Old-time vaudeville star Jimmy Durante’s catchphrase, “Everybody wants ta get inta the act!” well describes the current state of cryptocurrencies. These are forms of electronic money, the accounting and control of which are outside usual banking and government-sanctioned central banking orbits, and for which encryption and anonymity plays a key role.
These are not new. Bitcoin started in 2008. Millions of people reportedly now are owners and users. Additional millions certainly follow its value.
But some developments are new: Federal Reserve Chair Jerome Powell recently issued a cautious statement affirming cryptocurrencies. Minnesota GOP Rep. Tom Emmer has taken an enthusiastic interest in such currencies as do some other elected officials.
The most concrete recent development is the pending IPO of Coinbase, a cryptocurrency company that would be the first as a publicly-traded corporation. Its reputation is clouded by reports of accountholders who saw hundreds of thousands of dollars disappear from their accounts. But the company says these losses were due to lax security of account numbers and passwords by the depositors and not from any misstep by of Coinbase. The IPO is expected to be successful. Expectations are that Coinbase will assume a significant role in payments systems.
Traditional credit cards such as Visa and Mastercard, entrenched within traditional banking systems, are running scared. They have held — and abused — monopoly positions for decades. PayPal and other new competitors already have eroded their power. Cryptocurrencies will hurt them further.
I am sure Powell is right that cryptocurrencies, or features of their technologies, will grow as payment platforms. Yet history also demonstrates there will likely be major hiccups along the way. Unbreakable codes, like computer security systems and “impenetrable,” tank armor, always get broken into or penetrated. Much of the attraction of cryptocurrencies is their opaqueness and hence their utility in helping users evade taxes and launder money. Those very features will also make it hard to solve any inevitable electronic heists.
Enthusiasts argue that criminal uses of cryptocurrencies are incidental byproducts, not central to their inherent functions. But that raises the core question: Just what legitimate functions will cryptocurrencies do for society that are not already being done efficiently by what we have? True, paying cash in person provides anonymity for both buyer and seller, but it is inefficient for making a mortgage payment and impossible for buying something online.
Econ students should recognize the term “functions” because most must memorize the classic “three functions of money,” as follows:
First, money is “a medium of exchange.” It is a convenient mechanism for buying and selling things. Money took human civilization beyond barter. The person with whom you were exchanging something need not offer anything that you wanted. You no longer had to reckon the value of items you really did not want, knowing you would have to swap with third or fourth parties to get what you really needed. Money, including “commodity monies” of gold, silver and copper, enormously increased efficiency of economies and the well-being of people.
Similarly, a century ago, postal or telegraph money orders, or checks acceptable through a national clearing system, facilitated the rise of Sears Roebuck and other catalog stores, increasing economies of scale and competition in retail and broadening the range of goods average families could get. Credit cards, 1-800-numbers and to-the-door package services kicked got this ball further down the field for my generation. Amazon.com has become immensely valuable by essentially following the Sears business model.
Second, money also functions as a “standard of value.” An hour of work for a $13.50-per-hour barista buys 4.84 gallons of gas at $2.79 a gallon. One thousand bushels of corn will pay for the $5,500 used F-250 said to be “a good runner;” last July it would have taken 1,930 bushels. Even considering all student aid, you still must work to keep your daughter at Princeton and help with her loans.
Finally, money is a “store of value.” You can sell corn today and buy a pickup in October. Or start putting salary away when your son is five and send it to Northfield when he is 19.
As yet, Americans have no good alternatives to U.S. dollars, either in physical currency or accounts in existing banking-and-payments systems, as a medium of exchange. The dollar functions as a standard of value for the whole world The euro, pound and Swiss franc also play a role. The Chinese yuan still languishes in insignificance.
To store value, however, there are many alternatives to money. Real estate has so served for millennia, as have precious metals. For along time so did livestock and still does in peasant societies. Stocks, bonds and sundry investment funds now are common in industrialized countries. These all include the possibility of appreciation in value in contrast to dollar bills under mattresses. Many people are willing to sacrifice some reliability as a store of value for greater possibility of increase. Some hold gold as a store; others buy it speculatively because an Internet guru promises sharp jumps in its dollar value down the road.
So what functions do cryptocurrencies accomplish that are not met with existing forms of money? Will these new instruments really make us better off? Yes, some see them as a means of exchange that can be hidden from the eyes of taxmen and law enforcement. Regardless of the protestations of enthusiasts, this remains a major factor in international cryptocurrency transactions and will for some time.
Others, especially with libertarian leanings, see them as both stores and standards of value that are safer than fiat currencies like dollars or euros controlled by central banks like the U.S. Federal Reserve or European Central Bank. They are not tainted by the dirty hand of government.
Such sentiments are common among high-tech software and hardware entrepreneurs and among increasing numbers of Republicans. History may prove them right. Cynical governments may debase existing national currencies while private, decentralized cryptocurrencies will sail along safely, untainted by vile politicians and unbuffeted by international events.
All this depends on a very heroic assumption that cryptocurrency systems will never be hacked. No “miner” running warehouses full of computers solving problems to generate bitcoins or any nation’s rogue intelligence service will ever discover new algorithms that penetrate the impenetrable. I am skeptical.
There also is the factor of the sheer waste of electricity used in this “mining.” Experts now argue as to whether the sum of electricity used to run bitcoin-generating computers exceeds all that used by Britain or only as much as Spain. John Maynard Keynes described gold as a “barbarous relic” of earlier times because of the resources devoted to mining it. We snicker at the Pacific islanders who chipped away for weeks to create the stone doughnuts used as money when they could have been growing food or making clothes. But we do essentially the same thing to a more extreme degree.
St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
