Critiquing Krugman — More Homework Needed
Photo by Diego PH on Unsplash
In an OpEd for the New York Times on Monday June 6th, noted economist Paul Krugman labelled cryptocurrencies a ‘scam’ and questioned their real world usefulness.
It’s a typical crypto opinion piece from Tradfi thinkers; some points are valid and others show serious gaps in knowledge. At NotCentralised, we feel duty bound to unpick these pieces in the interests of informed debate.
Krugman compared crypto to the GFC experience of housing, and MBS securities built on mortgages, which fell sharply in value in the 2007/08 financial crisis. However, houses are quite different from the derivatives built with the loans used to buy those houses. While many highly leveraged MBS structures collapsed with zero value, very few housing assets are worth less today than they were in 2007.
Median US house prices peaked at $257,400 in 2007 and fell to $208,400 in Q1 2009, before returning to the pre-GFC price levels by Q1 of 2013. Right now, after a surge during Covid, median US house prices are $428,700–67% above the pre-GFC peak. Bitcoin peaked at $18,942 in December 2017, falling to $3,194 a year later. It took a full two years (December 2020) to regain that prior peak, and right now bitcoin sits around 64% higher than December 2017. Just as the highly levered MBS derivatives imploded, but housing has since recovered. So too we see some highly levered defi structures collapse to zero (ahem, Terra?!), while bitcoin retains value.
Next, Krugman rolls out the tired trope of crypto being used for fraud. See, he gasps, the Federal Trade Commission tells us crypto is used for fraud! Correct. All involved in the ecosystem know this. News flash — the entire fiat banking system has been used for fraud since its inception. The USD is the most utilised means of money laundering, indeed the most utilised criminal currency, across the globe — estimated at 2–5% of global GDP. Ah, you may say, but only a small proportion of fiat currency is used fraudulently. We agree, but this is a far lower proportion in crypto. Chainalysis regularly tracks the use of illicit wallets and fraudulent activity, reporting those figures as a proportion of overall wallet activity. The level of illicit crypto use is less than 0.5% of all transactions. You can read about it here. This proportion is falling, not rising, as the usage of crypto broadens. The number of new wallets created on ethereum rises every year (now over 200 million).
Continuing, Krugman questions what can be done with cryptocurrency that cannot be done more easily, with more conventional forms of payment. Oh boy, this shows a stunning lack of knowledge. The conventional banking system is slow (with no atomic settlement), has many middlemen and has high barriers to entry for those in developing countries. If I wish to send say $1,000 from Australia to a friend in Nigeria, or Brazil, or Greece — this is an arduous, multi-day task even with platforms such as OFX or Airwallex. Even if I wish to send money across continents from myself, to myself — it’s complex. And yet it’s my money!
With crypto — whether KYC’d or anonymously — this can occur in seconds and with lower transaction fees than conventional banks. In the time it has taken you to read this article, you and your buddy could set up a crypto wallet, transfer fiat into crypto, pay each other from those wallets, and sit back down to read. Even with a KYC step to identify yourself, you are adding just minutes to the process.
Another huge advantage of crypto over “more conventional forms of payment” is the use of programmable money. By integrating payment mechanisms into automated code — smart contracts — the crypto user can make any payments conditional upon other outcomes. And this can be done with no ongoing human intervention, once the protocol is established.
Which leads to yet another advantage with distributed computer networks and ledgers, upon which crypto currencies sit; the lack of “tech debt” compared to traditional banking systems. Many banks run 30, 40 or 50 separate systems, some over 30 years old, which are stitched together by a Gordian knot of fudges, bridges, manual spreadsheets and custom code. This costs time, money and human power to maintain and fix. It makes those banks slower and less competitive, through higher embedded cost structures.
Finally, Krugman insists cryptocurrencies have no real world application, and they are built on “nothing at all”. Clearly Krugman failed to attend the famous 2018 MIT lecture series conducted by now-SEC Chair, Gary Gensler. Through these lectures (found here), Gensler meticulously takes students through the amazing cryptographic and mathematical advances which make public blockchains like Bitcoin possible. Such innovation and industry is hardly “nothing at all”. Due to his respect for bitcoin’s advanced foundations, it is no wonder Gensler is now seeking to reign in crypto as a threat to centralised finance, with his SEC hat on. This technology is so opposite to “nothing at all”, that institutions like the Federal Reserve Bank of Boston are working on open projects with crypto leaders at MIT, to develop lightning fast transaction protocols for use by CBDCs and other digital coins. You can read about that here.
As time progresses, more and more utility value is being added to the core of layer zero and layer one platforms. Importantly, no cryptocurrency is really designed for use as an everyday, transactional currency. Fiat and crypto will continue to operate in parallel. Today, we see crypto used for anything from estate planning, pooled investment clubs, alternative asset ownership to gaming. A great example of real usefulness is the speed and ease with which Time Magazine’s Keith Grossman raised funds to help Ukraine, through accepting bitcoin donations. This feat was achieved in just hours, and amounted to millions of dollars. It was the deployment back into fiat, and movement into Ukrainian banks, which was problematic! To find out more, watch and listen here.
As a parting thought, ask yourself this question — if crypto was really worth “nothing at all” and has “no real world application” — why are centralised authorities from Europe, to the US, to Asia so keen to control the narrative? To implement more stringent regulations than those for traditional finance?
