Response to Nouriel Roubini & The Guardian (Part I): Central Banks vs Decentralisation

A recent article published by The Guardian titled ‘Why central bank digital currencies will destroy bitcoin’ written by Nouriel Roubini — professor of economics at New York University’s Stern School of Business — raises interesting questions and thoughts, though without providing a holistic view.

Such people and articles are among the many reasons why many people still have no idea what bitcoin, blockchains and other decentralised protocols have to offer when compared to traditional alternatives including — but not limited to — the financial and governmental systems.

In this article we will go over some basics so that people like Nouriel Roubini can learn the fundamentals and gain a better understanding of the cryptosphere and the sharing economy, which could hopefully prevent the spread of falsified information.

We have broken down the topic into two parts. This first part covers the role of central banks and the birth of bitcoin. The second part will cover the role of economists and the expansion of the sharing economy.

Banking the Unbanked

“M-Pesa in Kenya; Paytm in India — offer attractive alternatives to services once provided by traditional commercial banks.” — Roubini, The Guardian, 2018

This claim fails to address the fact that many “unbanked” people had no access to traditional banking services. Only a privileged society would assume that the new tools were introduced as an alternative to existing services, when no existing services were previously available to the unbanked.

As mentioned in a National Geographic article written by Ken Banks, M-Pesa is a great solution for “people who live in isolated areas.” With M-Pesa, these people do not have to carry carry cash on their person and perhaps risk loosing it to thieves. It also allows people “without permanent addresses or bank accounts” to gain access to “an economy from which they had previously been locked out”.

“Rather than giving up on poor, isolated communities as unbankable, it has extended financial services to their most apparently unlikely customers. Rather than giving up on sophisticated economic transactions in countries with poor infrastructure, it has found a way to circumvent that infrastructure, creating a virtual, mobile one of its own.”- Ken Banks, National Geographic, 2012

In short, M-Pesa was introduced due to the lack of services and banking facilities within Kenya, it was not introduced as an alternative. When one considers the consequences of not having access to traditional banking services and financial tools — over 2 billion people are unbanked in today’s world— it seems evident that providing a service that can help them connect to the global economy is of the utmost importance. As mentioned by the World Bank:

“Access to financial services can serve as a bridge out of poverty. We have set a hugely ambitious goal — universal financial access by 2020 — and now we have evidence that we’re making major progress…” — World Bank Group President Jim Yong Kim.

Bitcoin and other cryptocurrencies give unbanked people financial access today and have been able to do so for more than half a decade. An example of this is BitPesa which has been operating since 2013 and has since established itself in 7 different African counties — Tanzania, Uganda, Nigeria, DRC, Senegal, Ghana, & Morocco. As mentioned on their website, “our innovative products solve the issues you’ve no doubt faced when trying to do business in Africa — it’s not easy, it’s very expensive and it takes forever. BitPesa changes all that.”

It does not take long to consider the positive impact this would have on the security, livelihood and overall prosperity of what is referred to as the ‘System D’ Economy.

Central Banks

Roubini seems to prefer a world where central banks continue to take charge of our financial safety. A world where printing money — or rather digitally creating them — without requiring the permission of the people who will carry the debt is the answer to our prosperity. A world where wars are fueled by the ability to endlessly create money out of thin air.

“The very act of creating money and manipulating interest rates distorts the market. Therefore, the Federal Reserve System cannot be fixed with a “rules-based” monetary policy or even with “tying” the Fed-created money supply to the price of gold. It is amazing how many economists who oppose price controls on all other goods support allowing a secretive central bank to control the price of money.” Ron Paul, Fitsnews 2018

Does the current financial system support our freedom? Is this the system everyone had hoped for? Is the USD or any other fiat currency controlled by a central bank safe from volatility? Would the global economy — GFC 2008 — powered by the USD remained stable, had they not “printed” trillions of dollars to bail-out the bankers? Should we forget about the 10 Million people in the USA alone who lost their homes as a result?

It was Henry Ford who said, in substance, this: “It is perhaps well enough that the people of the Nation do not know or understand our banking and monetary system, for if they did I believe there would be a revolution before tomorrow morning.” — Charles Binderup, House of Representatives, 1937

In a recent article titled ‘Ron Paul: Donald Trump Is Right About The Fed, Central bank is “crazy …”’ Ron Paul discusses the consequences of the Federal Reserve as well as Central Banks. He goes to say that “In contrast to market money, government-created fiat currency is anything but stable. Central banks constantly increase and decrease the money supply in an attempt to control the economy by controlling the interest rates.”

Birth of Bitcoin

Whether by coincidence or not, Bitcoin was introduced shortly after the global financial crisis (GFC) which started back in 2008. It was and still is revolutionary due to many factors that can easily be overseen.

For the first time, people had digital money which was not issued nor controlled by the state, operating on a decentralised network where all transactions were distributed and accessible in an immutable manner — meaning once a transaction was sent through there was no way to reverse it.

The immutability aspect in itself has opened the doors to many other applications being built using the underlying technology behind Bitcoin — known as blockchain technology. Other important factors include accessibility and the ability to innovate — both without requiring permission. This not only benefits the 2 billion people who are unbanked but also emeging technologies such as Artificial Intelligence and Self Driving Cars.

Blockchains have opened the doors to platforms like those developed by Ethereum — where data integrity is of great importance. Use cases include land registration, registry systems, peer to peer loans, Identification systems, services usually provided by the government and the traditional financial system, which arguably are the root causes of violence, corruption and poverty across the world.

Most importantly, blockchain technology solved the byzantine generals problem, in that the network could reach consensus in a trustless, decentralised environment such as that seen in Bitcoin. A solution never before thought to be possible.

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible. — Satoshi Nakamoto, P2P Foundation

Unfortunately the media does not pay much attention to these huge breakthroughs, and instead focuses on the “volatility” of Bitcoin. To see digital currencies as only a form of money would be similar to seeing the internet as only a new form of postal or directory service. The word “myopia” would be an understatement in such a case.

In the next article we will cover several other aspects in relation to Bitcoin, peer-to-peer tools, the sharing economy and decentralised protocols.

Image from Pixabay