Ethereum Watch

On Friday, February 9, 2018, in a thoughtful post on Liberty Street Economics, a blog kept by the Federal Reserve Bank of New York, Antoine Martin and Michael Lee, economists in the bank’s research and statistics group, answered questions about cryptocurrency.

After Lee provided some insight into the relationship between money and trust, Martin explained how cryptocurrencies compare to conventional payment systems. He answered the question, “Are cryptocurrencies the future of money?”

“Cryptocurrencies arguably solve the problem of making payments in a trustless environment,” Martin explained, “but it is not obvious that this is a problem that needs solving, at least in the United States and other advanced economies.” Generally speaking, in developed nations, people can rely on banking and credit institutions – notwithstanding unscrupulous or irresponsible behavior by financial executives.

But, Martin added, solving the problem of trustless transactions forces us to confront other issues. “One is scalability; the process of picking random validators takes time, is expensive, and consumes tremendous amounts of energy,” he observed.

“Bitcoin and other cryptocurrencies are trying to improve scalability and convenience so perhaps in the future one of these cryptocurrencies could realistically compete with current payment methods,” he added later. “But, fundamentally, we wonder whether a payment method designed to function where trust in institutions is completely absent can ever be as convenient as one where trust is required, but also already exists.”

In addition to the technological challenges, Martin remarked on the financial instability characteristic of cryptocurrencies. This, he said, “makes them less useful as currencies.” He went on to say:

“This volatility is an inherent feature by design. Since there is no central bank that adjusts the supply of bitcoin to accommodate changes in demand, bitcoin’s value can swing sharply with demand. In a world where all things were priced in bitcoin, this would likely translate into massive swings in inflation and economic activity.”

Higher-level Federal Reserve officials seem to share Martin and Lee’s doubts about bitcoin.

Yesterday, at a town hall in South Dakota, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said, “If you live in any modern advanced economy, I would stick with the dollar, I would stick with the yen and leave bitcoin for the, you know, toy collectors.”

“I don’t really think of bitcoin as a currency. I think of it as a novelty,” he added. “The idea that these virtual currencies are ever going to compete with the dollar is hard to fathom.”

Still, it’s possible that stateless digital currency could be useful in less developed or less financially secure nations, a point that Kashkari acknowledged. ETHNews considered this possibility in a July 2017 piece.

Matthew is a writer with a passion for emerging technology. Prior to joining ETHNews, he interned for the U.S. Securities and Exchange Commission as well as the OECD. He graduated cum laude from Georgetown University where he studied international economics. In his spare time, Matthew loves playing basketball and listening to podcasts. He currently lives in Los Angeles. Matthew is a full-time staff writer for ETHNews.

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