Back in 2018, the Managing Director of the Monetary Authority of Singapore (MAS) Ravi Menon, gave a speech about the future of crypto and cited an old concept in economics known as Gresham’s Law, which is loosely interpreted as ‘bad money drives out good money’.
He opined: “Like Money, crypto tokens can be a force for good or bad… It is the enchantment with these tokens as a way to make a quick buck and their abuse for illicit activities that are at the root of our concerns.”
Therefore: “We must work together – regulators and the crypto industry – to make sure that bad money does not take hold. And that a new generation of crypto tokens emerges, that harnesses the potential of blockchain technology for social good while mitigating the risks today’s tokens pose.”
Good Money vs. Bad Money
The original concept in Gresham’s Law is that in an economy where there are two currencies with the same face value, people will use up first the currency that is constantly devaluing (bad money), and hoard the currency that retains or increases in value (good money).
For example, let’s say you are given equivalent amounts in both MYR and USD. As MYR keeps depreciating against USD, you will spend MYR first and hold USD in reserve. The so-called ‘bad money’ would be used for daily transactions and dominate circulation, while ‘good money’ would eventually disappear from circulation as it is kept for savings and long-term investment.
Imagine now that you are given BTC (bitcoin) instead of USD. If you expect that BTC will rise in value, you will not pay your daily expenses with BTC as you may lose out on its future valuation. This is one of the reasons why BTC has grown faster as a store of value than as a means of payment.
Going back to the MAS speech: Interestingly, it applies the concept to market conduct. It refers to the illicit use of crypto by bad actors in the market, along with the profusion and poor quality of crypto products as a form of currency. If these bad actors continue to flourish, they will crowd out and drive away the good actors. The crypto industry and its innovation benefits will suffer as a result.
But if crypto can be used responsibly as a force for good, it will be ennobled and gain wide acceptance by the public. This would turn into the opposite of Gresham’s Law (known as Thiers’ Law) which states that ‘good money will drive out bad money’.
Is Private Money Good or Bad?
The characterisation of crypto as either good-or-bad is not always helpful. Private money like crypto, which are not issued by central banks, is very diverse and hard to generalise. Tech is morally neutral. They are self-serving financial constructs and are not mandated to be a public good. The vast majority of them are work-in-progress prototypes that will fail.
On one hand, you would read of industry reports claiming that illicit or criminal activity constituted only 0.10% (according to CipherTrace) to 0.15% (Chainalysis) of total crypto transaction volume in 2021, the lowest level ever. This makes crypto sound like a model private citizen!
But on the other hand, the crypto scandals keep getting bigger and bolder, with contagion impact on venture capital and lending companies as seen recently. The industry has spawned an entirely new genre of lawlessness (which Elliptic calls) “DeCrime” which could rewrite the penal code. Black hat hacks are commonplace, highly sophisticated, and even state-sponsored.
Ironically, as crypto improves and creates better version of themselves, they become too good to ignore. Savings and capital may leave financial systems, for good. Domestic banks may become undercapitalised. In response, governments are mulling to create crypto-versions of central bank digital currencies (CBDC), so that their national currencies will not be substituted by crypto. And they have the natural advantages to do so. As the Bank of International Settlements remarked, “anything that crypto can do, CBDCs can do better”!
Investors are at a unique point in economic history. They are spoilt for choice between private money (crypto) and public money (fiat), something that was unthinkable a generation ago. They have free capital movement, in the truest sense of the word, across borders, assets and entities. Whether this is ‘good’ or ‘bad’ is anyone’s guess.
Disclaimer: All opinions expressed above are the author’s own.
About the Author
Edmund Yong is the managing partner of Celebrus Advisory and appointed by MDEC as part of its Talent Expert Network (formerly known as Digital Expert Panel) for blockchain technology. He is also the resident consultant for GLT Law, a multi-award-winning legal practice with specialisation in digital assets.