A slow learner’s road to crypto enlightenment

I have been involved in blockchain for close to five years now, and was a co-organizer of what was probably the first “serious” blockchain conference in Luxembourg in the summer of 2015, focusing mostly on researchers and academics rather than evangelists. I saw the potential of this technology, but was always extremely puzzled by the “bitcoin is the future of money” crowd. In fact, one of my reasons for getting rather deeply involved in blockchain is to show that while crypto is not money, blockchain can be the technology from which a real revolution of our monetary systems might emerge. But that’s another story…

Why do people think crypto can replace fiat?

I have finally come to the conclusion that the reason some people think that crypto can replace fiat is that they think money is somehow created “out of thin air”, without intrinsic value, and that the reason we use it is based on some kind of “common agreement” or “network effect”. If that is the case, the reasoning goes, why could we not go from one belief system (fiat) to another (crypto).

To me, that’s like saying 2+2=1789. Nonsense. No-one can really believe this. But I’ve come to the conclusion that some people do. As I said, I’m a slow learner.

So the facts are this. Our banking system is far from perfect. Our governments have taken on too much debt. However, the vast majority of money issued in developed countries today is in the form of bank IOUs that are themselves backed by IOUs of individuals, companies and governments. Yes: backed! And crypto is not. Any questions?

Backed assets cannot be fully decentralised

Anything that is “backed” cannot be completely decentralised, because “backing” refers to the real world of assets and commitments by humans and corporations. Therefore a pure cryptocurrency cannot be backed by anything, its value must derive from its utility and the network effect created by its users.

In that sense, Libra is not a cryptocurrency, it is a tokenised asset: hugely divisible and easily transferable shares of a multi-currency diviersified money market and bond fund.

The risks are also different. A stablecoin that is backed by bank deposits may lose value if it is found that the amount of deposits is not sufficient, if deposits are stolen or if the bank holding the deposits fails. A cryptocurrency may lose value because its perceived utility declines, for example because a competing network is seen to offer superior features. Both are of course subject to software errors and hacks.

Crypto for the unbanked? Let them eat cake!

Another meme is that crypto will solve the problems of the unbanked. I have jokingly written years ago about the number of bitcoin transactions that the average Indian farmer could afford given an average income of less than EUR 4 per day, but in fact it is not funny. Telling poor people: “just use crypto” is like Marie-Antoinette telling starving Parisians in 1789: “if you don’t have bread, eat cake instead”. It is simply insulting.

As The Guardian noted in a recent editorial, “surveys show the most common reason people do not have a bank account is that they have nothing to put in it”. It stands to reason that giving poor people bitcoin wallets will not help them. A starving man does not need a cookbook, a drowning child does not need coupons for swimming lessons, a poor woman does not need a crypto wallet or a copy of “how to become a billionaire by waking up at 5 AM every morning” or some such. A starving man needs food, a drowning child needs a good swimmer nearby, and a poor woman needs money. It is as simple as that.