More than 10 years have passed since bitcoin’s arrival as the first cryptocurrency, but widespread adoption remains elusive. Cryptocurrency critics can help us understand what roadblocks persist, even if listening to them does not tickle our fancy.
One useful critique comes this month from Enterprising Investor, a CFA Institute publication: “Crypto Dreamin’? The Good, the Bad, and the Ugly.” Michael Falk, author of Get to Work . . . on Our Future (114 pages, 2019), is charitable to cryptocurrency merits and frank about why he is skeptical and has a “cynical bias.”
1. Cryptocurrencies threaten the nation-state. As Max Borders notes in The Social Singularity (208 pages, 2018), “cryptocurrency and income tax cannot coexist.” This poses an ideological challenge. While those who favor limited or private governance see this as an advantage, most people still buy the “social contract” fiction.
Governments, Falk writes, “will do whatever it takes to stop any real breakaway from their currencies.” Many have already introduced cryptocurrency bans and de facto bans via regulation and taxation. Akin to Uber’s entry, there will be an agorist, gray-market element to adoption. This is not fatal—it has not been for Uber—but it tilts the playing field and means a higher adoption threshold.
2. Cryptocurrencies are not democratic. There are dominant players in mining, ownership, and exchanges. There is no one-man-one-vote element. Cryptocurrencies simply do not run on electoral campaigns or function the way most people imagine democracy. Although cryptocurrencies are in many ways decentralized, they are not subject to democratic checks that make many people feel safe.
3. Bitcoin transactions are not anonymous. Even though cryptocurrencies threaten the traditional nation-state, they are not by default private. Rather, as Falk notes, “cash is more anonymous.” That is why control-freak governments and credit-card companies discourage cash and herd people into digital transactions for profit, taxation, and surveillance. If privacy is a key value proposition for cryptocurrency use, proponents need to emphasize altcoins such as monero and dash. The Washington, DC-based Coin Center has published on this challenge, and you can find my analysis with the Frontier Centre.
4. Adoption will falter without usability. Although speculators thrive on price volatility and exchanges enjoy hefty fees for transactions, prospective users do not, and they will simply move on. Take note, bitcoin maximalists: first-mover advantage is not everything. That is why cryptocurrencies find greater favor in nations such as Argentina and Venezuela. The state’s fiat currencies there are so inflationary, users will seek almost anything as an alternative. By way of contrast, Canadians have little incentive to abandon the loonie.
Without unit-of-account and medium-of-exchange usability, what is the point? That leaves cryptocurrencies as a store of value, and an unpredictable one at that. As Falk writes, “why not just buy gold?” Of course, gold comes with storage and transport complications, but the point remains that the fundamental value of cryptocurrencies derives from their usability. Store of value, on its own, will not suffice.
5. Insecurity keeps people on the sidelines. Although there are secure ways to hold cryptocurrencies, experience has demonstrated people favor outsourcing this to exchanges for convenience, even though they are vulnerable focal points. That is particularly the case because the exchanges enable access to the conventional financial sector: people can buy and cash out with ease. Although many entrepreneurs are doing valuable work to resolve security concerns, embarrassing stories continue to pop up.
Perhaps the most ridiculous is QuadrigaCX. This Canadian exchange likely stole people’s money and never bought cryptocurrencies on their behalf. Many victims suspect the criminal owner faked his own death late in 2018 and got away with about US$125 million. Whether that is the case or not, the money is lost, and 76,000 users are out of pocket.
Falk’s evenhanded critique is, even if inadvertently, constructive feedback to those who favor an alternative to confiscatory central banks and fiat currencies. Some elements he sees as insurmountable merely require a long-term, careful approach to ushering in the alternatives. Cryptocurrencies will see their day in the sun, but serious roadblocks remain, and ignoring or downplaying them will not make them go away.