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December 31, 2013 6:57 PM

Another Lame Banker Attacks Bitcoin

Author: Gordon Hall

Another day, another banker, another ignorant jab at Bitcoin. This time it’s Steven Englander of Citibank, America’s third largest TBTF zombiebank. Mr. Englander wisely steers clear of attacking Bitcoin on the basis of made-up numbers, instead relying on rhetoric. He writes (and I comment) as follows:

The libertarian streak in me likes the anonymity of Bitcoin transactions, but there  is a rational part of me that asks whether that aspect is essential if I am paying for a latte in Soho.  Similarly if the Bitcoin wallet can be made more secure by dropping  anonymity, how many transactors will give up transactional security for libertarian principle? Giving up anonymity may make Bitcoin transactions more secure, and I suspect almost all transactors will value security much more than anonymity.

This is a false choice. If Mr. Englander’s rational side wants to pay for a latte in Soho without anonymity, it can use a credit card. If it wants anonymity, plus far better security than a credit card, there’s Bitcoin.

Despite all the intensive research I’m sure Mr. Englander didn’t put into his article, there is no likely scenario in which de-anonymising transactions would offer improved security against bad actors. If Target accepted pseudonymous Bitcoin, 40 million people wouldn’t have had their accounts and data compromised.

Going further, Bitcoin’s decentralized nodes are not needed, if there was less concern about keeping Bitcoin outside the current payments/fiat currency system. The nodes allow transactions to be validated by the Bitcoin community, but you can have efficient transactions without the particular validation system used by Bitcoin.   The secure ledger of transactions can be centralized rather than decentralized. Bitcoin’s particular approach may be attractive for those who really want to operate outside the current financial system. There may be both legitimate and illegitimate reasons for this, but the vast majority of  transactions do not have this need.

Centralisation, item two on the list of prohibited changes, would of course require a hardfork. And a name change, because it sure wouldn’t be Bitcoin any more. I suggest that Mr. Englander call his latte-purchasing, centralised and identity-linked fork “CitiBits.”

And here’s a legitimate reason for keeping Bitcoin outside the existing payments/fiat currency system: why would Bitcoiners wish to link their savings to rapidly depreciating fiat currencies? Here’s another: what if people’s accounts are seized, as in Cyprus? And one more for the road: what if the financial system fails catastrophically, as it nearly did in 2008?

Going even further, if Bitcoin or an alternative currency embraced the financial regulatory system to make it more secure, how much payments efficiency is lost? You can still have secure, instantaneous transactions but inside the financial system there may be more security against fraud and more recourse if your Bitcoins are contained in your PC which gets hit by a meteor.

Again, Mr. Englander just doesn’t get it. Even suspending disbelief long enough to imagine an impeccably honest, centralised CitiBit processing department with, incidentally, enough juice to match the world’s largest computing network, how would this be any more secure? One meteor strike and the entire system fails, never mind a single wallet.

So there is this story about a special recipe for potato fritters (a very good recipe that I have tried). When a chef is handed the recipe, she decides to  ‘improve’ it by replacing each ingredient one-by-one with something more familiar. Having done so, she and her husband decide that the final result isn’t nearly as good as advertised and is pretty close to what they prepare all the time.  In eliminating anonymity, decentralization and non-regulation, much of the original intent of the Bitcoin developer(s) is being thwarted. The question is whether the core innovation of Bitcoin has been compromised or whether unneeded baggage is being  dropped.

Here Mr. Englander descends into folksy fritter analogies to show that replacing Bitcoin with credit cards called “Bitcoin” is best for everyone. Are you convinced yet?

For the record, mining Bitcoin is waste of resources from a social perspective. The amount of CPU and electricity needed to mine Bitcoin is high, and from a social viewpoint about as valuable as building defenses against attacks from Mars. What the mining  does is decide the allocation of the limited amount of Bitcoin produced each period and encourage the ledger to be kept. There is a  real social cost to the decentralization designed into Bitcoin.

Luckily, printing paper money and minting coins doesn’t waste any resources, right? Apparently, diverting billions if not trillions of taxpayer fiats to bailing out giant banks (which embraced moral hazard to speculate on complex derivatives to predictably disastrous result) isn’t a waste of social resources either. Right?

Anyway, it would appear that someone’s been reading Krugman… But mocking The Krug’s ridiculous “let’s fix the economy by printing infinite money to prepare for a fake alien invasion” gaffe while adopting his flawed “mining is wasteful” argument doesn’t really widen Mr. Englander’s apparently razor-thin libertarian streak. Here is the hint: mining is done to process everyone’s transactions. Even were it not for this fact, efficient mining turns electricity into more money than the electricity costs, so I’m not sure how that’s wasteful as opposed to productive.

If Bitcoin is a payments technology, much of what makes it efficient and attractive can be retained, while dropping some features that most users find unnecessary. Bitcoin may become less attractive to illicit users as a result, but that is a sacrifice many will be willing to make. Culturally, the developers of Bitcoin may find this evolution extremely unattractive, because the distrust of the financial system and of financial authorities was one of the motivations for its development. However attractive philosophically, many users will vote for pragmatism over principle and a Bitcoin clone that satisfied this pragmatic streak could be able to overcome the first mover advantage.

At least Mr. Englander has done his homework and polled a significant number of Bitcoin users about which features they find attractive and which they’d nonchalantly discard. Oh wait… No, he hasn’t. He just made up that “most users” part. And of course, his justification for breaking Bitcoin is stopping naughty people, blah blah…

But next he makes an interesting point, at last. I agree with him, let’s get pragmatic! Let’s put theory into practice and let the market decide… Mr. Englander, please make your centralised, de-anonymised, proprietary CitiBits and release them to trade freely on cryptocurrency exchanges. It will be most interesting to follow their adoption rate and value relative to Bitcoin. And if value doesn’t instantly shoot to the moon as expected, will Citi’s deep-pocketed pumping operations be de-anonymised for security purposes?

So far I have ignored Bitcoin as a store of value, but the proponents of Bitcoin as a store of value/speculation crucially need Bitcoin to be unique and have strong barriers to entry, despite the replicability of the technology. If it turns out that investors/miners will arbitrage between Bitcoin and other mined alternative currencies, the outcome will be that there are many perfect or near perfect substitutes for Bitcoin, and the effective supply will be much larger than would be suggested by the gradually increasing and ultimately capped supply of the original Bitcoin.  This will mean that valuations will be very fragile because in the long-term there will be no ability to limit the supply of Bitcoin lookalikes … unless some subset of Bitcoin-like currencies gain government/central bank endorsement which gives them an advantage over non-endorsed Bitcoin-like currencies.

Certainly, an infinite amount of alts can be produced. However, the network effect rules that genuine innovation (and perhaps gimmicky marketing tricks, thanks Dogecoin) will be required to catch up to Bitcoin’s ever-expanding usage. But really, this is another specious argument cribbed from The Krugmeister. Zimbabwe can compensate for its failing economy by printing all the Zim Dollars it likes, without tanking the value of the German Mark. The only result will be that people won’t want Zim Dollars because they’ll be worthless, and the same is true for cookie-cutter altcoins with no real economy.

Further, the Fed is now started on tapering and the BoE is talking about tightening, however slowly. Whatever sins major central banks commit, they are forgiven rapidly when they show any sign of moving back to orthodoxy,  provided they have not hugely compromised price stability, and sometimes even when they have. Improved confidence in some G4 fiat currencies is giving gold bad days, and the willingness to take the risk on alternative currencies may be inverse to how unrestrained major central banks are in their reserves creation.  Investors and central banks are looking for improved stores of value beyond fiat currencies, and Bitcoin possibly may be one of them. There are scenarios in which it could work as a store of value  but there are clearly many, many outcomes in which Bitcoin is one of a bunch of alternatives with a very indeterminate value.

Translation: the Fed now prints $75,000,000,000 instead of $85,000,000,000 a month to stave off the inevitable implosion of the financial system. Interest rates remain at record lows but the BoE has made some soothing noises. Therefore everything is fine now and we can all go back to full faith and credit in our debauched fiat currency. Nothing to see here, folks, show’s over. Also, gold derivative contracts largely unbacked by physical metal have been consistently hammered with naked shorts, so no one apart from two billion Chinese and one billion Indians want that silly yellow stuff… Another sound argument against the alternatives to flagging fiat currencies, although potato fritters are notable by their absence.

Bottom line, there is the possibility that Bitcoin represents a big step forward in payments technology, but there are also seem to be straightforward ways to improve on its security, make it less attractive to criminals and more attractive to governments. It is far from guaranteed that that it will emerge as a stable store of value. Either function would be enhanced if it were within the financial system and embraced by the authorities, but it is unclear whether the Bitcoin philosophy will change fast enough or whether an alternative alternative will pip Bitcoin’s original first mover advantage.

This bottom line is about as lacking as Citibank’s would be if forced to re-adopt standard accounting practices and mark its toxic assets to market. Bitcoin’s philosophy won’t change to accomodate the wishes of petty plutocrats, so I wish Mr. Englander the best of luck in pipping us with his CitiBits.

Well, that’s it. Pretty lame kung fu, really. The joke is a banker who pretends to libertarian sympathies while advocating centralisation and government control.

It seems to me that banksters have assimilated much of government but in so doing become dependent on endless liquidity. With both trotters in the public trough, they’ve forgotten how to compete in anything like a free market. Naturally, they now want government to step in to outlaw their competition. That’s how monopoly operates, after all… What happens next will certainly be interesting. Right now it seems to me these guys have no clue what they’re up against.

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