Cryptocurrency’s Promise Met Skepticism – Twin Cities
Old-school vaudeville star Jimmy Durante’s slogan, “Everyone Wants To Be In The Act!” Describes the current state of crypto-currencies well. These are forms of electronic money, whose accounting and control lie outside the usual banking orbits and government-sanctioned central banks, and for which encryption and anonymity play a key role.
These are not new. Bitcoin started in 2008. Millions of people are now believed to be owners and users. Millions more certainly follow its value.
But some developments are new: Federal Reserve Chairman Jerome Powell recently released a cautious statement claiming cryptocurrencies. Minnesota GOP Representative Tom Emmer was enthusiastic about these currencies, as have other elected officials.
The most concrete recent development is the ongoing IPO of Coinbase, a cryptocurrency company reportedly first as a publicly traded company. Its reputation is clouded by reports from account holders who have seen hundreds of thousands of dollars disappear from their accounts. But the company says the losses were due to the lax security of account numbers and passwords by depositors, and not a misstep by Coinbase. The IPO should be successful. Coinbase is expected to take an important role in payment systems.
Traditional credit cards such as Visa and Mastercard, rooted in traditional banking systems, are scary. They have occupied – and abused – monopoly positions for decades. PayPal and other new competitors have already eroded their power. Cryptocurrencies will hurt them even more.
I’m sure Powell is correct that cryptocurrencies, or the functionality of their technologies, will thrive as payment platforms. Yet history also shows that there are likely to be major issues along the way. Unbreakable codes, such as computer security systems and “impenetrable” tank armor, are always punctured or penetrated. Much of the appeal of cryptocurrencies is their opacity and therefore their usefulness in helping users evade taxes and launder money. These same characteristics will also make it difficult to resolve the inevitable electronic heists.
Enthusiasts argue that the criminal uses of cryptocurrencies are incidental byproducts, not central to their inherent functions. But this raises the central question: what legitimate functions will cryptocurrencies perform for society that are not already being performed effectively by what we have? While paying cash in person guarantees the anonymity of both buyer and seller, it is inefficient for making a mortgage payment and not possible for buying something online.
Students of economics should recognize the term “functions” because most need to memorize the classic “three functions of money”, as follows:
First, money is “a medium of exchange”. It is a convenient mechanism for buying and selling things. Money has taken human civilization beyond barter. The person you’re trading something with doesn’t have to offer what you want. You no longer had to calculate the value of items you really didn’t want, knowing that you had to trade with third parties or fourths to get what you really needed. Money, including the “base currencies” of gold, silver and copper, has enormously increased the efficiency of economies and the well-being of people.
Likewise, a century ago, postal or telegraph money orders, or checks accepted through a national clearing system, facilitated the rise of Sears Roebuck and other catalog stores, increasing economies of scale and competition in the retail trade and expanding the range of products that average families could obtain. . Credit cards, 1-800 numbers and home plan services have helped my generation to go further. Amazon.com has become extremely valuable by essentially following the Sears business model.
Second, money also functions as a “standard of value”. An hour of work for a barista at $ 13.50 an hour buys 4.84 gallons of gasoline at $ 2.79 per gallon. A thousand bushels of corn will pay for the used F-250 of $ 5,500, called “a good runner”; last July, it would have taken 1,930 bushels. Even with all student aid included, you still have to work to keep your daughter in Princeton and help her with her loans.
Finally, money is a “store of value”. You can sell corn today and buy a pickup in October. Or start setting aside your salary when your son is five and send him to Northfield when he is 19.
As of now, Americans have no good alternatives to the US dollar, either in physical currency or in accounts in existing banking and payment systems, as a medium of exchange. The dollar serves as a standard of value for the whole world The euro, the pound and the Swiss franc also play a role. The Chinese yuan is still languishing in insignificance.
To store value, however, there are many alternatives to cash. Real estate has served so much for millennia, as have precious metals. For a long time, breeding did the same and still does in peasant societies. Stocks, bonds and various investment funds are now common in industrialized countries. These all include the possibility of appreciation in value unlike dollar bills under mattresses. Many people are willing to sacrifice some reliability as a store of value for a greater possibility of increase. Some hold gold as a store; others buy it speculatively because an internet guru promises big hikes in its dollar value down the road.
So what functions do cryptocurrencies perform that are not fulfilled by existing forms of money? Are these new instruments really going to improve us? Yes, some see it as a means of exchange that can be hidden from the eyes of tax specialists and law enforcement officials. Regardless of the protests of enthusiasts, it remains a major factor in international cryptocurrency transactions and will remain so for some time.
Others, especially with libertarian leanings, see them as both safer stores and standards of value than fiat currencies like dollars or euros controlled by central banks like the US Federal Reserve or the Central Bank. European. They are not tainted by the dirty hand of the government.
Such sentiments are common among high-tech software and hardware entrepreneurs and among a growing number of Republicans. History can prove them right. Cynical governments can depreciate existing national currencies while private and decentralized cryptocurrencies will navigate safely, unscathed by vile politicians and unaffected by international events.
It all hinges on a very heroic assumption that cryptocurrency systems will never be hacked. No “miner” running warehouses full of computers solving problems to generate bitcoin nor any dishonest intelligence service in a country will ever discover new algorithms that penetrate the impenetrable. I am skeptical.
There is also the factor of wasted electricity used in this “mining”. Experts are now wondering whether the amount of electricity used to power bitcoin-generating computers exceeds that used by Britain or only as much as Spain. John Maynard Keynes described gold as a “barbaric relic” from ancient times due to the resources spent on its extraction. We laugh at the Pacific Islanders who saved for weeks to create the stone donuts used as money when they could have grown food or made clothes. But we are essentially doing the same thing to a more extreme degree.
St. Paul’s economist and writer Edward Lotterman can be contacted at [email protected]