Renowned Economist Calls For Outlawing Bitcoin

Yesterday in an interview with Bloomberg, economist Joseph Steglitz called for literally outlawing Bitcoin, on the basis that it doesn’t serve any “socially useful function“. In the same interview, he unintentionally did a good job highlighting several of Bitcoin’s socially useful functions.

Let’s leave aside whether or not governments should outlaw things that they deem to lack “socially useful functions”, or who decides how much utility a product has in the first place if not consumers, and focus on the ways he disproves himself in his two minute interview.

1. “One of the main functions of government is to create currency“. Of course, perceived problems with the way government has managed currency, and the fact that governments have moved from money to currency by removing intrinsic value was a major motivating factor in the creation of cryptocurrencies and a major appeal for early investors. Government has gone from coining currency and using regulation to standardize weights and measurements to, in Steglitz’s words, “create” it instead. Attempting to address this is a socially useful function.

2. “Bitcoin is successful only because of it’s potential for circumvention (of government currency).” I’d argue that it isn’t the sole reason, but again, he’s highlighting at least a potential for a socially useful function–namely, competition among currencies. Bitcoin may not be used exactly as money currently, but his fear and our hope is that it or something like it could one day function as such. There are other laws that cryptocurrencies are used to circumvent, namely those that enable black market trading in illegal goods–silk road staples like drugs and guns. However, the same can be said of the internet, or the use of paper money rather than traceable digits, or even the US mail. Freedom in conduct or commerce always comes with risks and trade-offs–but so does curtailing the same.

3. “Lack of oversight” is at most charitable how he describes a feature he deems a bug. Given that this follows his description of Bitcoin as a form of currency competing with the US Dollar, it seems quite an odd claim. There are several actions of the federal reserve and it’s deliberations which affect the money supply of the US Dollar that are immune from audits and shrouded in secrecy. Bitcoin’s blockchain, by contrast, uses an open ledger system, while decisions about any changes to bitcoin are made in public forums. No… what he means is lack of government oversight and ability to control it. What he means is centralized control, rather than decentralized oversight.

4. “We ought to just go back to what we have always had.” Does he mean a return of currency to something backed by gold or silver? He certainly doesn’t seem to. No, he seems to imply that we should return to the monetary system as it’s existed after Nixon defaulted by pulling us out of Bretton Woods, and the creation of the first cryptocurrency. Progressing to something new rather than sticking with something flawed certainly seems like a socially useful function if the attempt is successful… hell, the attempt itself seems worth trying even if there’s potential for failure. Of course, he wrote his first major work on risk aversion.

5. “This (Bitcoin’s rise) is just a bubble.” Maybe he’s right. Maybe Bitcoin will plummet tomorrow. There’s certainly evidence that it may be in bubble territory. The problem is that if it is in a bubble, it is more (or less) than just money, and many Bitcoin holders are using it as an investment vehicle. In other words, a socially useful function for investors attempting to increase value. How wise current investors are may be debatable, but what’s not debatable is that plenty of Bitcoin investors in the past have seen more than significant returns on their investment… and that future investors are risking their own assets. This may be a bubble, and it may pop, but Steglitz has access to no more information than the average holder, and is merely highlighting one more function of BTC through the lens of investment. BTC seen as an investment is one of the main factors driving it’s volatility, and preventing the kind of stable certainty that would allow it to function more like money.

6. He uses Bitcoin as a segue to discuss “the medium of exchange used for transactions“, and how we should “move away from paper into a 21st century of a digital economy“, sounding almost like an enthusiast. Many investment houses are wary of cryptocurrencies in general. They often don’t invest in them, advise clients on them, or make exchanges easy in-house. However, many investment houses have started looking to blockchain technology that has been revolutionized by Bitcoin and Litecoin as a way to secure their own financial data. Seems the crypto revolution offers something even for them, as a socially useful function that even big investment houses can utilize without needing to corrupt the cryptocurrency markets themselves.

7. “It’s smoke and mirrors” he says, again, of a completely transparent system controlled by users, for good or ill, while comparing it to fiat money controlled by a central bank opposed to basic transparency requirements and fuller audits.

8. “The value of a Bitcoin today is based on the expectations of what a Bitcoin will be tomorrow.” Well, sure. At this point I think it’s value is entirely not just subjective, but almost exclusively speculative. This is also true of assets that have more in the way of underlying use value, whether precious metal commodities or merely corporate shares. For those looking to preserve or grow value, the expected future value of government currencies without backing by tangible assets are often taken into account as well. Certainly, future expected value of the US Dollar is why most people with assets don’t keep them in bank accounts where they would lose value over time, incentivising them to gamble on investments like stocks, bonds, funds, and yes… Bitcoin.

A nobel prize doesn’t necessarily make him right. As smart as he may be, in this interview the most I can credit him with is the good intention of trying to save individual investors… from themselves… by restricting their choices. However, his intentions seemed more centered around protecting the government monopoly on money by using it to prevent the evolution of cryptocurrencies towards that end. Every so-called critique he leveled against Bitcoin in his two minute interview was either a feature rather than a bug, or a feature shared by other forms of currency or investments that he’s not calling to outlaw. Despite his claims that Bitcoin doesn’t serve any useful function, he went on to list several, as well as highlighting a need for the kinds of functions that cryptocurrencies are trying to fill, regardless of how successful or unsuccessful they may be in the future.