A new blog post by economists at the N.Y. Federal Reserve branch states that while cryptocurrencies are ideal when operating in a trustless environment, they do so at the expense of convenience and as such are not a “problem that needs solving”.
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The post, written by Antoine Martin and Michael Lee, makes the case that while cryptocurrencies have increased in popularity, they will need to compete with the likes of Visa and PayPal in western countries because there is little need for trustless payments in society, “at least in the United States and other advanced economies” where trust in banking and government “already exists”.
While the large majority of Westerners are well served by their current financial institutions, they are forced to use them due to their reliance on third parties and lack of alternatives.
Cryptocurrencies provide a different option, and while the lofty end goal may be trustless and censorship-resistant payments that require no middleman, in an era of near zero returns on interest bearing accounts, the savings on exorbitant fees just to transfer money is but one happy symptom of the efficiencies of the blockchain.
For the authors to then also say, un-ironically, that “people do tend to trust financial institutions to handle payments and central banks to maintain the value of money… [perhaps] if we lived in a dystopian world without trust, bitcoin might dominate existing payment methods,” is perhaps rather myopic considering the storied histories of both institutions and the current financial climate.
This view, of course, is a case of perspective. This “trust” is a relatively recent phenomenon — traditionally many populations have not trusted their governments or financial institutions, with a glaring example being countries in South East Asia, or more recently Latin America.
It could be argued that the actions of the Federal Reserve since inception have leveraged the world via credit inflation and lifted millions out of poverty. Alternatively though, perhaps the immigrant earning a few dollars an hour and being charged a large percentage in fees to send money home to their family, or someone like Julian Assange, would beg to differ. In their respective cases, cryptocurrencies like Bitcoin could be or have been a lifeline.
But Martin says that cryptocurrencies are not a good form of money, despite their trustless nature, due to volatility and the fact that currencies need to be trusted to work at scale. “Even cash requires some trust. The grocer has to believe that the cash I pay with will retain its value and not be eroded by inflation or confiscatory monetary reforms. So she needs to trust the central bank.“
The point being missed here is that one of the major selling points with cryptocurrencies is that the user does not need to trust an institution that employs fallible human beings. Instead a user can verify — blockchains are public and anyone who can read computer code can also examine the coded “rules” of an individual cryptocurrency whenever they like.
Maintaining the value of money is also a stated goal of debatable merits; the actions of the Federal Reserve have often caused or exacerbated a crisis — the necessary rate rises of the Volcker years were tempered by Alan Greenspan keeping rates too low for too long, over-stimulating the economy after the disaster of 9/11.
This led to cheap credit and the housing bubble, and that led to a situation where the chair of the Federal Reserve admitted Q.E. was a grand “experiment” in monetary policy.
In short, trying to create stability in a system of such complexity where all participants are emotional beings is nothing short of crazy and leads to “Minsky Moments” where forced stability leads to severe instability.
What the authors also fail to note is the social aspect of “trust”, or to be more precise the perception of trust in a system, which many believe the government and banking industry have repeatedly broken. This more than anything — see Satoshi’s Genesis Block message — inspired Bitcoin and motivated many of the early adopters to disrupt the economic status quo.
Throwback Jan 2009: The message “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” is placed in Bitcoin’s genesis block by Satoshi Nakamoto pic.twitter.com/kyGisuyDOs
— ⚡️Distributed Paul Technology (@Saucerys) January 29, 2018
Martin and Lee seem to gravitate towards a particular way of thinking surrounding Bitcoin and cryptocurrencies: that their only use is as a payment system. They wonder “whether a payment method designed to function where trust in institutions is completely absent can ever be as convenient as one where trust is required, but also already exists.”
What they fail to grasp is that Bitcoin is not designed to solely operate where trust is absent, but rather to operate without requiring trust. There is a big difference. And even though Bitcoin is currently inconvenient, the authors at least recognize that improvements “could” improve scalability and speed, leading to more efficient use as a currency.
Perhaps though they are being myopic in their characterisation of cryptocurrencies, especially Bitcoin; the case has long been made that Bitcoin is akin to a digital version of gold, and due to the deflationary, limited supply that exists outside of the control of governments, may eventually become a store of value as well as a payment method. The payment side of things can be seen merely as an efficiency improvement, removing third parties from the payment process.
This is something Ari Paul of BlockTower Capital has mentioned, citing the trillion dollar market for an un-seizable asset:
2/ Floor of the fair value = sum total of every dollar hidden in swiss bank accounts and secret gold stashes.
— Ari Paul (@AriDavidPaul) June 6, 2017
The trust in central banks that the authors exhort has only recently eroded significantly, due to the crisis of 2008. In the late 90s central bankers like Alan Greenspan were feted as celebrities, and even when the system imploded — largely to the excessive risk taking enabled by Greenspan’s stewardship — central bankers and their political counterparts were still seen as saviors, not enablers.
This perception changed however, as the Fed essentially used taxpayer money to bail out the institutions that caused the crisis, and then imposed “austerity” on the population to counterbalance the expenditure.
Remarkably, despite the frauds and the devastation caused, no-one went to jail. Instead many bankers moved into government and many former government employees moved into banking or lobbyist positions.
This is not to say that Bitcoin or cryptocurrencies solve the risk taking behaviors that define humans, but it is important to note that Bitcoin was borne out of the ashes of such a slimy response by the governments of the world, and it is this kind of mistrust that cryptocurrencies aim to destroy. It’s a system that takes taxpayer monies and gives it to the very people who caused billions of dollars in losses and an untold number of social problems stemming from the losses of jobs, savings, shelter and family structures.
What exactly does “trust” mean in an economy anyway? Feel free to sound off in the comments.
Images via Pixabay, Observer, Despair.com, Wikimedia Commons