UBS Wealth flags a ‘fundamental flaw’ in cryptocurrencies

Cryptocurrencies may never be able to function as real money, according to Paul Donovan, the chief economist of UBS Global Wealth Management, one of the world’s largest private-capital managers. Bloomberg reports.

According to Paul Donovan, the obstacle will be a ‘fundamental flaw’ inherent in digital assets. He argues that this flaw lies in the impossibility of reducing supply when demand falls in most cases. Therefore they cannot be considered currencies, the economist says.

A ‘proper currency’ can act as a stable store of value, providing confidence that tomorrow its purchasing power will not fall. This is ensured by the ability of central banks to shrink the money supply when demand for it falls, he notes.

Most cryptocurrencies lack such a mechanism to shut off issuance, so their value could crash, undermining purchasing power, the economist notes.

‘People are unlikely to want to use anything as a currency if they have absolutely no confidence that they will be able to buy anything with it tomorrow,’ Donovan said.

Earlier, UBS Wealth compared cryptocurrencies with the once-successful internet projects Netscape and MySpace, which ultimately disappeared.

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