The complexity of assessing national income is further escalated due to the involvement of the underground and unregulated sectors. This challenge is magnified as digital currencies become more prevalent, with their usage in unlawful pursuits such as money laundering augmenting the necessity for the development of bona fide economic indicators. On the surface, figuring out how the surge in cryptocurrencies ties into national accounts may seem academic, engaging only statisticians, national accountants, and macro-economists. However, given the rampant financial innovation and ambiguity, cryptocurrencies provoke deeper thought about our understanding of output, income, and growth.
The cornerstone of understanding how Gross Domestic Product (GDP)— a common economic indicator—is calculated is the three-pronged concept of triangulation. Essentially, what a nation consumes should align with its yield and the amount its inhabitants make. ‘Gross value added,’ a term synonymous with national output, is an agreeable concept. This indicator is a mosaic of data, sculpted together by countless statisticians relying on myriad sources.
Doubts may be raised about the veracity of this approach, and indeed, certain elements remain arguable from a conceptual standpoint. Accountants dealing with national income are fully aware that their approximations won’t hit the bull’s eye. The surreptitious activities within the shady part of the economy and the informal sector invariably slip the estimation net. Yet, it’s this candid admission that earns statistics agencies the public’s trust when they release national growth rates with decimal precision.
The conundrum is how to integrate the crypto sector into this scheme. There’s a pressing challenge in deciphering how the actions of this industry should be portrayed in the national accounts. As per the Keynesian paradigm, national expenditure is a sum of consumption, investment, stock-building, government expenditure, and net external sales. The questions then arise, where does the money spent on cryptocurrencies fit? How are cryptocurrencies consumed? If there is no direct consumption pathway, what form of expenditure are they?
The cryptocurrency mining process, for instance, doesn’t inherently create substantial value-added, but it does devour enormous energy resources. This question has garnered attention at international institutions such as the United Nations, where norms for national income accounting are conceived and consented to. Some economists have advised that the energy usage of cryptocurrency mining be labeled as ‘capital formation.’ Others might classify freshly created Bitcoins as inventory and hence part of stock-building. The discourse remains inconclusive.
Cryptocurrencies typically see booming growth in two types of settings. The first type is destabilized nations where no single entity has commanding control or where an operational legal structure is entirely absent. Under normal conditions, a nation’s currency is propagated by a central bank and is supported by the government’s assurance of acceptance as legal payment. However, such guarantees are usually lacking in troubled nations where both a functional central bank and government capable of confirming such standards may not exist.
Another breeding ground for cryptocurrencies is regions where corruption is not viewed as a significant issue. The confidential nature of cryptocurrency transactions adds to their appeal. Although every transaction is logged on a distributed chain ledger, the actual personalities behind these digital pseudonyms often go unidentified. These dynamics substantially simplify the laundering of money and make non-disclosure less challenging.
Digital currencies offer an alternative avenue for high-value transactions that circumvent conventional financial systems. The sheer size of this ‘shadow economy’ is striking. Even if the exact estimate is debatable, there is a consensus that the verification technique employed by national income statisticians in developed economies cannot be extended to the informal sectors.
A considerable portion of cryptocurrency trade is executed by law-abiding citizens primarily motivated by financial speculation. However, the reality of cryptocurrencies diverges from the theoretical understanding of their role and function. The entities involved, including issuers and traders, do not form a concrete industry per se. They create little real value. Disturbingly, their facilitation of money laundering results in active value destruction.
Measuring economic activity has always been a complex task due to the existence of unregulated markets that operate outside standard channels. One can look back to a statement made by an economist from the Bank of England in the 1980s: ‘The biggest creditor in the economy is statistical discrepancy.’ Reflecting on this statement today, in the context of the growing cryptocurrency market, it seems eerily accurate.
The post Untangling the Concurrent Rise of GDP and Cryptocurrencies appeared first on Real News Now.
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