The U.S. Senate hearings on cryptocurrency and blockchain held October 11 have become a real contest for the supporters and opponents of the digital economy. The testimony of an ardent critic of the crypto market, Nouriel Roubini, professor of economics at New York University, caused a flurry of emotions among crypto enthusiasts and industry experts. A great many of them, known and unknown to the general public, spoke on the net with weighty counterarguments against Roubini. If we summarize all the objections, it becomes clear that the professor got a little excited with his categorical statements in the Senate.
The Main Value of Bitcoin
From the discussion, it is obvious that Roubini does not believe in any social value of Bitcoin, not to mention other cryptocurrencies. This is evidenced by a number of his comments. For example, he notes that “so far, the only real use of Bitcoin has been the promotion of illegal operations, such as drug trafficking, tax evasion, and money laundering.” In addition, Roubini denies many of the basic qualities of Bitcoin. He does not consider Bitcoin as a measure of value, nor as a means of value storage.
Arguments of the Crypto Community
The proponents of Bitcoin take on a different view. Bitcoin is revolutionary and has much to offer the world in the digital age. Two qualities of Bitcoin make it better than modern fiat as a medium of circulation and a guarantee of financial independence. Digital money is not perfect, but these two qualities allow them to outperform fiat currencies. Bitcoin has already proved that it can be a measure of value and a means of accumulation. There is a strong guarantee that the number of coins is limited (about 21 million), it has several advantages over gold in terms of divisibility, transportation, and storage, and, finally, the digital asset has demonstrated resilience to a large number of attacks for ten years (and it is very important for a currency to maintain its value in the long term).
In addition, transactions are very difficult to track. Bitcoin is a valuable bearer resource that is difficult to confiscate if it is stored correctly, so one can use it to reject state and banking money systems. And these are the very properties that give guarantees of financial sovereignty.
It is clear that it is still very early to talk about the usefulness of Bitcoin for society. Although for many it has become a good investment, demonstrating market value. And this is despite Roubini’s repeated warnings about the collapse of the first digital currency. But Bitcoin’s price volatility is still too high. Given the small digital asset market, high volatility is not surprising. It has already decreased and should decrease even more so that Bitcoin can be considered a reasonable measure of value.
Bitcoin should be valued not as a currency formed as a full-fledged sort of money, but as a currency that is in the process of developing and has powerful potential.
Roubini’s claims that Bitcoin does not make any difference for third world countries and that only fintech is important look more than doubtful. The use of the “black mirror” of modern technology by the Chinese government to create WeChat and the Alipay payment applications, which, according to Roubini, are good examples of fintech, is hardly a beacon if society seeks to promote freedom and democracy in the digital age.
Decentralization of Bitcoin
In assessing the basic qualities of Bitcoin, "Doctor Doom" was extremely categorical. He completely denied the scalability, decentralization, and security of digital assets. Moreover, Bitcoin was presented as a system that is completely dependent on oligopolies.
Arguments of the Crypto Community
The combined opinion of the experts suggests the opposite. Decentralization is a key feature of digital money. And it lies in the fact that the power over the network is divided, as the activities in the network and the rules that regulate it are distributed among members of the community, rather than concentrated in the hands of one subject or a small group of individuals.
This does not mean that Bitcoin is a perfect democracy. The power over Bitcoin, in contrast, is very common and not concentrated. Decentralization is fundamental to Bitcoin, because without it, there is no certainty about the safety of the main functions of the digital currency as a measure of value, means of accumulation of value, and a guarantor of financial independence. If the network is controlled by a single center, then the question of issuance or lack of censorship in transactions will be largely dependent on the center’s whims. And in this case, Bitcoin will turn into the digital equivalent of Beanie Babies (plush toys produced in very limited quantities).
Roubini argues that power over Bitcoin is concentrated in the hands of several mining farms. Indeed, there are a limited number of miners and companies that produce equipment. Many mining farms are located in China. But there are already positive developments in this segment. Mining is gradually moving from China to countries such as Canada, the United States, and Iceland. In addition, there is a technology that can help decentralize the Bitcoin mining process.
There is no need to confuse mining decentralization with digital currency decentralization. Bitcoin decentralization has been repeatedly confirmed, for example, by the cases of Bitcoin Cash’s failure and the New York agreement in 2017. Both of these events were initiated by a small number of participants in the crypto community, mainly from the mining sphere, and went against the will of the main mass of crypto enthusiasts. Thus, even the oligopolistic Bitcoin production market could not affect the decentralization of the most popular cryptocurrency. This is the power of Bitcoin. And over time, it is becoming increasingly decentralized.
Bitcoin as Money
Roubini does not consider Bitcoin to be valuable money. From his point of view, Bitcoin is neither a measure of value, nor a means of payment, nor a means of accumulation, “none of this.”
Arguments of the Crypto Community
This argument is reminiscent of the conclusion made in the 19th century about gasoline cars. Early gasoline cars could not be considered vehicles, as they often broke down and could not move quickly. At the end of the 19th century, Henri Studebaker claimed that gasoline-powered cars were “clumsy, dangerous, noisy brutes that stink to high heaven and break down at the worst possible moment.”
Yes, Bitcoin does not yet fully possess all the properties and functions of fiat money, but this does not mean that some of these properties are not inherent in it. BTC certainly functions as a unit of account within the cryptocurrency ecosystem as a whole. Many investors view and use it as a means of long-term accumulation. A digital asset does not appear so often as a means of payment, but this market is growing and becoming more and more stable. And it’s completely unrealistic to expect that over the whole decade Bitcoin can become a fully developed form of money. This will take much longer.
There is a historical precedent indicating that new forms of money are not too quickly accepted by society. In the early 19th century, the Dutch Central Bank barely kept afloat. The reason for this was the introduction of paper money. Nobody wanted to use paper "candy wrappers" issued by the bank. Most of the Dutch had a serious resistance, the distrust was enormous. Bank recipients sought to get rid of them as soon as possible. And this process did not take 10 years at all, but much longer.
Therefore, the idea that Bitcoin was supposed to become a successful form of money in just 10 years is very short sighted.
Roubini’s statement that hundreds of cryptocurrencies cannot function successfully in one market and their existence contradicts the very concept of money is partly true. The bulk of crypto experts are also skeptical of a significant number of altcoins. Most of global monetary history has developed in a multi-currency environment. The centralization of the issuance of money is a relatively recent phenomenon initiated by banks in the 19th century.
The main argument that Roubini gives is: "In the U.S., the use of the euro or the yen in addition to the dollar would make the economy less efficient."
If we draw parallels between Bitcoin and fiat, the statement makes sense, but the reason is that BTC offers a completely different value than fiat money.
It is possible that there is no such unified form of money that encompasses all types of value required by society, so the multicurrency system has the right to life even if there is some decrease in efficiency, which should not be very noticeable given modern technology. In addition, the multicurrency system creates competitive potential for the development of the financial market as a whole. Traditional economists always advertise the advantages of competition in all aspects of economic life, but defend the value of a single non-competitive monetary system.
Bitcoin has become the undisputed leader among cryptocurrencies, but this does not mean that it is able to satisfy all the requirements of the crypto community. This provides additional space for some altcoins today.
Bitcoin’s Intrinsic Value
Roubini states that “cryptocurrencies have no intrinsic value, whereas fiat currencies certainly do because they can be used to pay taxes. Fiat currencies 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 or real assets (such as gold, stocks, or other commodities).”
Arguments of the Crypto Community
There is an error in this statement. One cannot compare the intrinsic value of gold and fiat. Gold can be not only a measure of value but also used for other purposes from jewelry to the production of satellites. It is incorrect to use the term “intrinsic value,” since gold directly depends on its utilitarian value.
For many centuries, gold has been a measure of value and a means of payment because of such properties as easy transportability, divisibility, scarcity, clarity in the ratio of reserves, and consumption, and not because of its usefulness for other purposes. Roubini makes the same mistake in reasoning about the intrinsic value of Bitcoin. Paying taxes and making legal payments is the utilitarian, not the intrinsic value of money. Government support also adds utility value to fiat, but does not add any internal value.
As for paying taxes using digital assets, such precedents have already been noted in Switzerland. And, of course, if it will be possible to repay debts to the state everywhere by Bitcoin, and this will give it additional value.
Furthermore, tax payments and government support are not the only signs of currency value. And gold is proof of that. Possessing additional valuable properties, gold coped well with the function of the means of payment in the pre digital era. Now gold has largely replaced Bitcoin. And there is every reason to assert that the first cryptocurrency is valuable precisely because it is not controlled by the state, in contrast to the main fiat currencies.
Internet and Blockchain
Roubini at some point says that the blockchain technology is not similar to the birth of the Internet: “Boosters of blockchain technology compare its early days to the early days of the Internet. But whereas the internet quickly gave rise to email, the World Wide Web, and millions of commercial ventures, blockchain’s only application — cryptocurrencies such as Bitcoin — does not even fulfill its stated purpose.”
Arguments of the Crypto Community
According to Roubini, the launch of the World Wide Web in 1991 was the birthdate of the Internet. To consider this date as a starting point is a fallacy. It is true that the Internet quickly attracted public interest after the launch of web browsers (the first, Netscape, launched in 1994). But before that for several decades, narrow groups of high tech developers and enthusiasts laid the foundations for future explosive innovation. In other words, it took several decades to make the Internet useful to an ordinary person, primarily with the help of the invention of web browsers.
And such a long period of formation is inherent in almost all well-known projects. The first Diners Club credit card was invented in 1950, but it took a long time for credit cards to be firmly established in society. The basis for pagers was laid in the 60s, but by the mid-80s pagers were mainly used by doctors and drug dealers. The first cars with an internal combustion engine appeared at the end of the 19th century, but even 30–40 years later, cars remained a rarity.
Therefore, although it is true that successful new technologies at some point have an exponential increase in the number of users, this usually does not happen in the early stages of a project’s development.
Bitcoin and Illegal Activities
Roubini says: "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."
Arguments of the Crypto Community
This is one of the most common arguments of opponents of the cryptographic market along with the fact of excessive energy consumption. There is an element of truth here, but there are many nuances and reasons for reflection.
Bitcoin's connection with crime has been so widely spread by the media that journalists can be blamed for chasing the “hot” facts that are the basis of eventual journalism. There is an assumption that journalists so often publish such materials, regardless of the degree of involvement of crime in the Bitcoin ecosystem, due to the fact that:
The Bitcoin ecosystem is difficult to understand;
Journalists are looking for simple, relevant topics for their audiences;
Most journalists focus on conflict and drama.
This is not about the small proportion of journalists and publications that produce high-quality content on the cryptographic market. As for those who find it easier to communicate news about Bitcoin, then criminality, conflicts, drama, and wide audience coverage abound. Fortunately, the situation is changing for the better, and the proportion of high-quality content is growing.
Do not blame everything on the media, though. The reality is that any new technology in the early stages attracts the attention of two groups of members of the public: enthusiasts who understand the value of innovation and are ready to experiment with it; and criminals who work in conditions of high risk and try to get ahead of the law enforcement agencies by several steps. Offenders tend to quickly introduce new technologies and are often innovators.
History knows many examples of the rapid introduction of new technologies by the criminal world. To some extent, this probably happened with Bitcoin. One of the earliest uses of cryptocurrency was the purchase of drugs on the “Silk Road.” Recent studies on the use of cryptocurrency transactions in illegal activities show a decrease in activity, which is to be expected, given the history of the development of new technologies. The House Financial Services Committee confirmed the fact that digital currencies are rarely used by terrorists.
The crypto market itself, of course, suffers from fraudsters and suspicious schemes. These are projects that are being created with clearly criminal intentions pyramids, Ponzi schemes, and hypes. There are just projects created by amateurs, but they also condemn investors to the loss of capital. It is often difficult to distinguish whether it is a fraud or a scheme that is erroneous in terms of the value of an idea. Most ICOs fall into one of two categories, and many altcoins correspond to this description.
This, of course, undermines the credibility of new technologies. But the ecosystem, in some way, is not very different from previous similar social movements railroad enthusiasm in the 19th century, the internet in the 20th century, and IPOs in the late 90s. So Bitcoin and some other relevant projects will have to go through a stage of hype and associated fraudulent schemes. But nothing indicates that Bitcoin will not overcome this stage.
It is important to note that this is exactly what governments can help the crypto market with. Partial regulation, which has already been introduced in some countries, despite the shortcomings, usually implies some degree of protection for the consumer. And the crypto community, for the most part, supports reasonable legislative initiatives.
The flurry of criticism from Roubini at Bitcoin and blockchain benefits the crypto community, because it sharpens the thoughts and arguments of ecosystem supporters. The testimony of "Doctor Doom" is not convincing, as it turned out, it was not able to discredit the main valuable properties of Bitcoin and the new technology.