Debating crypto critics: Nouriel Roubini’s testimony before the US Senate

Nouriel Roubini. Source: Wikimedia Commons

Late last year, Nouriel Roubini spoke before a US Senate hearing on banking, and delivered a testimony that can only be described as a FUD MOAB — a comprehensive presentation of the major criticisms levelled at Bitcoin and crypto in general, and aptly titled “Crypto is the Mother of All Scams and (Now Busted) Bubbles”. Since the testimony has been made public it has been lauded on one side as the death knell for the crypto-sphere and written off on the other side as the dinosaurs of old money trying to crush this new phenomenon. As always the truth is probably somewhere in the middle, and so it is regrettable that no real debate took place on the merits of Prof. Roubini’s comments. Ethereum founder Vitalik Buterin initially agreed to debate Roubini, but no solid plans are forthcoming and the two have been trading heavy-handed barbs on Twitter. With that in mind, it would be pertinent to discuss his most prominent talking points before such an event, to at least have a fair framework of the debate at hand. The testimony ranges from fair to unreasonable in its criticism, so this article will address just ten of his most prominent propositions on their merits.

  1. Bitcoin is a poor store of value. It can fluctuate 20–30% in one day.

This is an incomplete sentence. Bitcoin is a poor store of value, compared to…what, exactly? The US dollar? That might be a fair assessment, but there are other national currencies that do not look so good by comparison. Zimbabwe springs to mind — in 2008 they saw a daily inflation rate of almost 100%. Bitcoin is deflationary by comparison, as eventually coins will be lost faster than they can be mined, so there at least exists the chance that those fluctuations will be in an upward direction.

Prof. Roubini also exaggerates the volatility to which Bitcoin falls prey — 15% in one day would now be a serious outlier, as BTC has become less volatile year on year. In the developed world 15% swings would indeed be considered quite volatile. However, if BTC outperforms even a single national currency in this regard, this is already an incredible achievement — a fact Prof. Roubini does not acknowledge.

2. Crypto is full of charlatans, fraudsters and thieves

Without a doubt. One need only visit a single conference to see that. The community of enthusiasts and those working in the space regularly fail to acknowledge nefarious actors, and worse they will go to lengths to defend them. The level of due diligence is woefully insufficient at present — ICOs are completed with anonymous CEOs who subsequently flee with the money, ICO rating websites are paid to provide favourable reviews, and some crypto-focused news sites regularly fail to cover exit scams, insider trading and obvious Ponzi-like projects. The instinct to defend cryptocurrencies as a whole at present is overpowering the cynicism that is sorely needed — not least if they are to be regulated fairly by central governments.

3. Crypto is not scalable, is not decentralized, is not secure

Roubini discusses Vitalik Buterin’s impossible trinity — that a blockchain can be secure, it can be decentralised and it can be scalable, but at present it cannot possess all three qualities. This is a serious problem, and one which most of the biggest projects in the space are trying to solve. Prof. Roubini takes this further, saying that blockchains do not possess any one of these qualities. The evidence he provides to support this claim are not entirely convincing, however.

First, he argues that Bitcoin and Ethereum at present are not fully decentralised because their miners are in large part located in the same geographical region — Northern China, Russia and Iceland, where electricity costs and temperatures are lower. That is not centralization, these are places with vastly different governments and languages, but there is still cause for concern particularly if the dominance in Northern China continues.

For security he posits the potential for a 51% attack, which has happened to smaller coins. This has happened, most notably to the Bitcoin Gold hard fork. He speculates that if the accumulation of mining pools in certain regions continues, BTC would be vulnerable to a coordinated 51% attack by the mining pools as they would gain orders of magnitude more in fiat value than the cost of the attack. Although it is theoretically possible, at present the distribution of mining pools looks quite healthy, and the long term cost of destroying such a profitable enterprise would still make it completely irrational.

Lastly, both of these concerns really come as a byproduct of seeking scalability. The arms race for ASIC miners is largely due to the massively increasing price of BTC over time, which has obviously been proportional to the number of people purchasing and selling also growing exponentially. At present Bitcoin’s network is secure, it is decentralised and it is relatively scalable, though developments will be needed to ensure a smoother growth in the future.

4. Cryptocurrencies are used for criminal activities and to bypass capital controls

For the first point, Cryptocurrencies like Bitcoin and Monero certainly are used for criminal activities, but it will be a long, long time before they overtake the US dollar for those purposes.

As to the second point — the avoidance of capital controls — this is where Prof. Roubini has his wires crossed, and fails to understand or at least acknowledge the point behind cryptocurrencies. These products exist to grant financial empowerment to individuals, with all of the responsibilities that come with that power. He constantly references the inability to seek redressal when coins are stolen or embezzled — failing to see that there are individuals who will take that risk to control their own funds. In Western democracies we might feel this to be nefarious, or indeed as Prof. Roubini suggests, the realm of the conspiracy theorist. Not all states are as liberal with capital controls, however, countries like Russia, India and China have strict controls on buying foreign currency or taking a national currency abroad. Cryptocurrencies are a tool of liberation in those circumstances.

5. Crypto is dominated by rich white men

Just in case we forgot we were reading the words of a coastal social scientist, Roubini reminds us that white men are the sole beneficiaries of the blockchain revolution. This is perhaps the easiest point to dispense with — there is certainly no cabal of crypto-racists or cyber-misogynists dictating who can and cannot participate in blockchain projects. Anybody can invest, and moreover anybody can develop, even anonymously should they choose. It is true that coin owners are in majority male, at least if the self-reporting on Twitter polls are used as evidence. As for why that is, one can only speculate. Perhaps it is the risk factor of such investments, to which women are on average more averse, or it could be the general fact that more computer scientists and tech enthusiasts are men. There is certainly no barrier — and when it comes to projects many are crying out to include more women on their teams. Does Prof. Roubini suggest we force women into these roles?

As for their skin colour, it’s impossible to see the ethnic makeup of wallet holders, as that feature has not yet been added to block explorers. We know that the vast majority of mining takes place in Northern China, as Prof. Roubini regularly references, where people are not generally considered to be white, and crypto is tremendously popular in Japan and Korea (both Koreas, in fact). Prof. Roubini’s comments here are inflammatory and unnecessary. There is no real support for the idea that anyone is being oppressed by the crypto-patriarchy.

6. Blockchains will not be used by banks because of their public ledgers, and companies have not incorporated blockchain technology despite their research

Sure! It’s a free world — it is not crucial to cryptocurrency that nations or banks adopt them or their technology. These products are for individuals, aimed at giving them more choice and control over their money. If the present technology employed by banks is more effective then they should, by the laws of capitalism, continue to use those platforms.

On a more productive level, the public/private binary is not as concrete as is suggested here. Models have been created of hybrid blockchains — a private, internal blockchain which outputs a hash to the public blockchain, for instance. This allows a company to keep full records of transactions and related data internally, while still making use of pre-existing platforms like Ethereum. So if the transparent nature of blockchains are the chief concerns there is a solution, and if financial institutions reject the technology completely (which does not seem to be the case at present), then that is also not a problem.

Finally, Prof. Roubini argues that companies broadly have not incorporated blockchains, despite heavy investment into their research. Here he strays almost to the hypocritical — one of the reasons they have not been adopted is precisely because of the opaque regulatory environment, the ‘grey areas’ where blockchains stand currently. This is circular reasoning — he decries blockchain to legislators as a failure because of their lack of corporate use, but legislators have not provided a regulatory framework for companies to follow. It is not fair nor reasonable to hold this as a criticism of cryptocurrencies.

7. Stable coins like USD Tether are a scam, backed by nothing and used to prop up prices.

Tether is cryptocurrency’s Schrodinger’s cat — until an audit takes place those tokens both are and are not backed by fiat. Tether Inc. has published attestations from banks towards the effect that they are indeed backed by USD, and regulators have accepted these attestations elsewhere in the past (as they did with the Winklevoss twin’s Gemini stable coin). Nonetheless the discovery that these stable coins and particularly Tether have no backing would be disastrous, and certainly Tether Inc. has not been as transparent as could be desired.

To lend credence to his position that Tether has been used to artificially prop up the price of BTC Roubini references an article by John Griffin and Amin Shams, which tracks some of the biggest exchanges of Tether for BTC in 2017 and 2018. Such transactions clearly impact the volume on Bitfinex’ exchange, but manipulating volume is common in crypto exchanges (and even in private stock and securities exchanges). The article in question shows how closely correlated BTC’s price has been with the issuance of new Tether supply, but as always correlation does not imply causation and both would be expected to rise with the growth of the market in general. The article does not track Tether’s supply past January 2018, but we know that the supply reached its highest point in the fall of 2018, when Bitcoin was priced around $7,000. If nothing else this implies that the price did not remain correlated with the supply of USDT.

8. Cryptocurrencies have no intrinsic value, whereas fiat currencies certainly do, because they can be used to pay taxes.

If the ability to pay taxes is the defining characteristic of intrinsic value, then have no fear. Arizona passed a bill early last year that will see bitcoin and other currencies accepted for tax payments by 2020. At which point, by Prof. Roubini’s definition, Bitcoin will for the first time have intrinsic value.

9. The crypto bubble is similar to the tulip bubble

The tulip bubble occurred when the price of tulips were speculated upon far higher than their fundamental value. Whether or not one bitcoin is really worth what it trades at is a discussion that will never go anywhere. But one can absolutely make the case that it could be.

Imagine a scenario where Bitcoin achieved relatively widespread adoption, and many companies need to make large international transactions of 10 million dollars or more per day using Bitcoin. The supply is fixed at 21 million, much of which is not in circulation at any given time, so to make that transaction bitcoins need to be obtained. This demand will necessitate the purchase of massive amounts of bitcoin which in turn drives the price up while the dollar value of the transactions remains the same. This cannot happen with tulips, nor any flower for that matter. So yes, people are speculating based on expectation of future prices. But it is not unforeseeable that bitcoin as an asset could be valued at those prices in the future.

10. Crypto has not produced one killer app

Many people are turning towards bitcoin or other assets as a means of transfer because they are prey to the predatory remittance market — those services which allow individuals working abroad to send money to their families. The average fee for these services is around 7.5%, which is extremely hard to justify. Depending on the cryptocurrency used, international transfers can be done at a flat fee far below one dollar. The technology to completely and permanently replace the remittance industry exists already, but doing so will require improving public trust and understanding in blockchain technologies.

So, now what?

The approval or disapproval of legislators towards cryptocurrencies has enormous consequences to the value of those projects, but can do very little to stop the liberating benefits they bring to individuals. These are extra-governmental currencies by nature, and the legislative environment will obfuscate but never block any paths to their use.

There is a grand irony here — Nouriel Roubini is renowned more than anything for his prediction of the 2008 banking crisis, which plunged the economies of the Western world and many more besides into recession and hardship. Can he see no value in taking power from the institutions — financial and governmental — instrumental in that disaster? Certainly economic disaster can befall coin “hodlers” — indeed the past year has been quite a large one. In this, however, those individuals were the architects of their own downfall, speculating at prices far beyond what might be considered reasonable. They have no centralised authority to seek redress to, but in this regard they are not much different to the victims of the crash Prof. Roubini predicted.

Advocates of this technology also must learn to take on board or at least grapple with some of the grievances, warranted or otherwise, aimed at this industry. There is a tendency for coin holders to treat their project like a beloved sports team, which could not be further from reality. Bad actors in the space must be acknowledged, as must legitimate practical obstacles to development as a whole. The alternative will lead legislators towards the pessimistic outlook exemplified by Prof. Roubini’s testimony, and hurt the industry far more in the long run.

Article by Byron Murphy, Editor at Viewnodes. For information on some of the services provided by Viewnodes, including our Tezos delegate, click here.

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