
Central Banks Can’t Ignore the Cryptocurrency Boom - omarchowdhury
https://www.bloomberg.com/news/articles/2017-08-30/cryptocurrencies-are-new-barbarians-at-the-gate-of-central-banks
======
shubhamjain
I wasn't there when the first dot-com bubble happened but having read about
it, all the recent developments seem to be vaguely similar to that time.
Burgeoning exchange prices with no solid fundamentals, inexperienced people
launching their cryptocurrencies, everyone expecting to get rich quick and
people trying to get on the bandwagon to avoid missing out. The last bit is
crucial because that's what drives most bubbles: everyone wants a share of the
next big thing.

It seems the tech bubble that is being predicted for the last decade would
manifest itself in a slightly different form. I doubt that the end-result
would be anything different than a crash.

~~~
ACS_Solver
In the dot-com bubble, there is a huge difference between the underlying
technology and all the failing dot-coms. The bubble grew, and burst, because
of the many companies that had little other than Internet buzzwords and got
crazy valuations. Those went bust but the Internet as a whole only continued
to grow and become increasingly important.

With crypto currently, there is a similar pattern. I follow the Ethereum
ecosystem closely, and there's an incredible amount of projects that just say
they will do something with crypto and blockchain, and they get millions or
tens of millions - and in the most ridiculous case, you have Golem with its
0.5 billion valuation. The projects that aren't outright scams still rarely
have anything functional and worthwhile, just like the many dot-coms of the
90s. But the underlying technologies, the blockchain as a concept and the
blockchain-as-VM the way it's being done with Ethereum and NEO, I think those
are incredibly significant and not going away.

And there are probably a few crypto projects around now that are going to end
up being significant (just like the dot-com bubble also gave us Amazon and
Google, it wasn't all failures). One such project I like is Sia. It's not too
hyped up but it solves an interesting problem, and it actually works.

~~~
nucatus
There is a term here that is misused. The world «currency» has nothing to do
with this, otherwise very nice and genuine technical artifact. The people who
coined the term definitely have no clue about economy and how currencies work.

If those were called «crypto-highly-speculative-assets», that would have been
a totally different story. But "Currency"?! That is way to off.

~~~
ACS_Solver
Genuine question: why is Bitcoin, for instance, not a currency? I understand
it's obviously not a fiat currency, it's not backed by any state. Bitcoin is,
though, in circulation, is convertible into numerous goods and services, or
can be used to stockpile value. Bitcoin is extremely volatile but I don't
think that precludes it from being a currency.

~~~
nucatus
Again, this can only work if a quite strong parallel economy develops, where
everything is in BTC. Well, for that to exist, it needs to get to a comparable
level of a real state economy, and this is pretty damn hard. That, in order
for you to have a stable exchange rate when you need public services, like
health services or to pay taxes. Otherwise, just having always to exchange
your BTC in the de-facto currency so you can do your daily stuff, that is just
not money. You can call it whatever else you want.

~~~
cinquemb
> _Again, this can only work if a quite strong parallel economy develops,
> where everything is in BTC. Well, for that to exist, it needs to get to a
> comparable level of a real state economy_

I think this is too absolutist. I don't think BTC or cryptocurrencies in
general, to be successful, don't have to have do all of that __today__, or at
all. They just have to chip away along the margins, as they have so far in
order to become more attractive to people to use for exchanging
goods/services. In the US, I could only pay for my electricity usage in USD,
in Indonesia, I can use BTC. People speculating on BTC face similar risk
considerations as people speculating on any asset.

> _That, in order for you to have a stable exchange rate when you need public
> services, like health services or to pay taxes…_

In any system of resource allocation, you need people to buy into it and stay
invested, and as I can see, the balance sheets of "real state economies" are
having a hard time getting people to stay invested through typical means that
states have established channels. Unless one thinks that continuously selling
T-notes to CB's or private investors by collateralizing ones taxation ability
through typical channels, or CB's buying up all corporate stocks/bonds will be
enough to win the hearts and minds in the long run…

> _Otherwise, just having always to exchange your BTC in the de-facto currency
> so you can do your daily stuff, that is just not money. You can call it
> whatever else you want._

As an expat living abroad, this isn't really issue since I need to do it
anyways to convert from whatever currency you have to what you need to use,
and ones habbits are reaptible enough that you should be able to get a good
guess to withdraw enough to cover a period of time to minimize the
inconvience. And there's increasingly more options in how to go about this
than there was say 5 years ago. I think there is more freedom by being able to
be exposed to numerous amounts of currencies to be able acquire/leverage goods
and services than just being locked into just one.

------
drubio
They don't ignore cryptocurrencies, they just don't recognize them as
'currencies'[1][2], since they're not backed by a central authority
(government or bank).

And by their very definition, don't expect either party to fully recognize
each other. Central banks operate on the premise of centralizing,
cryptocurrencies operate on the premise of decentralizing.

[1] A rather old post, on ex-Fed (Central Banker) Alan Greenspan take :
[https://www.coindesk.com/bitcoin-intrinsic-value-alan-
greens...](https://www.coindesk.com/bitcoin-intrinsic-value-alan-greenspan/)
[2] A recent post, on current central banker of Mexico take:
[https://www.coindesk.com/bank-of-mexico-governor-bitcoin-
mor...](https://www.coindesk.com/bank-of-mexico-governor-bitcoin-more-
commodity-than-currency/)

~~~
flashdance
> since they're not backed by a central authority (government or bank).

That's a weird way of wording that. The US Dollar (along with many other
currencies) doesn't meet the definition of a "backed currency", because it
doesn't have a _direct_ correspondence with the value of a commodity. If the
value of a currency isn't guaranteed, it isn't backed. Instead, the value of
the US dollar is determined by imports/exports, interest rates, monetary
velocity, confidence, etc.

There are many other differences that the US dollar has with bitcoin that are
more concrete:

1) It's legal tender in the US

2) It's exclusively accepted for the purposes of taxes (follows from 1)

3) It has a dynamic (as opposed to bitcoin's fixed) monetary policy (which is
either good or bad depending who you talk to)

4) It's the world's reserve currency

5) It's far more popular than bitcoin

6) It's not deflationary (which is either good or bad depending who you talk
to)

~~~
polotics
Nice list. Two questions: How would you distinguiah "not deflationary" and
"inflationary"? How is a non-shrinking money supply deflationary?

~~~
zzalpha
Do you buy into the quantity theory of money?

[https://en.wikipedia.org/wiki/Quantity_theory_of_money](https://en.wikipedia.org/wiki/Quantity_theory_of_money)

If so, then a fixed money supply is necessarily deflationary in an expanding
economy.

Of course, by that same argument, the US should be experiencing massive
inflation right now due to the actions of the government during the financial
crisis which led to a tripling of the monetary base, and yet it never
materialized...

~~~
unknown_apostle
Inflation is very hard to truly understand and track:

\- Monetary inflation and price inflation are different things. Right now we
have unprecedented monetary inflation in terms of base money, but almost no
price inflation.

\- Price inflation is always a very non-linear function of its drivers.

\- Price inflation also doesn't have to be uniform. Some people would argue
that the monetary measures taken after the financial crisis have already led
to price inflation, namely price inflation of financial assets such as bonds
and stocks. In this view, the money has been sloshing around the world as
excess liquidity, being passed on like a hot potato that nobody wants to hold,
propping up new bubbles but without leaving the financial system.

\- A simple quantity theory of money may not apply because we live in a
complex credit based system. Base money is just a liability of the central
bank. We don't pay and save much in base money, we pay and save mostly using
liabilities of private banks. As long as the increases in base money don't
trigger increases in these broader forms of money and credit (this is what it
means when they say "the transmission mechanism has broken down" or "the
velocity of money is too low"), we shouldn't normally expect any direct impact
of base money increases on price inflation.

About bitcoin: any healthy, advancing economy running mostly on actual
bitcoins as a medium of exchange would probably see price deflation in terms
of bitcoin. If we were to have technological progress like we had the last 50
years, the price deflation would probably be unprecedented. But if we could
manage to piramid ever increasing amounts of credit on top of actual bitcoins
and pay and save mostly in those credits, probably not so much :-)

------
unknown_apostle
Here's a question I've always had. If a government ever starts to fear a
cryptocurrency, could it just destroy the cryptocurrency by blocking it at the
network level? E.g. block a TCP port or something like that? Could that be
circumvented and if so, would the cryptocurrency still be scalable then?

EDIT: thx to everybody who replied! That being said, I would have really liked
to discuss the actual technicality of blocking a cryptocurrency :-) E.g. what
technical measures could a hostile government take against bitcoin and how
would any circumvention techniques, if they exist, impact scalability and
usage of bitcoin. A lot of answers here just give reasons why a govt would
never do something like this; or that there are other ways of discouraging
bitcoin users; or that it wouldn't affect users outside of that country
(wouldn't it though?). I think the dependence of cryptocurrencies on IT
infrastructure is an important issue, as it puts boundaries on the extent to
which a cryptocurrency's can truly be considered decentralized. I think we
should assume that, given enough time, any cryptocurrency that makes it to the
big leagues of being used as transaction money _will_ be put to this test. And
if it fails this test, its use cases will be more limited than what some
currently think.

~~~
indescions_2017
China, as of yesterday, is considering a blanket ban on all ICOs. Ethereum
prices, of course, appreciated as a result.

I think crypto-anarchists will always find technology to "route around" any
bad sectors in the network. Even if it comes down to sharing e-wallets via
secure bluetooth mesh networks in ad-hoc fashion.

The more impactful story may be the way Big Banks are adopting blockchain
tech. As with the R3 consortium and open-source Corda project:

[https://www.corda.net/](https://www.corda.net/)

Another data point to watch is LedgerX, the first LedgerX CFTC-regulated Swap
Execution Facility (SEF) and Derivatives Clearing Organization (DCO) for
crypto currencies.

[https://ledgerx.com/introducing-ledgerx/](https://ledgerx.com/introducing-
ledgerx/)

~~~
adrianN
Money is only attractive if many people accept it as a payment method.
Governments can easily make cryptocurrencies sufficiently unattractive that
they don't reach a critical mass. There are no technology solutions to social
obstacles.

~~~
zzalpha
IMO it's a mistake to view cryptocurrencies as "money".

If you view them as what they are, a commodity, you realize all you need is a
buyer and a seller of that commodity. Whether or not you can trade that
commodity for goods and services is entirely irrelevant.

------
richardwhiuk
The article doesn't support the title. There's nothing suggesting what might
happen if central banks ignore crypto-currency, not anything suggesting they
are.

The market for crypto-currency is very very small - much smaller than similar
forex markets.

~~~
rwj
What's missing from these discussions is a trend for trade volume. If more and
more transactions are being done using cryptocurrencies, then that suggests
that a shift is coming, and could provide a timeline for how soon it will
arrive.

~~~
TACIXAT
My speculation is that most network activity is artificial. The primary source
is likely speculation, purchase a cryptocoin and hold it, sell it eventually.
I bet another large source is mining pools. Miners place transactions in a
block, solve the hash, get a reward, then distribute the proceeds to members
of the mining pool creating more transactions to mine. There are also
darkmarket purchases and pass-through transactions (Bitcoin debit card). I do
not see Bitcoin being used as a base currency any time soon (i.e. having your
salary listed in BTC).

------
almostApatriot1
How many more blockchain "hype" articles do we have to go through before we
get one about an actual product that people use to do something with other
than speculate on value?

~~~
ohashi
wouldn't hold your breath, it keeps being hype articles because otherwise the
price falls

------
plaidfuji
Outside of Silicon Valley, people view cryptocurrencies as a 21st-century safe
haven investment. Insulated from overvalued equities? Check. Insulated from
sovereign debt crises and central banks? Check. Whether or not that's a fair
or accurate assessment is immaterial. The fundamental demand is for an asset
that isn't subject to the whims of an unstable, fallible government. The bonus
with Bitcoin: it also happens to be a viable currency, so once people shift
enough assets into its market, there's incentive to just keep it and use it.
This is what everyone wanted, right? The end of central banks, the end of fiat
currencies, the end of pointless middlemen, clearing houses and transaction
fees. This is the Bitcoin upside in action.

~~~
srrge
This and it's devaluation proof with a fixed maximum circulation of 21 million
coins.

~~~
plaidfuji
You're confusing "devaluation" with "deflation". It's a "deflationary" proof,
meaning the quantity of Bitcoins is formulaically scarce. Meaning their value
can't be torpedoed by massive paper infusions from central banks. Value is not
intrinsic, it's what someone is willing to pay.

------
VT_Drew
>Money as we know it depends on the authority of the state for credibility,
with central banks typically managing its price and/or quantity.

More accurately stated:

Money as we know it depends on the authority of the state for credibility,
with central banks typically manipulating its price and/or quantity.

Which is why Cryptocurrency is attractive in the first place.

~~~
zzalpha
_Which is why Cryptocurrency is attractive in the first place._

I expect if you did a survey, a very small, very libertarian group of
cryptocurrency "investors" may be concerned about governments managing their
respective currencies.

The _vast_ majority just wanna make money on the hottest new thing. A subset
of those people might even believe in the fundamentals. The rest are just
glorified gamblers.

~~~
ryanmarsh
This reminds me of the dot com boom. There was a very small very libertarian
group of people excited about things like disintermediation, the vast majority
of investors just wanted to make money on the hottest new thing, a subset of
those might have believed in the fundamentals but the rest were just gamblers.

The more things change the more they stay the same. LOL

------
snitko
It's been said many times before, but Bitcoin allows people who have certain
worldview (libertarian) to self-finance their projects and bypass investors,
VCs, politicians etc. This is very powerful. It's not just some asset you
invest in in the hope for some future gains. For many people it's a way to
stop being couch political activists and start actually implementing what they
believe in. That's why so many people are angry about Bitcoin - they truly
dislike what it represents and allows.

Here's a tweet that said it perfectly: "Cypherpunks are libertarians who
stopped whining."
[https://twitter.com/oleganza/status/902942938820263937](https://twitter.com/oleganza/status/902942938820263937)

~~~
zzalpha
_For many people it 's a way to stop being couch political activists and start
actually implementing what they believe in. That's why so many people are
angry about Bitcoin - they truly dislike what it represents and allows._

Oh please. This is just like someone's mom telling their kid "they're bullying
you because they're jealous".

The arguments against cryptocurrencies are legion. Some of those are arguments
are very good. Some not so much.

But this argument of yours is nothing more than a baseless ad hominem attack
leveled at people you disagree with.

~~~
snitko
I wish. I actually faced many of those people in real life. People are really
angry about Bitcoin.

------
shepardrtc
Not sure how much longer they'll be "ignoring" it, as Bernanke just spoke at
Ripple's crypto conference:

[https://cointelegraph.com/news/former-chairman-of-federal-
re...](https://cointelegraph.com/news/former-chairman-of-federal-reserve-to-
speak-at-blockchain-conference)

If he's jumping on board, then I imagine central banks are already looking at
it.

~~~
cookiecaper
They likely understand that they'll have to legitimize this in some form, and
it's really a dream situation for them.

It'd be easy to construct a network, either from-scratch or a fork of an
extant blockchain, where they set up rules that allow them to manipulate with
minimal effort while maintaining the appearance of independent mining and
consensus algorithms. If they wanted to, they could pretty much already do
this with bitcoin itself, which is still small potatoes to a state-level actor
looking to disrupt it.

And of course, the permanent, irrevocable public ledger of _every transaction
ever_ is the ultimate tool for concocting false associations.

You mean you _accidentally_ contributed 3% of the bitcoin that was used to
fund a drug operation 2 transactions down the chain? Sure, tell it to the
judge. It doesn't matter that we didn't unearth this until after you published
an article critical of the Central Money Authority! That is purely
coincidental.

People learned long ago that the best way to undermine a burgeoning movement
is not to moralize or criticize its obviously-resonant principles or core
properties. It's to build something that you can continue to control that
appears to have those same attractive qualities. Meet the demand with a
trojan. Big companies and governments do this constantly.

------
ryanmarsh
One thing banks have clearly demonstrated is they can be late to the party on
just about every innovation and it isn't going to hurt them much. I'll leave
it as an exercise to the reader as to why.

------
rimjeilly
I think if govt gets involved in any way, its surely the demise

~~~
plaidfuji
Equally unfounded, absolutist opinion: if government gets involved, it will be
the legitimizing endorsement that takes crypto mainstream.

------
nucatus
As long there is no consistent and measurable value to back the
cryptocurrency, the word "currency" in that construction is senseless. Who is
buying goods or services using bitcoins? Anyone? That is just because nobody
wants to sell something using a mega-volatile "currency", unless they want to
speculate. The problem in the economy is that basic trading IS NOT
speculative. Both, the seller and the buyer of goods and services have a
strong understanding of what the value of their goods and services will be in
one year in a currency, when that is denominated to a universally accepted
value.

At this point, cryptocurrencies are just tradable speculative assets. They are
not first-class-citizen currencies due to the major flaw exposed above.

No government in this world will ever give up the power to control its
currency through this body called "the central bank".

The only one condition to make this a true currency that is out of the hands
of the central banks is that EVERYBODY in this world will give up their
currency and adopt ONE AND VERY SAME cryptocurrency. Since this is not a plan
a government is willing to accept, they won't accept the cryptocurrencies
either, since governments are the biggest money handlers.

If that is not possible, and very likely not to be, having a central bank to
control a cryptocurrency cancels the very important and crucial attribute of
the cryptocurrencies – the decentralization and the distributiveness –
defeating its purpose.

~~~
snitko
_> Who is buying goods or services using bitcoins? Anyone?_

Excuse me, I am. Expedia, Cheap Air, NewEgg, Microsoft, Dell and lots of other
merchants accept it and I used them.

~~~
nucatus
Yes, they sell you in bitcoins at a spot value to dollar, or so. Technically,
you are using the dollars to pay using the BTC as an intermediate "currency".
On top of that, you are paying some extra money to cover the exchange rate
risk, which is quite high for BTC.

It is exactly like paying goods and services with, let's say, Apple stocks,
only that the price will always fluctuate depending on the DOLLAR quotation of
the Apple stock at the time of the payment.

~~~
tudorconstantin
Yeah, but these dollars don't have to pass through your bank account anymore,
so you're pretty safe with not paying taxes on them.

