The Bank of Finland has released a paper called “The Great Illusion of Digital Currencies”. In it, author Aleksi Grym calls all cryptocurrencies “a fallacy”. The author argues that “currency cannot be digitized” and that blockchain-based ledger systems are “not significantly different from other financial record-keeping technology”.
Bitcoin a Fallacy
Before we get into the paper, we need to consider where it’s coming from first. This paper was published by the Bank of Finland, which by no surprise is the central bank of Finland. According to Wikipedia, the bank is the country’s “monetary authority, and is responsible for the country’s currency supply”. Naturally, such an institution has a lot to lose in terms of control over global finance if something like bitcoin were to replace its freely printed fiat currency.
With that in mind, let’s go over some of the key arguments posed in the paper.
The Tech is Nothing New
The author of the paper takes great pains in explaining why they believe the distributed letter technology of pioneered by bitcoin is not revolutionary or even new. By their definition, having a ledger that exists across multiple servers and updates automatically through the Internet is old news. This assertion, however, indicates a severe lack of understanding in what bitcoin actually represents.
In a traditional, closed system where only pre-approved and trusted parties are given access to a distributed ledger (like a network of government owned banks), then perhaps on the surface this assertion would appear to be correct. A network like this could easily keep track of transactions and share data amongst each other so that a shared ledger is up to date.
However, bitcoin and other cryptocurrencies that use any type of mining are trustless systems in which anyone can participate.
It is this democratization of information that is the revolution, not the data sharing. In order for one to mine bitcoin, they do not need pre-approval, a license, or proprietary software in order to participate. It is this openness that also forces honesty and transparency.
In a closed system of only pre-approved nodes, things can easily be manipulated upon the agreement of the small set of participants. For instance, in the case of digital money, this small network could easily just say to themselves, let’s print one hundred million dollars worth of currency and then give it out to our political allies, all with the public having no access to this information. On a system like bitcoin where everything is out in the open at all times, and anyone is allowed to participate without needing any kind of license or approval, this sort of underhanded tactic to undermine the value of the currency is effectively impossible.
If new bitcoin were to suddenly appear outside of the established rules, chaos would ensue. In the global fiat system, new money simply appears and disappears every day, and no-one bats an eye.
The Old “Intrinsic Value” Argument
One classic attack on cryptocurrencies from the old financial world is the tired and oft debunked claim that bitcoin has “no intrinsic value“.
For this overused and malformed point, we refer to famed economist Saifedean Ammous who wrote The Bitcoin Standard. In his book, Ammous argues that money is a concept that appears in all human societies and can take many forms. Be it large stones, sea shells, beads, gold, minted coins, printed paper, and so on.
The problem with most forms of money is that they lack or fail to maintain their hardness. Basically speaking, the more difficult a form of currency is to produce or acquire, the harder it is.
“The relative difficulty of producing new monetary units determines the hardness of money: money whose supply is hard to increase is known as hard money, while easy money is money whose supply is amenable to large increases.”
Gold, for example, cannot just be picked up anywhere on the ground. Getting gold from nature requires complex and expensive mining. Further, gold only exists on earth in a finite amount. And while gold may be a good store of value, it is not necessarily a good currency because it is not highly fungible, divisible, or easily verifiable.
Bitcoin and other cryptocurrencies are instead an ideal form of money because they have hardness, a fixed supply, and are effectively immune from hyperinflation and other manipulation by central banks that would act selfishly to print reams of cash only to accomplish their own selfish goals.
“Without a central bank capable of increasing the money supply to pay off the government debt, government budgets had to obey the regular rules of financial responsibility” – Ammous, The Bitcoin Standard
No Institutional Backing
While the author calls bitcoin a fallacy, the idea that a currency requires institutional backing of any kind is in itself a fallacy of logic.
We would highly doubt that the Bank of Finland would consider gold to be a monetary asset that requires some sort of authority to back it. On the contrary, precious metals and gems require no central authority, central bank, or mint in order for them to hold any degree of value. The same is true for any number of commodities like chocolate or cement. A chocolate bar does not need to get a stamp from the “Central Chocolate Authority of Finland” in order to be considered real chocolate. The assertion that all objects that hold any degree of value need an institution of some kind put its stamp on it is foolhardy at best, and downright ignorant at worst.
A large reason why bitcoin is so highly valued is simply because it does not require a central institution of any kind in order for it to operate and fulfill its primary function of being a means of storing and transacting value. Centralized authorities create central points of failure, and easy means of manipulation. Bitcoin suffers from none of these weaknesses, and that is not by accident, but by design.
Central Bank Crypto A-Okay, Though
The entire argument made by this paper seems to come crashing down in its brief conclusion section. Specifically, the author states that if a central bank were to release its own cryptocurrency, then it would indeed be a true currency by the definition of the author. This is because it would then be “backed” by an institution, and not simply the creation of some computer geeks or anarchists.
It is in this paragraph that we see the author specifies that cryptocurrencies could function as a currency, but they somehow assert that without a central issuing authority, any currency is destined to fail. Once again, we must point to the example of gold, in that there is no issuing authority that prints out gold. Instead, gold is a decentralized asset that exists within nature and is not owned or controlled by any one central body like a central bank.
If a government were to create a cryptocurrency, it would only be hard money if it had a set supply and was immune to hyperinflation. If it could be endlessly printed or minted, then it would be just as subject to manipulation as any other form of fiat currency.
Wrapping It Up
It’s clear from this paper that the author from the Bank of Finland does not really understand cryptocurrency, beyond simply seeing as a threat to their own established means of control. They seem to view the features the bitcoin network very intentionally implemented as being weaknesses, instead of strengths.
We here at Blockonomi would suggest that the Bank of Finland should take more time to really understand why people are attracted to cryptocurrency before simply slamming it for not fitting into the established paradigm of centralized and highly manipulated fiat currency markets.
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