From a reader:
When in real-world, human-designed systems, is fiat money an example of theoretically easy to fix and cryptocurrencies an example of theoretically hard to break?
The reader is referring to my notion of “easy to fix” vs. “hard to break” as a way to think about financial regulation. Permitting, and even encouraging, concentration of financial markets and then regulating the resulting giant firms as carefully as possible is an attempt to make the key firms hard to break. But when one of those firms does fail, the results are catastrophic. Instead, encouraging a wide variety of financial firms, with no single firm vitally important to the system, is an attempt to allow the failure of a single firm to be easy to fix, as other firms take over the failed firm’s functions. Another way to make the system easy to fix is to encourage a low ratio of debt to equity, since equity degrades smoothly while debt default is more of a shock.
In the case of money, I would think that the “easy to fix” approach would be to allow for competing currencies. If one currency gets corrupted, then people can switch to using another one. Having a single government currency is the hard-to-break approach, since the government can insist that its currency is legal tender, using it to pay for goods and services and accepting it as payment of taxes. Of course, when a government currency “breaks” due to hyperinflation, it breaks catastrophically.
I am still a skeptic about crypto-currencies, for the following reasons.
1. They seem to operate like chain letters, as I have written.
2. The most important “use case” for crypto-currencies appears to be for illegal transactions. This means that many of the people who employ crypto-currencies do not feel bound by mainstream social norms. That is not a good crowd to run with.
Cryptocurrencies constitute a third category: “easy to break.” They are more akin to the highly cyclical free banking system in the 19th Century United States, which was frought with manias and panics, than to the relatively stable international monetary system of the last 70 years.
We now have a multicurrency system, but all the accepted currencies are fiat (plus freely traded gold). If the US Dollar fails, other currencies and/or gold might take up the slack, as the USD did relative to the GBP in last half of 20th Century.
Money technology changing fast on real time. There is a lot of mixed up semantics, multiple tribes using different terms for the same thing. I say, let it settle a bit.
The most important use-case for crypto-currencies is pure speculation, i.e. you “spend” Bitcoin by buying dollars. If you mean, the most important end-use-case for crypto-currency, then yes, probably illegal transactions, for the obvious reason no-one accepts Bitcoin.
We can all look back and wish we had bought Bitcoin 5 years ago. But then we all know people who caught the bug a year ago and are now down 50%. In speculation, timing is everything. It will be hard for Bitcoin to transition to Kroger and Walmart when it is so volatile, and so intrinsically worthless. One wonders whether it will survive the transition to quantum computers.
Illegal transactions are a terrible use case for cryptocurrency: each transaction is traceable forever, written into every future transaction.
Legal tender – cash – is much better for that use case.
In practice, recovering theft losses from credit card companies denominated in fiat currency is relatively easy. Properly secured cryptocurrencies are hard to steal, but most people aren’t good about properly securing things. Cryptocurrencies, once stolen, are usually just gone with no recourse.
https://www.ccn.com/biggest-theft-history-know-far-530-million-coincheck-hack/
Jay, you bring up the bigger point.
We can chase the scofflaw accounts and price their cost. We can do this in both fintech and crypto world, the two worlds severely overlap. Crypto means crypto protected, active accounts., high speed exchanges, trading bots and automatic run time portfolio management.
Chasing scofflaws and pricing them for insurance makes this all happen. Both crypto and fintech folks all agree.
With sufficient historical data (which we may or may not have yet), it is possible to generate a price for cryptocurrency insurance. Based on the number and value of known crypto thefts, it is likely that the price will be very high. I’d say this still counts as “hard to fix”.
Credit cards have an advantage in that thefts are limited to the cardholder’s credit limit, which means that $530 million single-account losses don’t happen. Also, cryptocurrency markets are evolving rapidly; a pricing model that makes sense at the start of the policy may be overtaken by events within a few months. Plus courts have lots of statute and case law dealing with credit cards; crypto offers much less certainty about anyone’s legal rights.
I still think that cryptocurrencies done right are hard to break but hard to fix, and that cryptocurrencies as usually implemented are easy to break and hard to fix.