New York Fed Economists Michael Lee and Antoine Martin aren’t entirely dismissive of bitcoin, which only seems to make matters worse. In a Q&A, which is posted on the New York Fed’s website, the economists question bitcoin’s utility, arguing it will never be as easy to use as the current central bank-backed fiat money, pointing to a host of concerns — not the least of which surrounds trust. But they don’t write bitcoin off, seeming instead to applaud the ingenuity while simultaneously dismissing its potential.
That the economists decided to pit bitcoin, etc. against fiat money is okay, and spending is certainly a key application of cryptocurrencies. But even Brad Garlinghouse, chief executive of XRP-fueled cross-border payments startup Ripple, isn’t against fiat money. It’s not always cryptocurrencies versus fiat currencies.
And in their argument, the NY Fed economists seem to take the tack that bitcoin and the others are gearing up to compete more directly with fiat currencies in the future, giving the trust and convenience argument to centralized fiat money given its head start in these areas.
The economists are quick to argue:
“If we lived in a dystopian world without trust, bitcoin might dominate existing payment methods. But in this world, where people do tend to trust financial institutions to handle payments and central banks to maintain the value of money it seems unlikely that bitcoin could ever be as convenient as existing payment means.”
And while it’s not unusual for economists to draw comparisons between cryptocurrency features and the more mature markets of a centralized system, the argument fails to account for the impossible feat that bitcoin has been able to achieve thus far, garnering it a market cap of $146 billion at last count. Let’s examine some of their analysis.
Lee and Martin, who are in the New York Fed’s money and payment studies function, point to bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin as being among the top cryptocurrencies – ok so far. Trust, they say, is what makes the centralized monetary system tick, from writing checks, to credit and debit cards to cash, the last of which requires trust in the central bank that issued it.
But they point to a weakness in cryptocurrencies, which is that it can be used as a vehicle that can be used even in an environment where a lack of trust exists. While an issue, the anonymity factor is truer with some digital coins more than others, and it’s something regulators are feverishly trying to tackle.
They also call into question the validation of the cryptocurrency system, arguing that “everybody in the bitcoin network could be picked, essentially at random, to validate recent transactions.” But they fail to mention that an attacker must have 51% control of a network’s computing power to alter transactions.
They admit that wider adoption of bitcoin could lead to an increase in its worth, even drawing a comparison to the US dollar that is similarly no longer backed by any commodity. Incidentally, the economists rule that cryptocurrencies solve the problem surrounding “making payments in a trustless environment.” The problem with that, they say, is they’re not sure it’s a problem worth solving.
But they fail to point to the benefits of digital coin payments, including the remittance of payments among migrant workers to their families in unbanked regions of the world or the awakening of blockchain technology that underpins bitcoin, which is transforming business as we know it.
Sure there’s volatility. And as they point out, nefarious activities can be traced back to bitcoin and other cyrptocurrencies that have forced the hand of regulators in China, South Korea and more to act. All of this surely interferes with the integration of cryptocurrencies into the mainstream.
But bitcoin at its core is a decentralized digital coin, meaning that it was never intended to function inside the confines of a centralized system. For that reason, bitcoin and altcoins will continue to frustrate many central bankers.
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