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February 07, 2018

A short note on bitcoin

We noted before that bitcoin supporters - many with a background in information technology, mathematics, or the sciences - have little regard for the centuries of knowledge gained by economists, sociologists, and anthropologist, on the deep meaning of money. Likewise, economists tend to dismiss bitcoin and blockchain in the way that monopolists treat potential competitors - with disdain and apathy. Agustín Carstens, the former governor of the Mexican central bank and now general manager of the BIS, is clearly in the latter camp.

Carstens yesterday dismissed bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster”, as the FT reports from a speech he gave in Germany. We would like to note that this may all be true. It is also true that central banks do not find that the blockchain technology offers advantages over existing technologies that underpin payment systems. We also agree that there are financial stability concerns that need to be addressed. But the idea that we can organise a globally coordinated crackdown on bitcoin is delusional when we can't even orchestrate global financial regulation and effective tax avoidance measures.

Central banks, and the economists who run them, are worried that in the future monetary policy may lose traction, and that they will lose their policy monopoly. This is bad for central banks, and bad for economists. And their ability to control the financial system with the current macroprudential tools will also be impaired. These concerns are justified to some extent, but the idea that they can reign in the use of a global private-sector technology is hopping mad. The state's money monopoly is coming to an end as is the ability of states to use financial channels as the main tool to fight organised crime. Carsten is right in his assessment that bitcoins are often used for criminal transactions. We didn't know that the energy consumed in the minting of bitcoins equals the entire energy consumption of Singapore. This is a nice statistic, but then again, Singapore is a small country and it is hard to estimate future energy consumption based on sheer extrapolation. And while it is perfectly sensible to ringfence the financial system from the consequences of excessive cryptocurrency speculation, none of this will stop the rise of cryptocurrencies because there is genuine demand for them. And while we, too, have supported the unconventional monetary policies of central banks, there can be no doubt that some of this demand is due to debasement fears propagated by some of the critics of the policy. 

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