Academics speaking at CoinDesk’s Consensus event in New York today appeared doubtful about the economic value of cryptocurrencies.
In a panel titled, From Digital Gold to Contract Theory: The Economics of Mainstream Adoption, Joshua Gans, professor of strategic management at Rotman School of Management, said that an economists job, when confronted by new and exciting technology, is to “de-sexify” that technology and reduce it down into a term that they can use.
“When it comes to new technologies, the lens we like to look at is: what is this new technology reducing the cost of?” he added.
Gans conceded that when it comes to blockchain technology this was a hard question to answer in relation to the economy but that ultimately the research he conducted with colleagues identified two distinct areas where it could reduce costs.
“One was the cost of verification, and by verification we mean the ability of people who are not party to a transaction to see what happens in the transaction. And a blockchain by storing things securely, and by securely I mean making it hard to fiddle the books in the future from what you’ve done in the past, might reduce the cost of verification and that would enable a whole lot of transactions,” he said.
Gans continued: “The other thing that blockchain is good for on the security front is it’s very hard to develop a new platform or network because you have to think about how secure it is, but the blockchain as an infrastructure, especially things like Ethereum, would allow smaller players to be able to cobble together those secure elements and build applications and so it may reduce the cost of the network.”
After this point, said Gans, everything else is just a matter of supply and demand. In this case, supply activity expands as verification and networking become easier and then people can start to “look for places where the blockchain might be useful”.
These comments were made right at the start of the panel session and the moderator wasted no time in observing that Gans had not mentioned cryptocurrencies in his answer about the value of blockchain technology.
Subsequently, the question was then put to David Yermack, chairman of the finance department at NYU Stern School of Business, of whether bitcoin is even a real currency, to which he responded that it is not by traditional standards – namely as a store of value, a medium of exchange or a unit of account.
“There are not many merchants that accept it, the throughput is seven transactions per second worldwide so no that many people could ever use it, people don’t post prices in bitcoin so it’s not a good unit of account, and as a store of value it is incredibly volatile. What you want for money is for it to be stable, not only hour-to-hour and day-to-day but even year-to-year, and bitcoin has higher volatility than almost any investable asset that you might see. So it really fails all of those criteria,” said Yermack.
Despite this, he claimed that bitcoin has performed a useful function by encouraging people to reconsider how they think about money.
“For economists, one of the things we like about cryptocurrencies is it pushes you back to first principles and it makes you reconsider what really is the definition of money – do we need banks to have banking?” asked Yermack.
For Eric Maskin, Adams University Professor at Harvard University, the answer to this question was “yes”, as he sought to highlight additional issues with cryptocurrencies beyond being dubious stores of values or mediums of exchange.
Maskin said that one of his concerns is that cryptocurrencies effectively replace government-backed fiat currencies with private currencies and that in the long-term this could interfere with “important public functions” such as “countercyclical monetary policy and the important role that central banks around the world play to limit business cycles by varying the money supply according to conditions”.
He added: “Also, the idea that you can go around banks with crypto so you don’t need banks anymore may sound appealing but actually banks perform a useful function too, which is to decide which entrepreneurial projects are promising and which are not, and if we undermine the banking system we’re doing so at our peril.”