Upside of the blockchain bust | Tim Congdon

This article is taken from the February 2023 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Cryptocurrencies promised a revolution. According to their many libertarian supporters, the creation of these currencies by blockchain technology would end the tyranny of the state in monetary affairs. 

In future, as computers and mobile phones became barely distinguishable, people would be able to make all their payments over these personal devices. They would give instructions that amounts of the various tokens — bitcoin, ethereum, tether, polkadot, troin or whatever — be transferred between different accounts in blockchain records. The transfers would have just the same effect as those between bank accounts in the old days. 

Traditional currencies had been issued by central banks backed by government, with their validity in settlement enforced by legal tender laws. Also known as “fiat currencies” (said to be from the Latin fieri, meaning “coming into existence”), they had relied for their value on the arbitrary enactments of politicians and bureaucrats. They could not be converted into something of definite worth, like gold or silver. 

Invariably, one nation had only one fiat currency, which it was argued represented a dangerous monopoly. Because citizens had no choice, the politicians and bureaucrats could steal from them by over-issuance, debasement and inflation. 

In the new world, all would be different. Choice would be unfettered and absolute. Bitcoin and its rivals would compete, and the “discovery process” unleashed by market forces would identify the best currency (or currencies). Entrepreneurs could tweak the various new currencies so that they would differ from each other in crucial respects. In the context of unparalleled market freedom, consumers would select the tokens with the most desirable characteristics. The dollar, the euro and the rest would be superseded. 

You may chuckle. On New Year’s Day, 2023) the CoinGecko website reported that the 12,811 coins it tracked had a combined market capitalisation of $829 billion. It also noted the melancholy fact that this was more than 65 per cent lower than a year earlier. The peak market capitalisation was in November 2021, at almost $3,100 billion. The fall from that peak is no less than 75 percent. 

Can it be overlooked that when an attempt is made to assess the size of the crypto market, the measuring rod is an old-fashioned fiat currency, the dollar? 

Admittedly, the visionaries did project a huge market in which cryptocurrencies would be bought and sold for each other, and one of them might emerge as the best of the lot. Crypto exchanges were promoted, with this end in view. 

In January last year the most prominent of the exchanges, ftx, secured $400 million in its third funding deal in nine months. That funding round gave the business a value of $32 billion and was the last in a sequence that altogether raised $2 billion. 

… the numbers do not add up

FTX is now bust. Despite the magic of blockchain accounting, the numbers do not add up. Not only has the original $2 billion gone astray, but a few billions more have vanished to no one knows where. The regulators are having difficulty making sense of the operations of the so-called “exchange”, though it appears at this early stage that the frauds were simple. For example, money was moved from customers’ accounts to those of ftx principals. 

All the same, the Financial Times of 28 December carried an article under the title, “Fees of high-priced lawyers mount in crypto bankruptcies”. 

It needs to be recalled that modern capitalist economies face a crisis in productivity. In several advanced nations, including Britain, the growth rate of output per person are at the lowest levels in decades. Can the crypto idealists explain how trading in ethereum, polkadot, troin and the rest adds to the wealth, health and happiness of nations? 

Can the prophets tell us how such trading, along with the attendant legal and regulatory farrago, boosts living standards? 

To put an obvious if naive question, do transactions in cryptocurrencies constitute national output at all? 

2023 will be a difficult year for the world economy, but one positive development is easy to forecast: the crypto madness of the last few years will fade. The movers, shakers and hangers-on in this alleged “industry” will direct their efforts to more productive activities and allocate their time to more useful work. 

Will there be longer-term consequences? One issue here is the status of Hayek’s proposal for the denationalization of money. In a 1976 pamphlet Hayek advocated the abolition of legal tender laws and the dissolution of central banks. 

The pamphlet purported to be an analysis of the theory and practice of what were called “concurrent currencies”.

Arguably, Hayek’s concurrent currencies and crypto coins come to much the same thing. More than one enthusiast has invoked the Austrian economist’s ideas to justify crypto mania. 

Hayek once said he was not a conservative. That certainly rings true in the monetary field. He would be better described as a Trotskyite who repudiated established institutions and championed permanent revolution. Great thinkers have their Eureka moments, and their occasional bad days.

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