Rhetorical style should never distract from the content of someone’s arguments. So when I heard that Nouriel Roubini testified to the U.S. Senate Committee on Banking, Housing, and Urban Affairs on the cryptocurrency and blockchain ecosystem, I decided to peruse his testimony and reflect on it.
His testimony makes an extensive number of critical points on the Bitcoin and cryptocurrency ecosystem. In this article, I want to set out a defense of Bitcoin against them. Importantly, I have not attempted to critically assess each and every single point he makes. Instead, I will focus my discussion on those areas of his testimony which I think are most important to defending Bitcoin.
I offer no extensive defense for the cryptocurrency ecosystem in general because I am, to a substantial extent, in agreement with Roubini. Though there are certainly some projects of technical and economic value outside of Bitcoin, in my view, it is mostly Bitcoin that is of value and, therefore, what specifically needs to be defended against his claims.
With regard to the “enterprise blockchain” ecosystem, as Roubini rightly notes, the word “blockchain” in this context is usually somewhat of a misuse of the term, and the initiatives in the enterprise ecosystem currently labeled as such generally have little to do with Bitcoin and cryptocurrencies. This is not to say that these enterprise initiatives have no value and are complete fads that are now “fading and imploding,” as he notes. There is currently a substantial wave within financial institutions and elsewhere in creating and reshaping digital platforms that integrate the actors and activities in ecosystems to enable value exchange. Using what are generally called “permissioned ledgers” can sometimes be useful in building these platforms. But such permissioned ledger systems should have entirely different designs, properties and purposes than Bitcoin and cryptocurrencies. The common slogan that these permissioned ledger systems use “the technology behind Bitcoin” is misguided, and discussion of their merits should be separated from the discussion on Bitcoin and cryptocurrencies.
Overall, Roubini makes a fair number of points on which he and I are largely in agreement. But there are also a substantial number of Roubini’s arguments which I think are flat-out wrong, misguided or at least lacking in proper nuance and context, specifically as they apply to Bitcoin. And this matters. As someone with a skeptical perspective on this ecosystem as a whole, I am left with a substantially more positive disposition toward that ecosystem, particularly where the future evolution and legitimacy of Bitcoin are concerned.
Bitcoin’s Main Value
From the discussion, it is clear that Roubini does not believe there is much of a positive case to be made for Bitcoin having any societal value, let alone any other cryptocurrency. That is obvious from a number of his remarks. He notes, for instance, that “until now, Bitcoin’s only real use has been to facilitate illegal activities such as drug transactions, tax evasion, avoidance of capital controls, or money laundering.” In addition, he attacks many of the core propositions that Bitcoin supporters commonly tout, such as its potential to be a store of value.
A positive case for Bitcoin, however, can certainly be made, and I don’t think that any of his more legitimate criticisms really significantly undermine it. In my view and that of many others, the fundamental value proposition that Bitcoin could potentially offer to the world is to be sound money for the digital age.
As can be expected, there are some different ideas of what exactly this means within the Bitcoin community. But I see sound digital money as a money with two aspects that would make it qualitatively different than modern fiat currencies: (1) it is a better store of value, and (2) it better enables financial sovereignty. Sound digital money may not be optimal in every single possible respect, but it would have notable advantages over fiat currencies in the aforementioned respects.
Bitcoin already has some aspects to it which we would expect from a good store of value: there is a hard guarantee on the scarcity of the number of bitcoin (about 21 million); it has a number of advantages over gold in terms of divisibility, transportation and storage; and, finally, the system has shown great resilience in the face of attacks over the last decade, as we would expect from a resilient money that holds its value in the long run.
In addition, Bitcoin transactions are currently practically uncensorable, bitcoin is a digital bearer asset that is difficult to confiscate if stored properly, and the system offers an opt-out to the government fiat and the banking system. These are the types of properties to be expected from a currency that wishes to promote financial sovereignty.
Clearly, however, bitcoin has gone only some way toward becoming sound money for the digital age, and it is far too early to claim victory. To focus on an obvious point: although bitcoin has, for many, been a good investment that has displayed a generally upward line in its market value over the years (despite Roubini’s persistent warnings at much, and I mean much, lower prices), bitcoin price volatility is still way too high to reasonably claim the store-of-value status. Given the small market for bitcoin, this price volatility is not surprising. Even though this volatility has been decreasing substantially over the years, it would certainly have to decrease further in the long run for bitcoin to be considered a reasonable store of value.
I would argue, however, that we should value bitcoin not so much because it is fully formed, sound digital money, but rather because it seems to be in the process of becoming sound digital money. The value argument is, therefore, one primarily concerning its potential.
Why should anyone care about financial sovereignty and the store-of-value proposition? Let’s begin by looking at financial sovereignty and deal with the store-of-value proposition later. It strikes me that there is a plethora of possible examples that attest to the value of financial sovereignty, but Roubini has made no attempt to engage with any of them.
Sweden, for example, has almost completely eliminated cash and made its population, to a large extent, dependent on the servers of their banks for access to their money and the ability to make or receive payments. That gives these banks an enormous amount of power over the population. It also creates highly centralized points of failure, which increases overall risks with regard to system failures and pernicious forces.
There are also many people around the world who depend on banks that are much less reliable than those in Sweden. And Bitcoin could be a good medium to hold some of our value, particularly for people who find themselves in those circumstances. Roubini’s claim that Bitcoin offers no value to the world’s poor and that only “fintech” matters in this regard is not very convincing. The “black mirror” usage of modern technology by the Chinese government that is intertwined with applications such as WeChat and Alipay, which Roubini mentions as apparently good examples of such “fintech,” is hardly a beacon of light if we care to advance freedom and democracy in the digital age.
All this is not to say, of course, that banking and banks have no value or are going to disappear entirely from the face of the planet. Intermediaries such as banks can address knowledge as well as risk problems for us. Such intermediaries will continue to perform these tasks in the future, and it makes sense that a lot of our value is, therefore, managed by them.
But it also seems wise to hold on to some of our value not merely via the protection of the law (as is the case with our bank deposits), but also in a technical sense. Before Bitcoin, it was not possible to have a bearer asset in a digital form — which is why Bitcoin was technologically revolutionary and a break with our technological past — and one would have had to resort to cash, gold, paintings or something similar. Bitcoin now makes it possible to have a bearer asset in digital form that can be easily divided and transported, and, with some expertise, well and safely stored. In addition, Bitcoin may offer new types of possibilities for “custodian” solutions that decrease risks for the user without giving up control entirely. An obvious example here is a basic multisignature scheme.
In conclusion, Bitcoin is the product of decades of research on digital bearer assets and digital scarcity, and to me it’s quite likely that the world will come to value it, once they understand it better and once it has become more practical to use for everyone, not just those who are technologically savvy.
Bitcoin’s Decentralized Character
The key property of the Bitcoin system that could allow it to play the role of sound digital money is its decentralized character. The term “decentralization” is thrown around a lot, sometimes with different meanings. But in my view, the key way in which Bitcoin seems to be decentralized is that power over the network appears to be dispersed: that is, power over the activities on the network and the rules that govern it seems to be distributed among a community, rather than concentrated in the hands of a single entity or a small group of entities.
This does not mean Bitcoin is a perfect democracy. Many philosophers have tried to come up with conceptions of what a perfect democratic community would be, whether it consists of everyone in the community having an equal say in decision-making, its members having power in decision-making relative to their interest in the decision being made, and so on. However we might conceive of that ideal, it is certainly not the case with Bitcoin that everyone in the community has an equally powerful voice (nor is that the case for any other community on the face of the planet). Instead, the point is merely that power over Bitcoin seems to be very spread out and non-concentrated, much in the way that decision-making power is spread out in parliamentary democracies over the courts, bureaucracy, executive, media, various representative bodies, the public and so on, but also to a greater extent and with a more popular form.
Decentralization is fundamental to Bitcoin because without it, there are no guarantees on the main properties that underlie the store-of-value and financial-sovereignty propositions. If the network were controlled by a central party, for instance, the limit of 21 million bitcoin or lack of censorship in transactions would largely depend on its whims. To put it bluntly, without Bitcoin’s decentralized character, bitcoin (the currency) would not be much more than the equivalent of digital Beanie Babies (an expression which I believe I owe to Joshua Unseth and Chris DeRose).
It is common for Bitcoin detractors to claim that the system is not really very decentralized, usually with the argument that power is concentrated in the hands of a few mining companies. Indeed, there is a limited number of mining pools and companies that produce mining equipment, and a lot of the network’s hash rate is controlled by a few mining companies. Mining also still seems to be relatively concentrated in China. However, there are potentially some positive changes in these respects. It seems, for example, that mining is shifting away from China to countries such as Canada, the United States and Iceland. In addition, there is technological progress that could help decentralize the mining ecosystem further (see, for instance, Matt Corallo’s recent work). Nevertheless, it is certainly fair to conclude that the mining market is largely oligopolistic in character, and we can presume that it will probably always retain that character to some extent.
We should not, however, make the mistake of concluding that oligopolistic tendencies in the mining market equate to a system that is centralized overall. That simply does not appear to be the case. The decentralized character of the system as a whole was significantly attested to, for example, by the failure of both the Bitcoin Cash fork and the New York Agreement in 2017 — basically both initiatives instigated by a small number of actors predominantly from the mining sector and a few other types of big companies to push through scaling solutions that were against the will of the majority of the market. So even with rather oligopolistic tendencies in the mining market, Bitcoin has apparently managed to stay relatively decentralized as a system — a sign of Bitcoin’s strength, I would say.
In the end, the claim that Bitcoin is decentralized is a thesis based on empirical observations and theoretical understandings of how Bitcoin works. There is much to be said for it. Those such as Roubini who claim that Bitcoin is largely controlled by miners or other centralized industries would have to be able to explain these empirical facts such as mentioned above and what is wrong with the checks within the system that currently curb their influence. But I have yet to see a really convincing story by him or anyone else along these lines.
As a final thought on this matter, the history of political systems does show that maintaining a community with a highly popular character is very challenging. Over time, such systems tend to be subverted in various ways. So skepticism in this regard is certainly warranted, and maintaining its decentralized character is, therefore, in my view, certainly the largest challenge for Bitcoin going forward. But in order for any concerns to be legitimate in this regard, they need to move beyond myopically pointing out the oligopolistic tendencies in the mining market or other types of Bitcoin industries, particularly given the fact that Bitcoin seems to be becoming more decentralized over time, not less.
Bitcoin’s Further Value
All the previous discussion is not to say that the only potential value to be gained from the Bitcoin system is sound digital money, buttressed by its decentralized character. It may be possible to scale the Bitcoin system to make it more suitable for payments and not just a system for a censorship-resistant store of value. Such scaling will undoubtedly have to come from a complex combination of initiatives that are difficult to foresee completely at this point, just as it would have been difficult in 1995 to envision exactly how the modern version of Netflix could have operated on the internet 20 years later, as Andreas Antonopoulos recently quipped.
The exponential growth of the Lightning Network this year reveals one of the ways in which such scaling is possible, and it is telling that Roubini makes no mention of it and other efforts in his discussion of Vitalik Buterin’s “inconsistent trinity,” which claims that it is impossible to have a system that is decentralized, secure and scalable.
There may also be further applications for Bitcoin. It may also be the case, for instance, that eventually Bitcoin can offer new ways to raise capital, such as through initial coin offerings (ICOs) — though they would have to be executed much better than the ways we have seen so far (there are some recent initiatives in this direction such as RGB and Drivechain, which would at least provide a sounder technological basis for them than the Ethereum platform). There already exist digital art and game applications on top of Bitcoin (e.g., Spells of Genesis, Rare Pepe), even if these initiatives are at an early stage. The open timestamping protocol or the possibility for one-time cryptographic seals could also have utility for financial institutions, government and other types of organizations in a number of applications (see, for instance, the work of Peter Todd on these topics).
But all of these possibilities rely on Bitcoin being sound digital money, as this is what supports the security and most important properties of the system. As money is one of our most important societal institutions, it is also by far the most important value proposition of Bitcoin from a societal impact perspective. If Bitcoin continues to grow, it could potentially have an impact on capital controls, time preferences and consumption patterns, monetary policy, financial privacy and so on. It could, for instance, make the system of excessive government debt, supported largely by the Federal Reserve in the United States, of which Roubini speaks so highly, a somewhat more complicated affair.
And in this way, the whole scaling discussion is somewhat misguided. Even if Bitcoin cannot scale to become a good digital payment system or to have any other applications, it would still have substantial value and could create a substantial impact on the world by offering a qualitatively different form of digital money, one that certainly scales better than the physical gold market. This system is certainly costly. And as subsidies for mining will continue to decrease over time, costs will noticeably be displaced directly to the users through transaction fees. The security of Bitcoin requires a price to be paid. But it’s hardly a bug in the system as Roubini makes it out to be: the system is designed to be that way. You cannot compare the costs of buying a cup of coffee with the ability to move censorship-resistant digital gold almost instantaneously around the world.
Importantly, lest I be misunderstood, it is most certainly not my contention that we are working toward a future with a “libertarian decentralization of all economic activity, transactions and human interactions,” where “everything will end up on a public decentralized distributed permissionless trustless ledger.” Bitcoin has the potential to enable sound digital money. There may be additional useful applications. But centralized systems work fine in a range of contexts. In fact, I would contend they work fine in most contexts. I certainly do not feel very comfortable with the idea of having my patient data, my identity or my house registered on the Bitcoin blockchain, to name but some of the more questionable ideas that I have seen circulating in the ecosystem.
Bitcoin as Money
Bitcoin is also not really “money” according to Roubini. In order to be money, something has to fulfill three purposes, he contends: a unit of account, a means of payment and a stable store of value. In his view, “it is none of those things.”
This is an argument frequently made by many other economists, but it strikes me as somewhat akin to saying that early gasoline-powered cars were not really forms of transportation because they constantly had technical issues and did not move very fast. I find it reminiscent, in other words, of the claim made by Henri Studebaker in the 19th century that gasoline-powered vehicles “are clumsy, dangerous, noisy brutes which stink to high heaven, break down at the worst possible moment, and are a public nuisance.” Just because Bitcoin does not yet completely have the properties that we normally associate with money does not mean that it cannot come to have those properties, or at least some of those properties, notably the store-of-value aspect.
And to some extent, it already does. Bitcoin certainly functions as a unit of account within the cryptocurrency ecosystem as a whole. A number of people with a long-term time frame already use it as a store of value. Although not frequently used as a medium of exchange, in my view, that can only come in the long term as the ecosystem grows and becomes more stable, and as layer-two solutions such as the Lightning Network are developed. It is just unrealistic to expect that Bitcoin could have become a fully developed form of money within a decade, and it may still take another decade or even more to fully develop.
And there is certainly historical precedent that attests to the challenge of introducing new forms of money. As Edin Mujagic, for example, shows in his wonderful exposition of Dutch monetary history from the 19th century onward (Boeiend en Geboeid: Een Monetaire Geschiedenis van Nederland sinds 1814/16), the introduction of paper money in the early 19th century by the Dutch Central Bank was hardly smooth sailing. He notes, “From day one, the Dutch Central Bank faced substantial resistance. Distrust of the bank was enormous. No one wanted to use their paper money. The average Dutchman refused to use it. … Whoever received paper money wanted to get rid of it as quickly as possible. The refusal of paper notes was not a temporary phenomenon: decades after the creation of the Dutch Central Bank, this was still the case” (p. 26, my somewhat liberal translation and emphasis). The idea that Bitcoin should have already been a successful form of money by now, given its time span of 10 years, therefore, strikes me as very shortsighted.
Roubini is partially correct when he contends, “The idea that hundreds of cryptocurrencies could viably operate together not only contradicts the very concept of money with a single numeraire that can be used for the price discovery of the relative price of thousands of good; it is utterly idiotic as the use of multiple numeraires is like the stone age of barter before money was created.” This is one reason why I am skeptical of the profuse number of cryptocurrencies other than Bitcoin.
But it is certainly not unrealistic to think that a number of currencies may operate alongside one another. In fact, that was the case for much of our monetary history, and the centralization of money issuance has only been a relatively recent phenomenon, spurred on by central banks, primarily since the 19th century.
Roubini’s main argument for a single numeraire is efficiency. He notes, “In the U.S., the reason we do not use euros or yen in addition to dollars is obvious: doing so would be pointless, and it would make the economy far less efficient.” If Bitcoin offered the same value proposition as fiat currencies, then his statement would indeed make some sense. But the point is that Bitcoin offers a qualitatively different value proposition. At the end of the day, it may very well be that there is not one form of money that offers all the kinds of value we might want from it, so a multicurrency system could certainly be valuable in this regard, despite some sacrifices in efficiency, which, given modern technology, would probably not be all that great in any case. In addition, there are also potentially benefits of competition that may be generated by a multicurrency system. It has always struck me as odd that economists who generally tout the benefits of competition in every aspect of economic life fail to see any room for those types of benefits when it comes to currencies, even if there are advantages to having a single currency.
I am generally skeptical of most alternative currencies — meaning here those that have their own blockchain system, not higher-level tokens — precisely because Bitcoin seems to have already captured the main value proposition that can be proffered in the ecosystem and has taken what appears to be an insurmountable lead. Nevertheless, it may indeed be the case that there are additional value propositions that Bitcoin cannot entirely capture, or that some alternative cryptocurrencies can carve out their own existence around a similar value proposition. This would provide room for perhaps a few more additional cryptocurrencies that operate outside the confines of just a small community. So far, however, I am not strongly convinced of that possibility.
The Intrinsic-Value Discussion on Bitcoin
Roubini contends that “cryptocurrencies have no intrinsic value, whereas fiat currencies certainly do, because they can be used to pay taxes. Fiat currencies are legal tender and can be used and are used to buy any good or service; and they can be used to pay for tax liabilities. They are also protected from value debasement by central banks committed to price stability; and if a fiat currency loses credibility, as in some weak monetary systems with high inflation, it will be swapped out for more stable foreign fiat currencies — like the dollar or the euro — or real assets such as real estate, equities and possibly gold.”
This point on intrinsic value is commonly made, both by gold bugs and fiat bugs alike, but usually for different reasons. For gold bugs, the intrinsic value lies in the fact that gold can be used for other purposes, such as jewelry, satellites and so on. This is really a misuse of the term “intrinsic value,” which, on the face of it, would have to refer to the idea that something has value regardless of its utilitarian value, such as the value of beauty that a painting may have regardless of its price. It’s also misleading because the primary value of gold throughout history has been as a monetary asset, due to properties such as transportability, divisibility, scarcity and its stock-to-flow ratio, not its utility for other purposes.
Roubini makes this same linguistic error. Paying taxes or serving as legal tender is clearly also a utilitarian, not an intrinsic, value of fiat money. A government backing it may also give it additional utilitarian value but cannot really be said to be adding intrinsic value.
Putting linguistic quibbles aside, the chartalist argument regarding tax payments and government backing is not entirely invalid (though much of it depends on which government that is). That certainly seems to be one way in which currencies can acquire value. And it would certainly be a boon for bitcoin if it became widely used for tax payments, as it already is in various Swiss localities.
The argument is merely that tax payments and government backing are not the only aspects of a currency that can give it value, as I’ve made the case for earlier in this piece. Gold here is the historical precedent. It certainly did not have value as a currency only because of the ability to pay taxes on it or the fact that governments valued it. Instead, however, gold has had substantial value, including as a currency historically, because of a number of beneficial properties. And there are at least many reasons why gold does not function well as a currency in the digital age, which are to a large extent addressed by Bitcoin. In addition, given that all major currencies are controlled by states, there is room to argue that Bitcoin is valuable precisely because it is not controlled by a state.
An Inflation-Resistant Asset
Roubini argues that “the usual crypto critique of fiat currencies that can be debased via inflation is nonsense: for the last 30 years commitment to inflation targeting in advanced economies and most emerging markets has led to price stability (the 2% inflation target of most central banks) and for the last decade the biggest problem of central banks has been that achieving the inflation target of 2% after the GFC has become extremely difficult as, in spite of unconventional monetary policies, the inflation rate has systematically undershot its 2% target.”