During a spirited debate with ConsenSys founder Joseph Lubin at the Fluidity Summit in New York this week, prominent NYU economist Nouriel Roubini raised some valid and thought-provoking criticisms of bitcoin and cryptocurrencies. But being an establishment figure, this is hardly surprising. Do his arguments actually hold any water?
Finally… A Sensible Cryptocurrency Skeptic
The Roubini-Lubin discussion, while at times heated, marked a far more intellectually stimulating assessment of the merits of cryptocurrencies than the likes of the outlandish “harvested baby brains” outburst from Berkshire Hathaway’s Charlie Munger. It was also a significantly more purposeful exercise than some of the absurdist antics banks have engaged in when comparing bitcoin to infectious diseases to describe its pattern of public acceptance.
Nouriel Roubini has a sharp mind and is widely noted for his prediction, two years in advance, of the U.S. housing market crash and the Great Recession that followed. He is not the only person who claims to have predicted the recession, but certainly one of the few who predicted it before it happened.
Some Peripheral Concerns
Roubini revealed himself at the Fluidity Summit to be a serious bitcoin and cryptocurrency skeptic. Three of his concerns will be left aside as they pertain to concomitant issues to the central question of “cryptocurrencies as legitimate currencies”.
Firstly, he accused cryptocurrencies of being too confusing to use. This relates to the way digital assets are currently “banked”, (i.e. by individuals), and to the fact that they are not government-guaranteed like fiat savings held at bank accounts. It is an observation of the relationship between states and cryptocurrencies.
He also referred to the Satis Group research that found 81 percent of ICOs to be scams, and only eight percent to have successfully found their way onto exchanges. This speaks to a fundraising technique that uses – but does not speak to the nature of – cryptocurrencies, and is an attack on ICOs and the level of criminality and incompetence accompanying many of them, rather than one on cryptocurrencies themselves.
He also spoke of the environmental impact of cryptocurrency mining. That is an externality relating to the manner in which many – but not all – coins are created rather than their merits or otherwise as currencies. It is also akin to the argument that fiat currencies are environmentally destructive because printing presses contribute to deforestation through their use of paper and are probably intensive consumers of electricity. (It is recognized that the polymer used in banknotes in a number of countries in the world is recyclable).
These issues are worthy of discussion but reside outside the scope of the present article.
Roubinomics & The Problem with Crypto
Roubini argued that cryptocurrencies fail to qualify as currencies insofar as they do not provide a unit of account (common measure of value) that goods or services are priced in, are not an effective means of payment, and are not a useful store of value.
On his first point, Roubini’s argument is entirely correct. The vast majority of goods and services worldwide are not priced in any cryptocurrency. Yet this is merely a product of regulation and history. 19 of the 28 member states of the European Union (along with four microstates within the physical EU, a further two that unilaterally adopted the currency, and some overseas territories) replaced their local currencies with euros.
In so doing, goods and services ceased to be priced in the currencies they had traditionally been priced in, and were instead priced in euros. That outcome does not suggest a dysfunction of the French Franc, German Mark, or Finnish Markka. Rather, it was a decision made through a political process that identified the likelihood of more fluid inter-European trade if a single currency was to be used.
To the economist’s second point, cryptocurrencies cannot be classified as ineffective means of payment simply because they are not widely accepted. Technologically, transferring a cryptocurrency is an extremely efficient and effective method of sending and receiving value in exchange for goods and services.
Furthermore, this denunciation is a disguised indictment of prevailing payment processing mechanisms. Merchants will always be able to price products according to an appropriate domestic fiat value. That does not limit them to accepting bank notes in that currency alone. A vendor in Madrid can readily accept not only euro cash, but also debit cards, credit cards, mobile phone payment apps, and PayPal transactions, any of which may be denominated in another currency.
There is no logical reason why the same cannot become true of cryptocurrencies. The issue Roubini raises relates solely to crypto-to-fiat convertibility at the point-of-sale. The interface between crypto and fiat currencies is awkward. Payment processor inertia has retarded our capacity to convert crypto into fiat currencies as instantaneously as a Chilean peso-denominated credit card can be used to buy products priced in Danish Krone.
That hardly qualifies as a condemnation of cryptocurrencies. It was only in the last decade that a barcode on a mobile phone was able to buy a double decaf soy milk grande latte from Starbucks in a few seconds.
Fiat currency is a notoriously poor store of value. Given the finite supply of most cryptocurrencies (by mathematical design), they have gold-like characteristics that lend them value-retention properties. This is in stark contrast to fiat currencies, which can be continually printed. Fiat currencies are debased over time due to their ever-expanding supply. Cryptocurrencies do not suffer those same deflationary pressures.
Furthermore, fiat currencies do not have, and never have had, any intrinsic value. Their value is determined by the government institutions that support them and the trust the public have in those institutions. Currency was not created as an asset with intrinsic value. It is merely a more convenient means of exchange than goats and sacks of rice.
Cavemen, Bartering, and The Stone Age
It is worth noting that cryptocurrencies are not nearly the first non-state issued currencies to have existed. During the Free Banking Era in the U.S. – from 1837 to 1866 – for example, anyone from banks, states, stores, railroad companies, and even individuals were permitted to issue currency.
Their currencies were only as good as their continued presence. Bankruptcy or closure would render the currency worthless. Direct parallels can be drawn between privately created cryptocurrencies and the non-state currencies of yesteryear. The primary difference is the sophistication of the algorithms.
Roubini bristled at the idea of a tokenized economy, arguing it would be like going:
“back to (the) Stone Age of barter, because that’s what tokenization is all about.”
The expanding number of cryptocurrencies and the tokenization fad is grossly inefficient and confusing, as Roubini asserts. One can’t help but sense a disconcerting trend toward “gift cardification” as more companies entertain the creation of utility tokens. While a valid and accurate observation, the “air mile-ization” process underway in the cryptocurrency arena is not likely to last.
Utility tokens redeemable only at certain venues and for a limited subset of goods and services will ultimately succumb to the perils of overcomplication. This is especially true as ICO fraud fatigue is beginning to set in among cryptocurrency veterans. Yet, it is difficult to consider this a broadside of cryptocurrencies per se, but rather a rejection of an unsustainable model that should fade as sophistication replaces hype.
Inequitable, Centralized, Concentrated
Roubini referred to the severe degree of centralization of mining, exchange, development, and wealth concentration in the cryptocurrency industry, which has arisen despite the spirit in which non-state issued digital currency was created.
A disturbing insight the economist offered was a comparison of the Gini coefficient (a measure of income inequality where 0 is perfect equality and 1 is maximum inequality) of bitcoin with some state economies. Roubini pointed out that Germany’s Gini coefficient is around 0.31; North Korea’s around 0.86 (where a corrupt elite own almost all of the resources); with bitcoin’s a staggering 0.88. In other words, bitcoin is distributed very inequitably, with a small number of people owning most of it.
Inequality is the result of a complex interplay between many factors. These include political ideologies, embedded bias and class structures, marketable skill differentials in society, cultural norms and practices, corruption, and fiscal policy. It also varies according to phases in any given economy’s development.
The concentration of bitcoin wealth and centralization in the cryptocurrency industry is not a direct bi-product of cryptocurrencies themselves. Some argue that inequality growth is a natural state, and without intervention, will persist and worsen over time. It is an unsightly reality in much of the world, and bitcoin inequality should rightly be met with opprobrium.
Sadly, however, cryptocurrency inequality has arisen because a handful of early adopters saw in it a promising future. Add normal human greed and crypto’s plight resembles that of its physical equivalent.
While valid and valuable, Nouriel Roubini’s insights are in fact more critical of the industrial infrastructure surrounding digital assets than of cryptocurrencies themselves.
Have your say. Do you agree with Nouriel Roubini’s assertions? Do you find them insightful?
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