Long before the current pandemic, we reported in an article published in December 2018 that the issue of cryptocurrencies had become one of the most important for all countries in transition from the old socialist system to the market economy. However, it is easy to observe that in many countries the transition is not yet complete. This process will continue for some time. During the first three decades of transition, some countries like Poland and Romania were declared market economies, but for many others, like Moldova, Albania, Kosovo, North Macedonia, Mongolia and d Others, it will take more time and more persistent effort, assuming global markets will continue to foster the transition process and the pandemic will be over for good.

Cryptocurrencies during the pandemic

During its spring virtual meetings held in April 2021, the International Monetary Fund (IMF) released revised figures on global GDP growth in 2021-2022, from an original forecast of a 5.5% annual increase. at 6.0% for 2021 and 4.4% for 2022 (after -3.3% in 2020). For emerging Europe, the projections are more modest at 4.4% in 2021 and 3.9% in 2022 (after -2% in 2020). These projections are of course subject to material successes in the fight against the current COVID-19 pandemic which has required enormous human, material and financial resources to cope with its disastrous negative impact.

Meanwhile, with no apparent link to the pandemic, a new issue has become the center of attention all over the world, including in countries in transition, namely cryptocurrencies (abstract and stateless assets based on chains of electronic codes) and the whole range of problems they have generated so far.

This development is unprecedented. Three years ago, there were estimates that more than 1,650 such cryptocurrencies were in circulation with a total market capitalization of $ 369 billion as of March 2018. The situation could not be more different now. The key cryptocurrency that has continued to dominate the market, namely Bitcoin (BTC) which holds 51.2% of the total cryptocurrency market cap, has grown from a modest market cap to $ 1,161.7 billion. dollars as of April 17, 2021. The number of cryptocurrencies is currently estimated at 9,257, of which the most widely used and known are bitcoin, ethereum, binance coin, XRP, cardano and ripple, with a total market capitalization of approximately $ 2.2 trillion. These are staggering numbers and, oddly enough, these instruments using blockchain technology are not regulated by central banks or any other financial authority. Over the past five years, central banks (such as the Bank of England in December 2017) have signaled that these instruments are not regulated as they should and that investors need to be aware of the risk they face. But it was far from sufficient. Additionally, statements from major financial institutions such as the FED (US Federal System of Reserves) and IMF in 2020-2021, while voiced, were not firm enough to dampen the euphoria of many investors. In addition, the role of speculators using dirty money or targeting money laundering has not been sufficiently examined. There have even been unfinished debates over whether these cryptocurrencies are legal means of payment or whether they are money as many people tend to believe, mistakenly. Blockchain technology has yet to prove its usefulness in other areas.

The situation has changed dramatically since the 2017 price peak for Bitcoin of $ 19,666 on December 17, 2017 and many other cryptocurrencies, as shown in the chart.

Chart: Bitcoin price dynamics, 2017 – April 2021, USD

Source: Coinmarketcap accessed April 17, 2021

The case of Romania

There is no specific date for when Romanians started to get involved in cryptocurrencies. However, the habit of playing financial games could easily be dated to the start of the transition to a market economy in 1990. The euphoria surrounding cryptocurrencies was not the first in the history of the transition, although differences existed. The first and most famous game was Caritas, a “Ponzi scheme” in which naïve Romanians were promised big returns in the short term. Understandable to some extent due to the poverty of the population during the last years of socialism, appetite was high, with families selling their most valuable possessions to deposit the money with Caritas, which was headquartered in Cluj- Napoca. This was done against the background of a clear lack of basic legislation or regulations on what was and was not possible. Shortly after this first start, many more followed (Procent-Caritas Constanta, FNI (National Investment Fund) and SOV Investments, to name a few), with some variations on the pledges for depositors, but in fact all are games organized according to the same recipe and based on one key common ingredient, namely the urge to get rich quick. However, the collapse of such projects was in sight (see photo below, left) for those who wanted to see it.

Romania: Procent Caritas – Misleading advertising and end result

25 years later, Romanians began to feel a new opportunity, namely cryptocurrencies. It’s easy to say that the first transition pyramid schemes have nothing to do with this new type of asset. Maybe, but people’s underlying desire to get rich is exactly the same in either case. Currently, many people regret that they did not have the courage to put their reserve money or savings in cryptocurrencies. To be fair, an investor buying, say, a Bitcoin before the December 2017 peak at say $ 3,000 / unit would today have a code that was briefly cited a few days ago at over $ 65,000 (obviously very priced. volatile!). The fundamental question here for many Romanians (as for everyone), however, is whether one can (easily) cash in the gain or use the respective cryptocurrencies for goods and services necessary for daily life. Until recently, the use of cryptocurrencies was extremely limited, but since 2020 well-known companies such as PayPal have started accepting payments in some cryptocurrencies. Additionally, in Romania, some educational units (such as Lucian Blaga University in Sibiu) have started allowing students to pay their tuition fees in cryptocurrencies. Start-ups have been created to facilitate the process, as universities finally need lei, the official Romanian currency. In addition, Romanian-founded cryptocurrencies like Elrond eGold began to circulate, and cryptocurrencies began to be increasingly used to purchase expensive art items such as paintings. These are important developments that should be followed to see if, in real life, such instruments could be of real use over a longer period of time or if they are simply a matter of fact. transient fashion. Meanwhile, many Romanian celebrities (former famous footballers, dissident poets, influencers, etc.) started to showcase their investments and earnings in mass media (mainly TV channels). This has had a huge impact on the appetites of many small investors who dream of getting rich overnight. The euphoria of the 90s of the last century is back.

Firm or other regulations

Meanwhile, Romanian monetary and financial authorities have stressed from time to time that cryptocurrencies are not regulated instruments and that the risks could be major, including the total loss of invested money. However, like in many other countries, these calls were not loud enough and, more importantly, they were not followed by strict regulations. Basically, cryptocurrencies are unpredictable and unstable instruments. Buying, “mining” and / or holding cryptocurrencies is highly speculative and consumes a lot of energy. The carbon footprint is obvious as the energy used to ‘mine’ cryptocurrencies is estimated to be equal to Finland’s total energy consumption. The IMF has said in the past that the issue should be properly regulated. It is very likely that these virtual assets will eventually deflate and “end up becoming short-lived curios,” as the President of the Bank for International Settlements pointed out. A relevant question would be when? But the answer to such a simple question is not very obvious. At the moment, the incredible increases in the price of Bitcoin (see chart above) and, in tandem, of all other cryptocurrencies are determined by the lack of clear regulation and by a large sum of money (estimated at $ 1.5 billion) invested in January 2021. by internationally renowned magnates who are very active in this field. Such a large investment has obviously had an impact on Bitcoin prices (see graph), while the debate of some 80 central banks over digital currencies still continues.

The low level of interest rates granted by commercial banks in the European Union (including Romania), the United States and other key developed countries (United Kingdom, Switzerland, Japan, etc.) on the increase in deposits is yet another contributing factor to the current situation. euphoria. The same is true for the very high price of gold which was once the “safe haven asset” for many, but which is no longer affordable for many small investors. By taking a low-key approach, the major international financial institutions, starting with the IMF and central banks, including the US FED and major European banks, are not fulfilling their respective roles in accordance with their charters. As the issue of cryptocurrencies is very likely to be present for the foreseeable future, such attitudes are fraught with dangers. The magnitude of the risks involved (some $ 2.2 trillion in total market capitalization) is far greater than those associated with the “innocent local” pyramid schemes of the early 1990s when the transition began.

Alexandru M. Tanase is an independent consultant and author, former associate director, senior banker at the EBRD and former adviser to the IMF. Mihai Radoi is administrator of an investment fund specializing in Romania / Bulgaria / Serbia and former CEO of the Anglo-Romanian bank. These are the personal opinions of the authors and not of the institutions cited. Assessment and data are based on information as of mid-April 2021.