.-China cooperation worth exploring. [footnote]Maybe the US should be more like China?  Who thought this is a good idea?  If China is jealously guarding its power over its people, the US should not use this as an opportunity to collude to gain additional power over its people.[/footnote]

If China were on board, the possibility of a U.N. Security Council resolution to ban cryptocurrencies could be in the cards. That would be a foundation for taking the issue to the Group of 20 to make it a global norm. [footnote]If you think people distrust you now, wait until you attempt to gain power over the entire world’s money supply and to prevent the people from making a free choice.[/footnote]

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For now, there are a whole lot more questions than answers. But the insidious new industry of cyber hacking and ransomware is an unacceptable disruptive threat to American economic security[footnote]Mexican drug cartels use American dollars.  That doesn’t prove that dollars should be outlawed. [/footnote]. It is a problem that is growing, not subsiding. And the proliferation of do-it-yourself digital currencies is a serious and bad omen for global financial stability.[footnote]It is the current financial system that has required bailouts, not the crypo financial industry.  It is obscene to hear the financial elites complain about Bitcoin — a system which was designed as an alternative to their system. It was their system whose corruption threatened world stability and  required trillions of bailouts with zero accountability.  If people want to put some of their money in an alternative system, can they make an appealing counter-argument or do they have to rule the whole world by force?[/footnote]

Yet amid an international order that is fraying and fragmenting, it’s an open question whether such threats are enough to catalyze sufficient international cooperation. I suspect that with a little U.S. leadership[footnote]Will this “leadership” involve bribes and threats or are people persuaded the more knowledge they gain?[/footnote], jump-starting financial diplomacy would go a long way. Certainly, it’s a good test for President Biden’s efforts to align democracies.

Robert A. Manning is a senior fellow of the Brent Scowcroft Center for Strategy and Security at the Atlantic Council. He was a senior counselor to the undersecretary of State for global affairs from 2001 to 2004, a member of the U.S. Department of State policy planning staff from 2004 to 2008 and on the National Intelligence Council strategic futures group from 2008 to 2012. Follow him on Twitter @Rmanning4.