Bitcoin can never achieve mainstream adoption without the support of a central authority. That is what university professor Dirk Baur asserted in an article he wrote titled “The rise of Bitcoin doesn’t mean the end of banks”.
He went on to clarify that he thinks “… a truly open public blockchain (that is, one without any central authority behind it) is unlikely to work.”
Doubts About an Un-Backed Bitcoin
The article by University of Western Australia finance professor appeared on the World Economic Forum website on November 20th.
Baur‘s main focus is the idea that blockchain does not create trust or work without trust — rather blockchain simply “converts trust from one form to another”. To make this point, the author cited a paper from the European Journal of Political Economy from 1998, and stated that essentially no currency that wasn’t backed by a central authority has ever succeeded, including gold.
He went on to say that with blockchain, since there is no central authority such as a central bank to trust, we are simply placing our trust in the technology.
Cracks in the Argument Appear
Later in the article, Baur noted the Ethereum DAO hack and the consequent hard fork that followed in response. He stated that this proves “… people still need a central authority or will appeal to one if the system fails.”
This example, however, is in fact an excellent demonstration of how Baur is incorrect. He seems to have a belief that the Ethereum Foundation is a central authority that has total control over the cryptocurrency. If that were true, then we would not have Ethereum Classic today.
The Ethereum Foundation is not the ultimate, absolute authority over Ethereum and its future. Instead it is a guiding force that encourages development and guides what we know as the main Ethereum chain.
As far as people appealing to a central authority goes, Charles Hoskinson, a leading voice in Ethereum Classic development, aptly stated that Bitcoin users did not demand a hard fork in order to undo the damage caused by Mt. Gox.
Bitcoin Can’t Be Controlled by a Central Authority
To understand what a central authority is, let’s consider the U.S. Federal Reserve, or, the Fed for short. The Fed was created after a series of financial panics that, according to Wikipedia, created a “desire for central control of the monetary system in order to alleviate financial crises”.
Today, the Fed is responsible for the printing of money in the United States. It also has heavy influence on interest rates, and lending rates that can manipulate the entire global economy.
Compare that to bitcoin. Bitcoin isn’t issued. It isn’t printed by a central authority, and its supply is finite. The Fed can and will continue to print more and more money, as their goal is to keep inflation rates steady. In that sense, the U.S. dollar, which is a global reserve currency, is designed to be worth less and less over time. Bitcoin, converseley, is deflationary.
People are flocking to bitcoin in droves specifically because there is no central authority that will suddenly create millions of Bitcoin. There is also no cabal of bankers and politicians secretly colluding to manipulate the money supply, and artificially control lending and interest rates.
Bitcoin is much more like a force of nature. It is not the result of monetary policy or a tax code. It is not the result of the financial elite trying to exert control over the masses. Bitcoin is none of these things. It is instead an excellent example of the invisible hand of the market that the founder of modern economic theory, Adam Smith, wrote of.
Conclusion: Bitcoin Has Already Proven This Argument Wrong
Baur’s article concluded with the following paragraph, beginning:
“If history is any guide, privately created money such as bitcoin or any other blockchain-based currency is unlikely to become globally accepted without a trusted central authority.”
The truth, Mr. Baur, is that bitcoin already is globally accepted. It may not be the currency of the masses, but there is no place on earth where bitcoin has no value.
As a matter of fact, you are far more likely to find a business that accepts payment in bitcoin than you are to find one that accepts payment in gold.
Does Professor Baur make any valid points? Feel free to share your opinions in the comments.
Images via University of Western Australia (UWA), Pixabay