Today at the Consensus Invest conference in New York, Allianz chief economist Mohamed El-Erian spoke about blockchain and cryptocurrencies, and the challenges of self-disruption. He believes that cryptocurrencies initially overstepped their claim as money and their nature is more akin to commodities.
El-Erian grouped the early cryptocurrency adopters into three segments. The first group he referred to as the fundamentalists who adopted cryptocurrencies out of principle because there is no central authority such as a central bank. The second group is the pragmatists who recognize that the technology can be adapted for different uses. And the third group are the speculators. He said the importance of the three groups would vary over time.
Talking about the entire blockchain and cryptocurrency sector, El-Erian thinks of it as a capital structure. The senior part is blockchain technology. “That is going to spread that’s going to be more stable, and that is a major, major change,” he said. He thinks of the technology as the equivalent of Senior Bonds in the investment world. Going down a bit in the capital structure you’d get cryptocurrencies. And at the bottom, you get the highly volatile and risky ICOs.
New York Times columnist Andrew Ross Sorkin asked about VISA, Mastercard or American Express building blockchain into their current systems.
El-Erian’s response was: “So having worked in an established company, let me tell you that I know of very few companies that can self-disrupt.” He outlined potential approaches. “Do you bring in people who have been brought up in a different culture with a different mindset and bring them in and hope that they can disrupt you in a beneficial way and that you won’t completely choke off the disruption? Or do you start collaborating with one, two, three of these and learn from them?” He believes the third model is the most likely.
Compared to the West, China is likely to make progress with blockchain first. The economist put this down to China’s ability to figure out where they want to be in ten years and then define the first two or three steps. Unlike in the West where every step would need to be identified. Hence China will execute the first two or three steps quickly and course correct. An example is how far ahead China is with mobile payments.
Sorkin asked about central bank digital currencies (CBDC) and whether cryptocurrencies pose systemic risks. El-Erian believes that a CBDC would validate private initiatives and doesn’t seeing cryptocurrencies as posing a systemic threat.
Instead, the non-bank sector and ETFs are the risks on El-Erian’s mind. “Risk doesn’t disappear it moves and migrates, and it has migrated to the non-bank sector,” he said. The concept of an ETF is to get immediate liquidity at reasonable spreads. “When you see it being offered on an illiquid asset class, ask yourself: How does that make sense? It makes no sense.”