The Financial Times writes about how cryptocurrency companies plan to make money through good old credit:
[BlockFi] is launching a credit card, a joint venture with Visa. The card rewards purchases with Bitcoin instead of airline miles. The purchases, though, are paid for with a consumer loan, like any other credit card.
Nexo, another crypto-finance company, will lend fiat cash against Bitcoin, at a 60 per cent loan-to-value ratio. That loan is brand-new credit money. Likewise, Kraken Financial, a crypto-coin brokerage, will let you trade on a so-called margin account in which they’ll lend you part of the purchase price of a coin.
– Bitcoin cannot replace the banks, Financial Times.
The article argues that in doing so, these companies are doing exactly what commercial banks have done for centuries – find new ways of issuing credit and creating new money in the process:
So-called “fiat” money derided by bitcoin supporters is usually defined as government-issued currency not backed by an asset like gold. But a lot of fiat money, which we use for purposes such as paying taxes, is actually a bunch of loans, regulated by governments but produced by commercial banks.
And so for all the promise of decentralisation and control over one’s own money,
Bitcoin is turning out to be a good way to reinforce the system we already have. There’s a lot about this system that functions poorly. The supply of credit money can be unstable, as banks stop making loans in a downturn, right when people need them the most. There is little incentive to extend cheap credit to people who need small loans. But there isn’t much, so far, that Bitcoin seems to have done to fix these things, and it’s not at all clear how it will.
This ultimate dependence on fiat cash is ultimately because of bitcoin’s limitations in being used as currency: there are issues of speed, scale, cost, convenience. Until those are sorted out, bitcoin will continue to be used mainly as a store of value, like gold.
When it does begin to be used widely enough as a medium of exchange – as currency, it will also begin being used as a unit of account. That is, transactions will be denominated in bitcoin, and in that context it won’t matter much what its price in dollars or euro or yuan is.
At this point, bitcoin fulfills the three functions of money.
Once that happens, to return to the FT’s examples above, BlockFi’s credit card will be used for purchases in bitcoin too. Nexo’s loans won’t always be fiat-for-bitcoin, they’ll simply be bitcoin-at-interest. And so on.
And it’s then that banks will be in existential trouble. But a long of things have to go right before one gets to that point.