We recently examined the structural misunderstandings of cryptocurrencies that were expressed in a blog post by one of New Zealand’s largest banks ASB). However, it seems that this misunderstanding of cryptocurrencies, blockchain technologies, and the power dynamic between them and traditional power structures is endemic throughout the entire global financial system. Bloomberg just released a piece from its editorial board, revealing their own limited knowledge in this area.
Since Bloomberg is the largest financial news site in the world, I hold them to a much higher standard than that applied to most other news organizations. The fact is that their editorial board should know better. And, given the influence they exert over their massive audience, I feel that it’s important to address their arguments and correct the record.
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If the Bitcoin bubble has a redeeming feature, it's that it has started some interesting conversations. One is about whether governments should get into the cryptocurrency business for themselves.
The unsatisfying (though undoubtedly correct) answer: It depends. A cashless future is indeed on its way, and governments and central banks have no choice but to prepare for it. But a cashless future doesn't necessarily require government-backed digital currency. And while the technology underlying Bitcoin and other such cryptocurrencies will almost certainly have many useful applications, replacing physical cash is unlikely to be one of them.
First, the assumption that Bitcoin is a bubble really establishes the tone of this article. If you are going to write a piece representing the largest financial news site in the world on a specific banking topic, you should leave personal opinions on asset classes out of the analysis if the underlying technology is what’s being discussed. This is like saying Amazon is overpriced while discussing the value of the existence of a stock market. A) it has nothing to do with the subject at hand, B) it has a bias against the topic already that is completely disingenuous to the material at hand.
While the phasing out or diminishing use of cash is a real and prominent thing, I would not attribute this to cryptocurrencies at all. This has been a trend for the better part of two decades, and the world has enjoyed many benefits as a result. This was happening well before cryptocurrencies, though crypto will be able to accelerate this process and resolve many other issues that existing fiat currencies simply cannot solve.
Nobody is claiming that cash will be replaced by cryptocurrencies, nor that traditional currencies will become obsolete or replaced. Only the most extreme elements within the crypto community believe anything close to this as a possibility, even as a long-term prospect. The Bloomberg piece suggests that the crypto world believes something that it does not, and then argues against that non-existent claim. One would think that an organization as highly-regarded as Bloomberg could find something better to do than erect and destroy strawmen.
Blockchain technology gives Bitcoin two crucial characteristics -- it can be exchanged peer-to-peer without the need for a trusted intermediary, and it lets transactions be anonymous. In both these ways, Bitcoin resembles physical cash. But whereas physical cash is the liability of a government, with a central bank controlling its value, Bitcoin is a liability of nobody. This is its fatal flaw as a currency. There's nothing to stop its value from falling to zero.
Granted, governments could issue their own Bitcoin-like digital currency, make it legal tender, and stand behind its value. The question is, why would they want to? The anonymity that physical cash provides is a drawback, from the government's point of view, because it cloaks tax evasion and crime. Central-bank digital currencies, if they're ever issued, are unlikely to be anonymous.
While the Bloomberg writers are correct about bitcoin being a peer-to-peer digital currency (well done guys), the fact that it is a liability of nobody is precisely what gives it value. The fact that it cannot be inflated or controlled by a central authority and is answerable to nobody and beholden to nobody is precisely what gives it value.
Take, for example, Wikileaks. In 2010, western powers used international sanctions to block Wikileaks from receiving donations through the traditional banking system. Out of necessity, Wikileaks switched to cryptocurrency to acquire donations to fund its journalism. Whether you agree with the organization or its mission is completely irrelevant to this point. What matters is that bitcoin and crypto allowed you to voice your political opinion with financial donations, regardless of what governments said you were able to do. This is the misunderstanding that is endemic within traditional financial institutions. Particularly with the ever-increasing politically-charged climate we live in.
The fact is that Bitcoin now not only has people using it as a medium of exchange and a store of value, but hundreds and soon to be thousands of cryptocurrencies are being based, traded and marked at value to Bitcoin. Personally, I believe that Bitcoin is slowly becoming a pseudo-reserve currency of cryptocurrency. However, even if the naysayers are correct and Bitcoin goes to zero (which I do not believe will happen), the underlying technology of blockchain currencies will remain. Pandora’s box is open and there is no closing it. Bitcoin was simply the first. There are now many, many more, and I think we are just beginning the flight into crypto as I explained previously in a use case for New Zealand businesses here.
There'd be no reason, either, for central-bank digital currencies to dispense with the trusted intermediary -- because that's what a central bank is. And as it turns out, trusted intermediaries would make it easier for digital currencies to work at scale. Lacking such intermediaries, blockchain-based systems are much more complex, and require vast amounts of computing power
Either the Bloomberg editorial team is being facetious, or they truly have no idea what they are talking about. Neither prospect is particularly encouraging, since many of their readers look to them for guidance and accuracy on these types of issues. The entire point of the blockchain is the fact that there is no need for third party intermediaries, thus lowering the overall cost of the network. The overheads of the traditional banking system no longer apply and thus those costs savings can be passed onto the users of those cryptocurrency networks.
To claim that one of the things holding cryptocurrencies back is computing power is pure nonsense. We live in an age in which computing power is literally the least of anyone’s worries when it comes to anything, and that includes cryptocurrencies. The inclusion of that type of argument suggests that the authors were desperately searching for any and all possible weaknesses, without taking the time to research their imagined concerns or back them up with hard evidence. Bloomberg’s readers trust its editorial analysis and rely on the news outlet to help them understand these types of topics. The failure to properly back up these wild claims borders on negligence.
So government-backed digital currencies, if they're ever introduced, won't work like Bitcoin. But there is an even more basic question: Will government-backed digital currencies be needed at all?
Don't take it for granted. To be sure, physical cash does seem increasingly anachronistic. In Sweden, for instance, some stores no longer accept bills or coins. Developing countries are making increasing use of money moved from balance to balance by mobile phone. But none of this electronic-money innovation has required digital currency, much less digital currency backed by governments. Economies are happily going cashless without it.
Fiat currency is already digital. The entire point of cryptocurrencies is the fact that they are peer-to-peer and the fact that they cannot be inflated like traditional currency ensured by the blockchain is their inherent value. Having governments produce their own cryptocurrency completely defeats the purpose of having fiat currency as this removes the ability for central banks to have control over inflation rates, interest rates, money velocity and other metrics that central banks control and monitor. This basic misunderstanding is truly frightening to those of us in the crypto community as it displays a shallow understanding of even the basics of crypto. It is even more alarming to see such a lack of understanding at the editorial board of the world’s largest financial website.
Moreover, a widely held central-bank digital currency might have far-reaching unintended consequences. Unlike physical cash, it could be a close substitute for a checking account at a commercial bank (with no risk of the bank failing, either). This new, government-backed competition might require banks to rethink their business, and governments to rethink their approach to financial regulation.
That certainly shouldn't be out of the question. The financial system that could then take shape -- one relying less on the dangerous alchemy of traditional banking, which uses short-term deposits to finance risky long-term loans -- might be an improvement.
It is refreshing to see Bloomberg address risky financial issues and unsustainable banking practices. But as long as they are doing so, it might be useful for them to acknowledge the unsustainable $400+ Trillion-pound gorilla in the room as we have discussed here.
On that, as they say, more research is needed. So for now, central banks are wise to be cautious. This much is already clear, though: The future of money may or may not include digital cash -- but such government-backed currency, if it's ever issued, will be very different from Bitcoin.
The one thing that is clear is that more research is needed at Bloomberg’s editorial board. This complete disregard and respect for the current state of cryptocurrencies and blockchain technology is completely unacceptable from an institution like Bloomberg.
Central banks and traditional power structures certainly have big decisions to make regarding cryptocurrencies. However, nothing presented in Bloomberg’s article will be of any use to them as they try to make those decisions.