End of November, in an article from Business Insider, another big name in the Financial Services industry shared his concerns and scepticism towards cryptocurrencies. Paul Donovan, UBS Wealth Management economist, pointed out that cryptocurrencies aren’t and will never be currencies.
Basically, his point was that cryptocurrencies lack some of the “basic” conditions for being currencies: they fails with respect to being a (stable) store of value and a widely used medium of exchange. These are valid critiques but they need some further considerations.
First, let’s address one other criticism that Paul Donovan mentions and is fallacious: the fact that cryptocurrencies can be issued ad infinitum. This is false. While it is true that we have seen a boom in the number of cryptocurrencies available, there is a reason why the cryptocurrency community uses the term “shitcoins”. Indeed, many of those cryptocurrencies have no specific use case and are just spin offs with minor tweaks of the code behind cryptocurrencies like Bitcoin. Most of them have failed already or are bound to fail soon. So no, there isn’t an “infinite” amount of possible cryptocurrencies. Convincing the cryptocommunity to support a “new” coin is not easy and you’d better have a very strong case for justifying launching one (faster, cheaper transactions, ASIC resistant mining algorithm for increased decentralization…), especially if it serves no purpose and is only a shared database (like Bitcoin).
Now, let’s turn to the two main points referred to above. In light of those criticisms, I believe it is time to change the name “cryptocurrencies” and switch to “cryptocoins” or “cryptokens” or “crypto-assets”, because in the end, that is what most of so called “cryptocurrencies” are. The Bitcoin community also agrees with this, as it compares Bitcoin to gold rather than fiat. It’s supply and emission is mostly inspired from gold: lots of (easy) mining in the early days in gold mines, gradually lowering as time goes by, and ultimately, a finite amount of gold on the planet. No one uses gold as a “medium of exchange”, but it nevertheless remains redeemable for fiat to make daily purchases in specialized shops. The same is true for Bitcoin: you buy and “hodl” it until you need the fiat money to pay for something, hoping that you have made some profit in the meantime.
The only difference is the “trust” between gold and Bitcoin or other crypto-assets. Gold has been around for several thousand of years, but it’s price has also had wild swings. During the Roman Empire, gold was gradually mixed with other metals to artificially create more money, which led to mass inflation. In the 14th and 15th century, the increased supply of gold coming from America caused a relatively high level of inflation (in light of the monetary system of that time) and a devaluation of the value of gold during the following century in Western Europe. Nevertheless, the trust people have in gold is still very high across the entire world. But this is just a collective hallucination since gold cannot be eaten, or provide shelter or heat and serves no “real” purpose for the ordinary man or women. The fundamental question is whether crypto-assets like Bitcoin will achieve the same level of trust based on their core attributes (blockchain technology, decentralization, governance based on consensus and majority vote, predetermined and limited supply, security…)
Besides, I would also underline that other metals joined the “family” of valuable metal assets throughout history, and the price of gold didn’t necessarily drop! No one knew what to make of Titanium or Aluminium just a few centuries ago. Cobalt is stealing the show nowadays due to high demand from the emerging electric car industry… And? Does it matter with respect to gold?
So addressing the question of not being a “store of value”, Paul Donovan is only half right. It is not a stable store of value, which fiat is supposed to be: throughout history, fiat also had it’s ups and downs, even nowadays, some currencies have seen a massive drop in their value like the Russian ruble or the Turkish lira. But Bitcoin is nevertheless a store of value, based on collective/distributed trust, as any other asset like gold, a stock or security. The only difference is that we are still in the exploratory phase and have no unified methodology to assess “risk”. The very first publicly traded stocks were not necessarily safer than Bitcoin is right now! It took decades or even centuries to develop indicators to measure and assess the “risk” of stocks/bonds (predicting future cash flows, asking companies to publish certain facts/figures about their companies…) Some indicators are starting to emerge like the number of active nodes on a crypto-asset’s network, how much the mining process is decentralized, how trustworthy is the development team behind a crypto-asset… This last point is probably one of the reasons Bitcoin is so popular: since it’s creator vanished, there is no single person that can “spoil” or ruin Bitcoin.
Now to address the second criticism: crypto-assets are not “mediums of exchange”. No shit! Don’t forget that only a small fraction of crypto-assets have ever had the intention of becoming “mediums of exchange”. Bitcoin was supposed to be a “decentralized payment” technology and instead, became virtual gold. At the moment, there are probably no crypto-assets which “fit” the criteria for being both a stable store of value and a medium of exchange, because their issuance is not controlled by a central authority which can limit or increase it’s supply based on various indicators (inflation, velocity of money/consumer spending, other economic considerations…) There may be one, which might completely revolutionize the way we think about monetary policy, but I will address it in a separate article. If you’re curious, you can delve into this theory here: the relative theory of money.
In the case of this solution, government would not need to tax anything since it would be entitled to generate as much money as it employs people.
Finally, there seems to be a misunderstanding about how bankers and other institutional actors comprehend crypto-assets. At the moment, most “new” blockchain “token based” projects have value not based on pure speculation, but on speculation with regards to the future service they will provide in exchange for “crypto-assets” which I would rather call “cryptokens”. Ether, the cryptoken of Ethereum, will be used to “fuel” or “pay for” running decentralized applications/smart contracts. In this regard, it is absolutely notlike a financial asset, a stock or anything else… It’s much more like trading your dollars against a special “coin” to play games inside an arcade.
This comparison is extremely important. Ethereum is very much like a decentralized arcade: anyone can share the computing power of their computer used to run the games inside the arcade and get rewarded in arcade “coins” that can later serve to play the games (aka mining), the developers that want to run games inside the arcade act as intermediaries between people who want to play and the “miners” who provide the power/infrastructure for those games to run (since the coins have to be bought from the miners, and can then be “spent” for playing games by giving the coins back to the miners against their computing power). It is very much a “circular” economy. The “original” creators of the decentralized arcade reserve a portion of the “coins” allowing to play games to themselves (via the Initial Coin Offering process).
How is this in any way similar to financial assets, stocks or securities? The only difference is that there is no easy point of taxation. While “traditional” arcades pay taxes by reserving a part of the fiat currency they get in exchange for the “arcade coins”, it isn’t easy to imagine where taxation will be paid for blockchain based decentralized services. But this is not new! How do you pay taxation for the value generated and created via open-source software? People use open-source software every day to generate value, and there are no taxes paid. How do you pay taxation in the case of time banks, where people exchange one hour of work against someone else’s hour of work? When you ask your family members for help moving out from your flat or renovating your home, there is no exchange of money yet value is created.
And so regulators will need to differentiate between “crypto-assets” which serve no purpose other than speculation on future returns (which is not bad per say) and “cryptokens” which will be used to pay for future blockchain based services. Taxation of the former might make sense, although I wonder whether certain assets like gold are subject to taxation. For instance, although taxation in many countries does tax sales of various goods like gold, antiquities etc, if you keep gold in a vault in your home, are you taxed when you sell it for fiat to private individuals? You might say this is “escaping” the law, but it is relatively easy, in many cases, to do so. Taxing “cryptokens”, however, is ridiculous. In that case, we should also tax any “token” which might become more desirable in the future and on which people try to make money. For instance, buying several highly sough after concert tickets and reselling them at a more expensive price, or buying several iPhones before they are out of stock and reselling them at a higher price online… There are millions of ways that people try to make a profit by speculating on the value of a good/token, and obviously, regulators systematically try to crack down on these practices: for instance, selling concert tickets at a profit is illegal in certain countries. Nevertheless, “cryptokens” might be best thought as a worker owned cooperative relying on open source software. The value generated doesn’t land in the pockets of greedy shareholders which open accounts in fiscal paradises to evade taxation, the value is rather redistributed and shared among the various participants in the ecosystem. Sure, you will always have speculators who buy and sell these tokens for profit, but this will stabilize in time, once these various Blockchain projects start providing the services that their tokens are meant to buy. If you’re really serious about taxation, then focus on the “easy win”, the elephants or even the bloody Mammoths in the room: the select few billionaires or multinational corporations that are evading taxes so much it’s driving our economies to the border of collapse, instead of chasing after Mr. Nobody that’s made a few thousand bucks by betting on the “right” crypto-horse. (As I side note, I would say this is not surprising since most billionaires/multinationals more or less control the governments and their tax policies, so technically, they don’t even need to evade taxation since they manage to get massive tax cuts…)
Take for example a blockchain project like Golem: it simply creates a blockchain based system to match up people that are willing to share computing power and people that wish to purchase computing power. Imagine you are a small video animation studio, you need powerful computers to export your animation and “rent” the computing power of millions of people spread all over the Internet to export it. Who should be taxed? If you put up an ad on a couch-surfing website that you are willing to share your couch against a virtual token that allows you to claim the same from another person offering his/her couch later, where/how should that be taxed? In the end, it’s simply a “generalization” of the most basic and ancient principle in economic exchange: the principle of reciprocity, people helping each other in turn. This principle is still alive in small communities, families, friends.. What Blockchain technology permits is to extend the trust derived from social ties and social pressure to make sure reciprocity works across the entire world. This is why Blockchain technology is so often referred to as being trustless.
And so in conclusion, I would like to stress the major differences there are between “crypto-assets” and “cryptokens”, which are worlds apart and cannot be put in the same regulatory basket.