There Might Be a Case for Financial Intermediation

In the early days of Bitcoin, I was explaining the technology to economist Edward Stringham. This new market-based money allows individuals to exchange peer-to-peer without financial intermediation, I said. All transactions are finally settled, regardless of geographic proximity, with no previous trust relationships, with zero access to financial institutions.

It’s as if everyone in the world is exchanging cash.

I thought this was the best case I could make at the time. It seemed obvious to me that this represented an obvious improvement.

He immediately recoiled.

“What? No chargebacks? The customer bears all risk? Institutions no longer vet people party to an exchange? This has some major downsides. The market has worked very hard to create reliable intermediation. It’s not going away anytime soon.” (I’m paraphrasing.)

You see, Stringham is the author of Private Governance, parts of which are a hymn to the brilliance of intermediation and how it protects consumers and sellers from fraud and makes life so much easier. The system is expensive, but the elaborate industry of intermediation massively improves our lives. He couldn’t see a case for getting rid of this wholesale, and he saw many downsides to the very notion of peer-to-peer exchange.

It was hard for me to wrap my brain around this critique of cryptocurrency. At the same time, looking back and reflecting on some recent experiences, I can see a case for his point.

Only a few months later, I had a buggy wallet on my phone hacked. Poof, there went 10 bitcoins. To this day, I can see this transaction on the blockchain. It just sits there. It’s never moved. That transparency is beautiful to behold. But there’s a problem. I have no idea to whom the owning public address belongs. Otherwise I would write that address and say: hey, give me back my property!

But in what sense is a stolen bitcoin still my property? I am free to think of it as such, but the reality is that someone else owns it. There is no governing body to adjudicate this dispute. There is no way to get my money back because, well, it’s not really money that belongs to me anymore, if you think of ownership and control as the same.

Stupid Wallet Mistakes

Just yesterday, I accidentally tried to send $930,000.00 in crypto to someone. Fortunately I didn’t have that much money, so the wallet balked. If I had, another address would have been in control of exactly that amount. How did this happen? I used the wrong currency denomination, just because I wasn’t paying close attention.

Yes, it was my fault. It’s called a mistake. Current crypto conventions are radically intolerant toward mistakes. Instant settlement. No counterparty risk. No trust is necessary. Poof, you are broke. We are all one tiny click away from full bankruptcy.No going back.

A few months ago, I was standing around after a speech and handing out two bucks in bitcoin cash to anyone who wanted it. Nice party trick! Meanwhile I was carrying on conversations. So I got a bit distracted. At one point, I was about to click send but something tickled my brain. I took a second look at my screen. I was on my way toward sending a stranger $2,000. I backed out of the transaction just in time.

Had I gone ahead, I would have found myself in an awkward position of having to beg some stranger for my money back. He would have been under no legal or contractual obligation to cough it up. Welcome to the world of peer-to-peer exchange. There is no third-party authority to adjudicate disputes at all.

I’m thinking of other cases. Just a few weeks ago, I sent $50 to the wrong address, simply because I had pasted the wrong address in the window on my phone. I had relied on the Mac OS feature that duplicates copy-paste from the laptop to the phone, but, for whatever reason, it didn’t happen to work in that instance. Probably my fault. Fortunately, the address to which I sent the money was one I controlled.

The more you use this stuff, the more stories you have to tell about mistakes. They are legion.

With the scaling problems that came to fruition in 2017, users discovered another source of uncertainty. You didn’t know in advance whether the transaction would be expensive or affordable, fast or slow. I was stunned by the middle of the year to discover that I could no longer send a buck or two to a new adopter, unless I want to pay three or four times that much in transaction fees.

To whom does one complain? Bitcoin is not a company, has no 800 number, has no terms of use, and offers no support at all. It’s all on you.

To be sure, there are wonderful aspects of this. The near elimination of counterparty risk is great. That there are no chargebacks is a great thing for merchants who deal with a constant fraud problem with credit cards. There is no identity theft. You don’t open up your account to find that someone has spent a few thousand dollars in a casino in Louisiana. It really is like cash for the internet.

The Trouble With Exchanges

Many of us have complained for years about how crypto exchanges are dominating the market. Coinbase today has more users than Charles Schwab. It’s just a bank. You are trusting someone else to control your access. It can be shut down at any time. In fact, you face a greater risk of getting your crypto-exchange account closed than you would of having a conventional bank freeze your funds. It happens to people all the time.

If you are using an exchange, you do not control your private keys. It’s a trust relationship, not all that different from the existing financial system.

We can kvetch about this all day, and I do, but we might also recognize that the success of Coinbase really is the market speaking. You can say that people are stupid, but the truth is that consumers rather like… consumer services.

When I bring up this subject to my crypto friends, they immediately talk about the role of smart contracts, better user interfaces, and further innovations down the road. All of this is true. Remember that there were many problems with email in the early days, and they were almost all solved in time. The same will be true in crypto spaces.

That said, we are probably being overly confident in claiming that the great merit of crypto is disintermediation of all things. That probably won’t happen. In fact, if the market decides that it does not want that, it probably should not happen. And let’s recall that there is a huge difference between forced intermediation and voluntary intermediation. What we are really seeking is not universal disintermediation as such but rather universal competition and choice.

Here is where we find the true brilliance of the crypto revolution. It’s all about choice in money, and many choices in everything. If we get our utopia someday, it will be because crypto killed forced monopolization.

A version of this article appeared in Forbes

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Jeffrey A. Tucker

Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his emailTw | FB | LinkedIn