FED New York

New York Fed economists question the future cryptocurrencies

In a recent Q&A-blog post, economists of the Fed of New York wrote: “Bitcoin and other cryptocurrencies solve the problem of making payments in an environment where trust is broken but it’s unclear whether that’s a dilemma that needs to be solved”.

The use(lesness) of Cryptocurrencies

Cryptocurrencies are like any current day used currencies. They allow for payments between two parties. The major difference is that they can also serve purpose in environments where there is no trust.

This trust is implicit for any modern currency. When paying for a loaf of bread the seller has to trust that the cash received, will retain its value and not get eroded by inflation or confiscatory monetary reforms.

People often critize Bitcoin because it’s not backed by a physical commodity and it’s completely based on trust, that’s not an issue for Michael Lee, an economist for the New York Fed, who says neither is the dollar and most modern currencies 1http://libertystreeteconomics.newyorkfed.org/2018/02/hey-economist-what-do-cryptocurrencies-have-to-do-with-trust.html.

“As long as I trust that someone will accept the paper, I’m willing to accept it in exchange for my lecture. It’s trust that the “worthless” piece of paper is actually worth something to other people that makes it an acceptable medium of exchange.”

Consumers trust institutions and the value of their currencies, at least in the U.S. and the rest of the developed world, so cryptocurrencies will have trouble competing with established payment methods like cash, checks, debit and credit cards, PayPal and others, wrote Martin.

“If we lived in a dystopian world without trust, bitcoin might dominate existing payment methods. But in this world, where people do tend to trust financial institutions to handle payments and central banks to maintain the value of money it seems unlikely that bitcoin could ever be as convenient as existing payment means.”

Solving the issue of trust comes at the expense of convenience and scalability, as the process of picking random validators so that the network can verify transactions instead of financial institutions, “takes time, is expensive, and consumes tremendous amounts of energy,” Martin said. Another issue is extreme volatility, which also makes them less useful as currencies, he said.

The future of money?

One group that’s using Bitcoin and altcoins are criminals. Cryptocurrencies are ideal for circumventing legal or regulatory authorities, because they aren’t governed by any, said Lee.

Lee further states that the DEA reports a strong decline in bulk cash smuggling in 2016, which is the traditional payment method for drug shipments, and suggests that payments may have shifted toward cryptocurrencies.

Still, Bitcoin and other cryptocurrencies are trying to improve scalability and convenience “so perhaps in the future, one of these cryptocurrencies could realistically compete with current payment methods,” Martin wrote. “But, fundamentally, we wonder whether a payment method designed to function where trust in institutions is completely absent can ever be as convenient as one where trust is required, but also already exists.”

 

Source: https://www.bloomberg.com/news/articles/2018-02-09/fed-economists-say-bitcoin-can-t-compete-in-world-of-trust

References   [ + ]

1. http://libertystreeteconomics.newyorkfed.org/2018/02/hey-economist-what-do-cryptocurrencies-have-to-do-with-trust.html
0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *