Professor Nouriel Roubini has appeared in front of the US Senate Committee on Banking Housing and Community Affairs to offer a Testimony on “Exploring the Cryptocurrency and Blockchain Ecosystem”: Crypto is the Mother of All Scams and (Now Busted) Bubbles While Blockchain Is The Most Over-Hyped Technolgy Ever, No Better than a Spreadsheet/Database

In this post I am giving a response to Mr. Roubini testimony. I will address the issues raised in the same order. I´d like to say first that what Mr. Roubini says or whatever I say means nothing in relation to the success or failure of Bitcoin as I am fully convinced that the market will use Bitcoin if it finds it convenient. And if this is to happen, it will happen despite of bans, regulations, with or without crypto-shillers and with or without crypto-haters.

“Crypto Bubble (2017) and Crypto Apocalypse and Bust (2018)”

The 2017–2018 up and down cycle was not the first nor the bigger in Bitcoin history, there have been several similar cycles since 2010 and certainly there will be more. Asset bubbles do not anticipate that the particular asset is useless, it is indeed rather the opposite, especially when it is about a new asset. The tulip-mania precedeed the strongest flower industry in the world, and that industry is still there 400 years later.

Picture by Eddie Hooiveld

The South Sea bubble was the bubble of corporations and finance, which is the fabric of today´s economic system. There are many other examples such as the railroad bubble or the Internet bubble. Trains or the Internet are definitely not useless, regardless of the necessary process of speculative price discovery that always precedes organic use.

It is not that this argument fails, it is that this argument is on the side of crypto, not against it.

“Crypto is not money, not scalable”

To be fair, if by money we understand general medium of exchange, Bitcoin does not fall within the category of money as it is not generalized yet. So the discussion can only be if it will ever be. It is the market that will decide if Bitcoin is more convenient as a medium of exchange than other alternatives. We are still in a very early stage where the price of Bitcoin is being discovered through speculation, not through real use. Speculators always anticipate real use. In the event Bitcoin achieves scale adoption, we must absolutely expect that it will be preceded by speculation.

There cannot be price stability without adoption, so it is pointless to require stability in order to be adopted. Adoption will be a slow process where at a first stage only the users that get a great benefit that offsets the burden of volatility will begin to use Bitcoin. For example people who live in countries with broken or unstable monetary systems (Venezuela, Turkey, Argentina, Zimbawe, etc) or in countries which have a poor banking system that is out of reach from most population (while a smartphone is not).

In the event Bitcoin is successful, the process would be like this: The most extreme use cases will increase adoption, which will reduce volatility, which will allow the use for lesser extreme use cases…. Rinse and repeat.

Indeed, the problem with Bitcoin is that there are too few speculators. A highly traded asset attracts a lot of long and short speculators and arbitrageurs, which provide bid / ask depth and price stability.

The illegal activities issue is an extremely poor argument. Criminals have been doing very well within the traditional financial system, whether using cash or offshore bank accounts. They do not need to bear with Bitcoin´s volatility, they are not in the extreme use case described above as they have plenty of other easy alternatives within the regulated, KYCed and supervised financial system.

Furthermore, this illegal activities argument could indeed turn into an evil argument if coupled with a call to ban or regulate crypto, because if that happens all the honest people that have a honest interest in using crypto would be impacted or prevented from using it, while the criminals would still use it if they want as their “job” is indeed to bypass regulations and bans.

The unit of account argument would fail if Bitcoin becomes the dominant currency. And it would also fail if the technology allows, which it will if necessary, to seamlessly use several currencies and liquid assets while from the user point of view there are only one or two main units of account to which other currencies and assets are converted automatically.

“Supply of crypto is massive. Bitcoin is deflationary”

The argument that fiat currencies have value because the government demands them to pay taxes (or accepts it for other debts) shows that that they do not have intrinsic value, but that they are a liability from the issuer (Government+Central Bank+Banking System). Liabilities have, at most, indirect value. Intrinsic value could maybe be applied to cattle, salt or gold, which are present economic goods. But “intrinsic” is a very unfortunate term as value is an abstract idea which is not within the things, but within the human mind (conditioned by human needs).

Bitcoin is not anyone else´s liability so it can only be one of the following two: a present economic good (if it is ever successful as a medium of exchange) or just a useless thing (being digital / intangible is irrelevant to decide if Bitcoin is a present economic good or not).

While economic goods do not have intrinsic value but subjective value based on its perceived utility, they do have intrinsic properties. What are the intrinsic properties of Bitcoin?: Durable, relatively scarce, easy to transport, easy to identify, difficult to fake, divisible, it is reasonably accessible and fungible, but both of these latter properties definitely need to be improved. Bitcoin is still difficult to use and the lack of full fungibility is by far Bitcoin´s greater weakness at this stage.

All the above intrinsic properties are good properties for a medium of exchange. The value of a present good acting as a currency is “backed” by its perceived utility as a medium of exchange, and that utility is rendered by the good´s intrinsic properties. In relation to physical gold, Bitcoin has the advantage of being much more easier (cheaper) to transport while retaining its distributed p2p nature. With gold a tradeoff was needed in order to leverage the advance in communications to make it much easier to transport, and that was achieved using gold book entries, which leaded to centralization of gold payments, which had the consequences of being coopted by the State and the banking system, taking it away from the free market.

The debt deflation is an absurd argument which applies only for credit currencies (dollar, euro, etc) which are backed mainly by debt assets. But it does absolutely not apply to currencies which are not anyone else´s liability.

Deflation is not necessarily a bad outcome. During the gold standard there were long periods of deflation coupled with very high productivity. Indeed mild deflation refrains people to malinvest or get in debt for non-productive projects, so in a natural deflationary environment there are more probabilities of a higher ratio of productive projects popping out.

The fork and spin off argument could also apply to fiat currencies. Is the dollar more inflationary because more Venezuelan Bolivars are issued?. No. Is gold more inflationary because more silver, copper or zinc is mined? No. Gold could “fork” or “spin off” to infinite gold alloy combinations, but the market will still be able to select pure fine gold, the same way the market will be able to select Bitcoin.

The complain about ether arbitrary supply is a contradiction with the argument that Roubini is trying to defend here. Isn´t deflation a problem? However, the existence of different crypto alternatives is called competition. Freedom is the key term here, users can choose freely. Let´s see which crypto survives and which not.

And yes, I fully agree tether is a scam. I´ll concede to call it cryptocurrency, but it is definitely a fully centralized cryptocurrency.

“Financial crises occurred well before fiat currencies and central banking; and are now less virulent thanks to central banks and fiat money”

I won´t spend much in this as it is not directly related to cryptocurrency and there is plenty of academic work that defends the opposite.

I will only point out that in the event central banking and credit currency might have softened recessions, which I do not agree, it has been at the cost of our privacy and at the cost of currency inflation. The dollar has lost nearly all of its purchasing power since 1913, not to mention all other fiat currencies issued during the last century, many of which are non-existent today.

Bitcoin or Gold are things. Things do not “intend” to stabilize recessions, that’s a job for social engineers. Bitcoin is just a set of rules that might be useful as a medium of exchange. The market will use it if it finds it convenient.

“The real revolution in financial services is FinTech and it has nothing to do with Blockchain or Crypto”

Fintech are at best an evolution of financial services, not a revolution. Fintech will be still out of reach from the millions of unbanked people, or from the people that could never overcome a KYC process because they don´t have the means to prove their identity.

Fintech do not only rely on Internet connections, they still rely on credit currencies, and credit currencies need a strong and sound legal system so banks can enforce their debt assets, otherwise their liabilities would be worthless. Bitcoin is money, not credit, so it is not anyone else´s liability, therefore it only needs internet connection in order to work, which is infinitely much easier and cheaper to deploy than a sound legal system in the countries where the most needed live.

“Buterin’s inconsistent trinity: crypto is not scalable, is not decentralized, is not secure”

This is not from Buterin, this is called the CAP theorem, which is true that applies to cryptocurrencies. However, I cannot believe that Roubini does not know or that he is forgetting to mention second layer solutions such as Lightning Network, which is not a promise, it is already in mainnet, and it is scaling. And by the way it is also solving the fungibility / anonymity problem of Bitcoin.

“No security in crypto-currencies”

51% attacks in Bitcoin are extremely difficult and expensive, and can´t be sustained for very long because the cost increases along with the duration of the attack. Moreover, such attacks are easy to identify and bitcoin users and full nodes can defend against it.

Again, regarding security in traditional fiat systems, Roubini is leaving behind people that do not have access to banking. Moreover, Roubini does not realize that if you have a mutable system, you cannot build an immutable system on top of it. But if you have an immutable system, it is trivial to build a mutable system or any safety system on top of it for the users who demand it. And that will definitely happen on top of Bitcoin if there is demand for it, because Bitcoin is open and anyone can build apps and services on top of Bitcoin without asking for permission, without paying connection licenses. Try that with SWIFT. The argument “many levels and layers of security” will never be an advantage of fiat over Bitcoin, quite the opposite.

And yes, it is true that centralized exchanges and also centralized traditional banks have been hacked and will be hacked over and over again. But, is it the problem on the “crypto” part of the equation or in the “centralized” part of the equation?. In any case, one thing is for sure, crypto has absolutely not the power of changing human nature, if crypto is valuable there will be people trying to steal it, and there is no 100% protection against that. The same applies to fiat.

Hardware wallets are not 100% secure (nothing is 100% secure, ask Cypriot bank depositors) but are a very reasonable and convenient way of securing crypto and do not cost a fortune. Hardware wallets could be embedded in smartphones at very low additional cost if people demand it. Moreover, Bitcoin is programmable money (stone age?), so withdrawal limits and decentralized identity verifications are trivial to implement.

“Decentralization is a self-serving ideology”

No, decentralization is the way of achieving a high degree of immutability, the same way double entry accounting is a technique to achieve a higher degree of consistency of accounting entries. None of these have nothing to do with ideology, they are just technologies.

Apart from that, it is true that the Bitcoin inventors and main contributors have an ideology, and it is freedom. No one is compelled to use, have or accept Bitcoin. Bitcoin is no different than the Pythagoras Theorem or double entry accounting. It is a set of rules, a knowledge that cannot be unlearn, and anyone can freely use if it deems it appropriate.

The fact that there are scammers around Bitcoin doesn´t change the nature of Bitcoin, which is just a set of rules. It is extremely naive to expect that scammers and criminals wouldn´t fly like vultures around an emerging and new kind of money. But the response to those scammers and criminals should never be bashing or banning Bitcoin, but trying to assess whether it is useful or not for the honest people.

“Decentralization is a myth: massive centralization and concentration of oligopolistic power and cartels among miners, exchanges, developers, wealth holders”

In this point Mr. Roubini is again very confused about the term “decentralization”. Decentralization is a technical way to achieve a high degree of immutability. Period. All the concerns he raises in this point are not about crypto but about politics and human nature.

Regarding the wealth concentration concern, I honestly find it meaningless. But apart from that, the numbers shown in Mr. Roubini testimony do not seem to consider the weight of centralized exchange wallets.

“Crypto is not the internet nor will ever be”

Core internet protocols (TCP/IP) begun its development in the early 1970s and they were not officially deployed until January 1,1983. Email was not widely adopted throughout the world until 1997–2000. Indeed, the information about the dates of development and deployment of tcp/ip are easily accessible in the Internet as of 2018, so it seems to me that not everybody copes well finding information on Internet…. We should not worry, Internet ease of use and adoption will continue to improve.

And no, Internet was definitely not booming in every dimension in its first decade. Not even during its second decade.

World Wide Web went live 20 years after Internet protocols were beginning to be developed. By that measure Bitcoin could still be on time to have “its own www” which would boost adoption, or not… Paper money took 400 years to be widely accepted. Credit cards were invented in the 1950s and were not widespread until the 1980s. Comparisons are just that, comparisons. They are only useful for illustration. No final conclusions can be drawn on either way of the discussion.

“ICOs are not compliant securities when they aren’t outright scams”

I agree with most of this concern. However, ICOs may allow a developer with no bank account, no financial resources and without an army of investment bankers, venture capitalists and lawyers, to launch a project and succesfully fund the implementation of a useful idea. I don´t care about greedy people that invest on scammy unregulated ICOs or regulated IPOs, that´s their risk, their money and their business, but I do care about not hindering honest projects, no matter if it is only 1 amongst 1000 scams.

By the way, the cure to prevent scams is education and legal due process, not “pre-crime” style regulations, not ad-hoc decrees and not State spying.

“Tokenization: cartels aimed to gouge consumers. No numeraire and return to barter”

Regarding scam ICOs, utility tokens and cartels, again, the market will decide. If they have to fail, so be it. Greedy investors will lose their money.

The barter argument is absurd. Mr. Roubini points out that most of those tokens are securities (which I agree), so from his own argumentation, this barter argument would be like saying that listing companies at the NYSE or Nasdaq is leading us to the “modern barter Stone Age world”. Not to say that in the doubtful event that all those tokens survive, conversions would probably be automated and abstracted away from the user.

“Massive manipulation: pump n dump, spoofing, wash trading, front running, exchanges conflicts of interest, tether scam”

Yes, there is manipulation on crypto exchanges. And Tether is scammy. But the only thing all these means is that Bitcoin has value at this stage. It says nothing about the current or future utility of Bitcoin.

“No Killer App in Crypto/Blockchain After A Decade: Only Ponzi Schemes”

The killer app of the Internet was email, and it took more than 15 years to take off counting from 1983. More than 25 if we count from the early 1970s. Killer app in crypto/blockchain is obviously p2p payments (Bitcoin). It doesn’t have to take the same time than email, nor more, nor less. It could be never. The fact that it would take more time than the killer app of the Internet does absolutely not mean that is not going to get widespread adoption.

“The energy consumption of crypto is an environmental disaster”

Is the energy consumption for heating, cooking or transportation an environmental disaster? This argument is a fallacy because if we pre-conclude that Bitcoin is useless, of course the energy is wasted. If we think Bitcoin is useful, then the free market will allocate those necessary energy resources for a service that the market is demanding. In a free market the utility of a good or service has to be greater than its costs, otherwise it won’t last very long.

“Blockchain is most overhyped technology ever, no better than a glorified spreadsheet or database”

Blockchain is absolutely not applicable to everything, that’s correct. As of today the only foreseeable specific application is payments, and it remains to be seen if it succeeds. Permissioned blockchains are useless, a waste of time and money. I fully agree. Not better than a traditional database.

I wonder where the “blockchain unseating TCP-IP” claim comes from. That´s just absurd, looks to me as an straw man fallacy.

Regarding the “trustless utopia” argument, again, you can build flexible contracts on top of provably immutable system. Never the opposite.

Enterprise DLT/Blockchain: All hype and no reality

Fully agree. Enterprise permissioned DLT/Blockchain are useless.

Crypto is corrupt eco-system full of charlatans, con-men, selfinterested insiders and scammers. But I have NO conflict of interest

Claiming that the criminal and scamming element is the rule in crypto land is an outright exaggeration. But again, Mr. Roubini is talking here about human nature, not about Bitcoin or crypto.