There are many valid reproaches that may be made to the still young, but, hopefully, quickly maturing, blockchain industry. There is still not a single cryptocurrency that can be used by many people to make payments without delays and fearing price volatility. No decentralized application (DApp) has secured any substantial user base, and those that are somewhat popular are relatively simple games. Many cryptocurrency exchanges are unreliable, probably manipulate trading volumes and are often hacked. Other actors in the space and ordinary users also regularly fall victim to scams and spectacular bugs.
However, many well-known public commentators still prefer to bash crypto not for its actual shortcomings but because it appears to cause an almost visceral disgust in them for one reason or another. Lately, economist Joseph Stiglitz has decided to join the likes of J. P. Morgan’s Jamie Dimon, fellow Nobel laureate Paul Krugman and Nouriel Roubini in this dubious stance.
Speaking to CNBC, he said that, in his view, “we should shut down the cryptocurrencies.” He further added that he was disturbed by the attention that was being paid to them because “those were moving things off of a transparent platform.” Stiglitz specifically mentioned that cryptocurrencies facilitated money laundering, and were linked to the shadow wealth held in off-shores and exposed by the Panama Papers. He also suggested that digital payment systems with authorized participation were a better way of bringing the benefits of modern computing to the payments industry.
The three key things Stiglitz does not get about crypto
There are many criticisms that could be made of Stiglitz’s worldview in general and his stance on crypto in particular. Let us stick to crypto and limit ourselves to three points.
To start with, Stiglitz is mistaken in his apparent belief that cryptocurrencies are somehow uniquely conducive to facilitating illegal activities. Most cryptocurrencies, with the exception of privacy-focused ones like ZCash and Monero, actually provide little genuine anonymity to most participants. A large part of the accounts can probably be identified because they were used by people to interact with exchanges that have KYC or to receive funds from exchange-linked accounts. Academic research also shows that crypto is not a particularly suitable tool for criminals to launder money, especially compared to traditional banks. And a Google search on the mentions of cryptocurrencies in Panama Papers suggests that there was not a single one.
Stiglitz is also wrong to believe that cryptocurrencies have been a significant or convenient means of storing wealth. From their inception, they have been characterized by extreme price volatility, and even though many really early investors have become rich, most people who bought crypto during the 2017 price run-up have probably lost money. It also was, and still is, very cumbersome for crypto investors to transform their nominal wealth into something more tangible or at least into more easily spendable fiat. Especially because of the repressive anti-money-laundering regulation imposed on banks that are extremely fearful of dealing with money arising from crypto sales.
Finally, Stiglitz has demonstrated how little he knows about the subject that he pontificated to CNBC when he called upon cryptocurrencies to be literally shut down. As anyone who is somewhat aware of how they work can attest, their precise core design principle is the absence of a central authority that could stop them from working. Any computer can download a copy of the open-source software that underpins a public blockchain, run it and connect to other nodes that do the same. This allows it to maintain a copy of the ledger and send and receive transactions. Any node that satisfies certain conditions can also validate blocks, and there is usually no entity, not even all the other nodes taken together, that can preclude it from validating if it plays by the rules.
For a Nobel laureate and supposed highest-order social scientist and public intellectual, Stiglitz really should know better than call for suppressing something that he did not even bother to give a cursory look.
Can the benefits of blockchain technology be realized less subversively?
While Stiglitz’s stance on crypto may be dismissed as ignorant and over-ideological, one may legitimately ask the question whether the benefits of blockchain technology can be realized without cryptocurrencies and the open participation. After all, those are highly subversive elements, and, perhaps, they are as (un)necessary for blockchain as the dark web is for the Internet. I would like to argue that the answer to the question is no.
Without the permissionless component, a blockchain is arguably just a fancy database. A permissioned blockchain may be distributed among many computers but, given that they are all known in advance and often managed by a central entity, it is vulnerable in a way a permissionless blockchain is not. The spectacular and highly costly 2017 cyber-attack on Maersk is a great illustration of this. Maersk’s container terminal software was distributed among the company’s computers but they were all tightly knit into the same whole and thus vulnerable to the virus. The consensus mechanisms in private blockchains are also probably more vulnerable to attacks, as argued even by Moody’s, hardly an unequivocal cheerleader of disruption through crypto.
As for cryptocurrencies, while many people believe otherwise, they are arguably indispensable for fully unlocking the potential advantages of blockchain technology. In the technical sense, they form the core incentive mechanism to induce enough block validators (whether in proof of work, proof of stake or other designs) on public blockchains to behave honestly. So far, there is only one project – Algorand – that attempts to do without cryptocurrency-driven incentives in its block validation scheme. Perhaps, it will succeed but I would not bet on it.
Public intellectuals like Stiglitz who are attracted to the vision of the economy and society managed by government will certainly continue to unfairly castigate public blockchains and cryptocurrencies. It is the task of all the blockchain advocates to to our best to make sure that their attacks are forcefully challenged.