The Unbearable Uselessness of Crypto. It is the contemptuous title of a long text by Andres Velascodean of the School of Public Policy of the London School of Economics and former finance minister of Chile. An article that attracted the attention of Nouriel Roubini, who in turn in recent weeks has lashed out several times against cryptocurrencies and iconic figures such as Binance CZ.
Roubini tweeted Velasco’s article commenting as follows: “The world should have realized the sad reality that the cryptocurrency industry is nothing more than a get-rich-quick lie wrapped up in hype, floating on an ocean of libertarian tech chatter. Will anyone do anything about it?”
Velasco’s J’accuse against cryptocurrencies
“Forgive the appalling cash management he has caught FTX with less than 1 billion dollars in hand at a time when short-term liabilities amounted to 9 billion dollars. This sort of thing has been known to happen to banks as well. Forgive the opaque accounting, the incestuous loans with fictitious guarantees and the 8 billion dollars that someone has ‘accidentally’ lost. Such misadventures also occur in the Russian Bratva, the Italian Camorra and the Japanese Yakuza. Forgive the advertised database technology, for many purposes slower, more expensive, and more cumbersome than the 30-year-old established ways of doing things. Someone will one day find a use for all those blockchains”, reads the incipit of the editorial by Andres Velascoformer presidential candidate and finance minister of Chile.
In his essay, the Chilean economist explains why the argument of “crypto enthusiasts” on the usefulness of cryptocurrencies, including the CEO of Coinbase, Brian Armstrong, does not correspond to reality. “Forgive the hyperbolic rhetoric about cryptocurrencies as a miracle cure not only for economic growth, but also for ‘reducing war and corruption and bringing greater happiness’. Crypto nerds aren’t the only ones talking nonsense,” Velasco continues.
What is truly inexcusable is that in the 14 years since the appearance of the bitcoin, the cryptocurrency industry has failed to produce anything of value. What factories were built with cryptocurrencies? What new goods and services are available? Which government has raised funds through cryptocurrencies? Certainly not The Saviorwhich has adopted bitcoin as legal tender and is now on the verge of default.
Even worse, Velasco continues, the central promise of cryptocurrencies – better money – has been proven entirely bogus.
Brian Armstrongco-founder and CEO of Coinbaserecently touched on the monetary issue of cryptocurrencies, telling al Financial Times which allows you to trust “the laws of mathematics, if you will, instead of the laws of men”. So “instead of ‘do not be naughty‘, is ‘it can’t be bad‘. This is the promise of cryptocurrencies.”
Cryptocurrencies vs fiat currencies
The “men” in Armstrong’s statement work for governments, which are the issuers of old-fashioned fiat currencies. If those “men” print too much money — say, to finance a large budget deficit — then the value of that money falls, and the government levies what amounts to a tax on citizens left in possession of a devalued currency. Libertarian distrust of politicians and government is the animating force of the cryptosphere.
Contrary to fiat money, only the “laws of mathematics” govern cryptocurrencies. An algorithm fixes the amount of cryptocurrency that can be “mined” and at what cost. The more drives you produce, the more expensive it is to mine the next drive. No politically motivated man or woman can debase cryptocurrencies. Mathematical rigor saves us from evil government.
“Sounds good, right? If only it were true”, Velasco cuts short pointing two reasons so people all over the world, not just citizens of the United States and the European Union, are happy to hold currencies like the dollar and the euro. The first was spotted by John Maynard Keynes, who argued in his General Theory that “the fact that contracts are fixed and that wages are generally rather stable in money terms undoubtedly plays an important role in attracting such a high liquidity premium to money.” ”. Guillermo Calvo of Columbia University called it the “theory of the price of money.”
If my monthly salary is fixed in dollars, as are the prices at the supermarket, I can be pretty sure how many kilos of rice or bottles of beer my dollars will buy. So, I’m happy to hold dollars, mostly for transactions, but also for storing wealth. Here, cryptocurrencies fail: no supermarket prices are set in bitcoin or its equivalent, and no one – apart from a few Silicon Valley geeks – is paid in cryptocurrencies.
The other reason a US resident is happy to hold dollars, Velasco explains, or a eurozone resident to hold euros, is that the government sets a floor price for that currency by allowing taxes to be paid in it. That is, the value of a dollar in the financial markets can never be less than the value at which Uncle Sam will redeem that dollar when Americans pay taxes every April 15th.
Here, once again, the crypto world fails. Crypto’s only value, Velasco argues, comes from the expectation that others will want to keep it. “If they do, then I want to keep it too. If not, I’ll download it. This is what happened last summer to the luna cryptocurrency, which crashed and vanished within days. It could also happen to any other cryptocurrency, on any other day,” concludes Andrés Velasco.