Cryptocurrencies Capture The Benefits Of Innovation While Controlling Its Excesses

According to Amundi, investments in cryptocurrencies may be promising - especially if an appropriate regulatory framework is defined - but they are still speculative in nature.

A digital representation of value based on cryptography — this is the definition of “cryptocurrency,” which, however, involves very different realities. If Bitcoin represents about 60% of the total capitalization of cryptocurrencies (more than $1,700 billion in March 2021), the remaining 40% is made up of a very large number of very heterogeneous products (such as Ethereum, Cardano, Binance Coin, Tether, Polkadot and Ripple, just to mention the most popular ones).

Crossroads Of Technological Innovation, Finance And Monetary Policy: In any event, cryptocurrencies are at the crossroads of technological innovation, finance and monetary policy. “While this innovation promises the development of a more inclusive form of finance, it cannot challenge the monopoly of central banks in terms of monetary policy without putting the entire financial system at risk,” emphasize Pascal Blanquè and Vincent Mortier, respectively Group Chief Investment Officer and Deputy Group Chief Investment Officer of Amundi.

The Task Of The Regulators: According to the two managers, it is up to regulators to find an appropriate regulatory framework to take advantage of the development of these assets without putting macro-financial stability at risk. A task which is even more urgent in the light of the spectacular boost experienced by cryptocurrencies since the beginning of COVID-19 pandemic (Bitcoin, for example, saw its value multiply by more than seven times in one year).

The Search For New Safe Havens: “There are various issues to consider here, such as technological disruption, the search for decentralized and inclusive finance (made possible by blockchains), as well as the increasing digitalization of our economies, with a strong appetite for a digital currency,” report Blanquè and Mortier, adding that in an environment where public debt tends to be increasingly monetised in the major advanced economies, where inflation expectations are rising and where mistrust of the traditional financial system is taking hold, the search for new safe havens also plays a key role.

Blockchains: Blockchains offer an opportunity to improve financial inclusion, and may provide a precious solution to most governments and central banks by promoting faster, more reliable, and cheaper payment systems, both nationally and internationally. Cryptocurrencies, however, are a potentially destabilizing means of payment that may result in systemic risk. “On the one hand, they are likely to challenge central banks' monopoly on money production and monetary policy in the medium and long term. On the other, the operational resilience of decentralized systems is still in question,” explains Amundi's two managers.

A More Inclusive Economy And Financial System: If - as it seems likely - G7 regulators are determined to regulate the cryptocurrency ecosystem, it cannot be excluded that such regulation will initially lead to an adjustment of their price - possibly brutal - since buyers do not seem to be discounting any regulatory risk. But once the regulatory environment is clarified and the main risks are addressed, cryptocurrencies are expected to flourish again, this time based on the needs of a more inclusive economy and financial system.

Cryptocurrencies Still Remain Speculative In Nature: “Capturing the benefits of innovation while controlling its excesses is the challenge facing regulators and central banks. At present, investments in cryptocurrencies may be promising, but they are still speculative in nature. Only once the regulatory environment has stabilized, and the relationship with central bank digital currencies has been clarified, will asset managers be able to recommend digital assets as safe investment vehicles,” conclude Amundi's experts.

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This article originally appeared on Financialounge.com and was translated from Italian to English. It does not represent the opinion of Benzinga and has not been edited. For news coverage in Italian or Spanish, check out Benzinga Italia and Benzinga España.