Does the Developed World Need Cryptocurrencies?

Wednesday, February 14, 2018

Liberty Street Economics, the New York Fed’s blog, recently did a question-and-answer session with Fed economists Michael Lee and Antoine Martin about cryptocurrencies. It’s a largely neutral and factual interview, but the economists do make one provocative comment: “Cryptocurrencies arguably solve the problem of making payments in a trustless environment, but it is not obvious that this is a problem that needs solving, at least in the United States and other advanced economies.” In other words, why go through the trouble of network bottlenecks and proof-of-work schemes when people already trust their government institutions and banking systems?

Cryptocurrencies are a litmus test for how one thinks about the size and power of government. Are they bad because they allow people to circumvent government institutions, or are they good because … they allow people to circumvent government institutions? But the Fed economists raise an interesting point, one that goes beyond this age-old debate. Do cryptocurrencies have benefits other than cutting out the middleman? In an obviously hypothetical world where everyone had perfect trust in the government, would so many of us be writing so much about them? I’d argue there are still plenty of reasons to be excited about cryptocurrencies, even if one doesn’t care about circumventing a central intermediary. Here are just three quick examples, both large and small.

Enabling Smart Contracts and Other Blockchain Applications

There are many uses for cryptocurrencies beyond plain old “digital cash.” As I’ve previously written, smart contracts, which automatically execute when certain conditions are met, require the true irreversibility of cryptocurrencies to be truly binding. One might completely trust the court system, but still wish to have fully binding contracts for transactions too small to make the threat of going to court credible. Similarly, there are hundreds of applications being developed that run on blockchains and require cryptocurrencies to operate. Even if this industry is still in an embryonic stage, it is likely that one day we will see important blockchain applications, and that cryptocurrencies will be woven into their fabric.

Anonymous Donations

One area where people might value the anonymity inherent in cryptocurrencies is charity. Large donations from benefactors who do not want attention is the obvious case, but not the only one. How many times have you made a small contribution to an organization only to be hit up for more money again and again? With cryptocurrencies, one could support an organization without worrying about having to say no to it later.

Democratize Foreign Policy

One might fully trust central banking and other financial intermediaries while not always agreeing with other aspects of their government’s policy. This is one of those litmus-test issues, and in an interview with Coindesk, former deputy national security advisor Juan Zarate discusses the problems that cryptocurrencies create when they allow government sanctions to be circumvented. If one wishes to transact with a small business in a country facing international sanctions, cryptocurrencies give the individual that power. But in addition to circumventing sanctions, cryptocurrencies give individuals the power to enact them. If you vehemently disagree with the policy of another country that is not under sanctions, then download a smart contract that makes sure nothing in the supply chain of goods you buy comes from that country. Political consensus is no longer necessary to make one’s voice heard. If 20 percent of the population wishes to join a boycott, they can do so more effectively using cryptocurrencies.

With apologies to those who don’t want to hear it, it is unlikely that cryptocurrencies will create a perfectly decentralized libertarian utopia. They may take hold in some areas, empowering the individual, while existing alongside intermediaries in others. This is important, perhaps revolutionary technology, no matter one’s political beliefs.

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Max Gulker, PhD

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Follow @maxgAIER.