The future of Crypto? From $TRUMP tokens to a quantum race

World regulation

In June 2021, El Salvador became the first country to legalise Bitcoin as official currency. The Central African Republic followed suit in April 2022, despite warnings from the International Monetary Fund (IMF) about the risks cryptocurrencies pose to financial stability, fiscal soundness, and consumer protection.

In late 2022, crypto experienced a crisis largely attributed to the high-risk nature of the cryptocurrency market (including the freedom of trading) and the loss of investor confidence caused by events like the collapse of FTX. At the same time, the US Federal Reserve was raising interest rates, which put pressure on the world's central banks, mortgage markets, and the banking sector. 

This led to tighter conditions for cryptocurrency markets, discouraging investors from taking out costly bank loans to invest in these assets. Rising global inflation following Russia's invasion of Ukraine made matters worse, as investors made for safe-haven assets like gold and sovereign bonds. 

More pressure came from China when Beijing instituted stringent financial controls designed to disrupt cryptocurrency mining platforms and declared cryptocurrency transactions illegal, prohibiting foreign exchanges from dealing with people in China. 

Concern over quantum

An additional and significant challenge first discussed years ago and recently reignited by The Wall Street Journal is the risk posed by quantum computing to the sustainability of cryptocurrencies. 

Quantum computing is an advanced type of computing technology with extraordinary speeds, capable of solving extremely complex problems (such as decrypting codes) in a fraction of the time it would take traditional computers. 

With cryptocurrencies, transactions are verified and records maintained by a decentralised system using cryptography, rather than by a centralised authority, so cryptographers are now in a race to develop encryption protocols resistant to quantum computing. 

Experts warn that hackers could leverage quantum computing to steal cryptocurrencies directly from digital wallets, undermining the network's security. Back in 2022, a Hudson Institute study said quantum-based hacking of Bitcoin could result in $3tn losses. Something like this could trigger a global recession.

Although quantum computing is still in its infancy, governments and big tech firms are working hard to advance it. Google recently had a major breakthrough with its Willow chip. The computational tasks it can perform in seconds would take traditional computers hundreds of millions of years.

The decentralised nature of Bitcoin, coupled with the absence of regulatory protections, makes it particularly vulnerable to quantum decryption attacks. Given Bitcoin's soaring value ($100,000), it is a tempting target for hackers.

Trump's new love

Trump, who in 2019 expressed disdain for Bitcoin, has said that any new regulations will be developed by cryptocurrency advocates, ensuring freedom of trading without government interference or control. His support for crypto seems political, not least because he got millions of dollars in digital donations. J.D. Vance, his vice president, is a staunch cryptocurrency advocate. 

The US president has also pledged to establish a presidential advisory council on cryptocurrencies and has replaced Gary Gensler as chairman of the Securities and Exchange Commission (SEC), criticising Gensler's "aggressive" approach to regulating cryptocurrency trading markets, which he likened to the Wild West. Gensler resigned just as Trump took office.

Trump may also be taking an interest because his sons Eric and Donald Jr have an interest through World Liberty Financial, which deals in cryptocurrency investments. Sales of its WLFI token have raised $385mn since September.

Two new cryptocurrencies named after Trump and his wife Melania have added o concerns about conflicts of interest and attempts to profit from his administration's deep ties to this industry, with 80% of the supply of the $TRUMP cryptocurrency, for instance, held by one of his affiliated digital companies.

Norman Eisen, a former White House lawyer, said foreign governments could buy $TRUMP and increase its value, thereby increasing Trump's wealth. He saw this as a violation of the Foreign Emoluments Clause of the Constitution.

Treading carefully

In May 2023, the European Union became the first global entity to issue regulations for cryptocurrencies, known as MiCA (Markets in Crypto-Assets). A year earlier, European Central Bank board member Fabio Panetta described cryptocurrencies as "the bubble of the era, doomed to burst" and "a new way to gamble." He also said they were for criminals, terrorists, and large-scale tax evaders.

The likes of Gensler and Panetta had reason to tread carefully, given the series of collapses among banks tied to cryptocurrency activities (such as Silicon Valley Bank, Silvergate Bank, and Signature Bank in 2023) and given that regulations surrounding cryptocurrencies remain ambiguous and subject to rapid change.

This may explain the strict stance taken by the likes of China, Russia, Algeria, Colombia, Egypt, Indonesia, Iran, Iraq, India, Qatar, Kuwait, Jordan, and Türkiye, which have banned cryptocurrency exchanges, trading, and mining.

Regardless of who takes the lead in regulating the market, any framework must prioritise the protection of investors, guarding against market manipulation and fraud. Investors also need access to essential data through disclosure standards—and to be able to verify the accuracy of that data. 

The next big shock

Investors, both institutional and individual, are increasingly likely to embrace cryptocurrencies as a primary or supplementary investment option since they offer a hedge against economic, geopolitical, political, and even environmental risks, which can have a big impact on traditional financial markets.

Drawn by the scent of reward, they could equally lose their savings since significant gaps in rules related to risk, transparency, financial backing, and client protection have allowed those who built 'crypto empires' or opportunistically rode the wave to exploit the system. These gaps have led to expensive market crashes.

While this is still early days for cryptocurrency, and while its full impact on the global economy remains unclear, some analysts think the recent shocks experienced by crypto markets indicate risks that investors must bear themselves and can, therefore, be contained. Yet if central banks intervene to protect financial stability, the problem quickly becomes a much broader issue with far-reaching consequences.