Economics Professor Interviewed: „Bitcoin Is a Step Back into the Monetary Stone Age“

In a study for the Hans Böckler Foundation, economist Jörg Bibow examined digital innovations in the financial sector. In it, he concludes that Bitcoin is unsuitable as a currency and calls for effective regulation of cryptocurrencies. In the interview, he explains where such regulation could come in – and which applications he does see as beneficial for blockchain technology.

Mr Bibow, you live and teach in Saratoga Springs in the United States. When did you last pay for something in cash?

It’s probably been years. I essentially don’t use cash at all here, and if I do, it’s a real exception. I’d have to think about it… There are rare occasions, but I really can’t think of any. I think I still have a few dollars in my wallet, but I have no idea how much (laughs).

In a study published recently, you examined the consequences of the increasing digitalisation of money. What advantages do digital financial services bring us?

There are many products that make life easier for consumers. Paying by mobile phone, in a shop, on the internet or at the parking meter, is of course very convenient.

How do digital services affect the security of payments?

The big question is, who is behind these services? You cannot claim that banks are always 100 per cent secure, but with the banking system we at least have a long-established financial system that is regulated and supervised. There are safeguards if a crisis occurs. In other words, damage can usually be limited if such services are offered by banks. This is not necessarily the case with new, innovative providers. In this sense, you have to pay very close attention. Who is behind it, are they monitored in any way, or are they criminals (laughs)? I mean, you can’t have any illusions about that. Money issuance and related services are lucrative, and that attracts criminals.

Coinbase was recently floated on the NASDAQ stock exchange. In your study, you are quite critical of the cryptocurrencies traded on the platform. Among other things, you write: „For Bitcoin and other cryptocurrencies, there is no welfare gain to be found in their use as a means of payment, at least for legitimate purposes.“ Why do you distrust this means of payment?

I find Bitcoin in particular highly suspect. And I think there is also ample evidence that Bitcoin is primarily used for illegal activities. It is absolutely unsuitable as a means of payment, as many studies have clearly shown. It is simply too volatile. Prices cannot be negotiated using the monetary unit of Bitcoin. There may be exceptions, but Bitcoin is not suitable as a currency. It is a purely speculative financial product that is also a natural disaster because of its huge energy consumption. I can’t find any positive aspects there. Which is not a criticism of the technology itself. The underlying technology is probably very useful for many products, including in the financial system. However as a currency, I think it is a gigantic step backwards into the monetary stone age.

Among other things, you call for effective regulation of cryptocurrencies like Bitcoin. At what level could such measures be taken? And which institutions could do that?

 

This is of course highly problematic as there are no limits to the use of cryptocurrencies and because there are certainly countries and dubious governments that would even encourage criminal activities to remain possible using them. Be it for money laundering or arms trafficking, it’s not as if everyone would like to prevent it. In this respect, how can the state limit the risks? First and foremost, you have to start with the banking system. And that is regulated and supervised anyway. That means that the authorities have to begin at the interface between the bank and Bitcoin. And they have to do it internationally. After all, it’s no good if Germany does but Denmark doesn’t. countries must agree to monitor the interface between Bitcoin and the banking system as well as the so-called exchanges where cryptocurrencies are traded. Tax authorities are another issue. If they determine that cryptocurrencies are assets and that their value fluctuates, then price gains and losses will also occur. And if you subject that to taxation, you have the opportunity to limit abuse. You probably won’t prevent it completely, but you can protect the financial system and consumers from abuse. You can also to a large extent limit the things that you are trying to prevent anyway, such as money laundering, arms trafficking and the like, I would hope.

So such interventions would be at the expense of cryptocurrencies‘ anonymity?

That applies to banks anyway. Banks are required to know their customers and ultimately everything can be tracked. The state is not normally interested in this. But when it comes to issues like arms trading, money laundering and so forth, the state must have the means to find and punish them. Which is exactly what makes cryptocurrencies so attractive to these people. The fact that it is more difficult for the state to do this. Yet it’s not impossible. It’s a pseudo-anonymity. So technically, I think it’s possible to track crypto money flows, but it’s very time-consuming. The question is, how much effort can and does the state want to go to?

How does the anonymity of Bitcoin differ from that of cash, which is also a very anonymous means of payment?

Absolutely. And that’s why there are corresponding laws for the use of cash. Depending on the amount deposited or withdrawn, banks ask where it is going or where the money comes from. The state is also trying to limit the damage. That will never succeed 100 per cent. And of course it’s not about spying on citizens who are buying something for five euros, it’s about criminal activities.

You mentioned the energy consumption of Bitcoin mining earlier. There are also those who claim that Bitcoin mining can partially harness remote renewable energy sources, meaning that the high energy consumption is not such a big problem. What do you make of this?

That seems to me to be a nonsensical argument. One could think about producing sensible products where this energy is generated. Producing the, in my view, completely nonsensical product Bitcoin there does not really make it any better.

You mentioned earlier that you see useful applications for blockchain technology, even if not in the field of cryptocurrencies. What do you have in mind?

An interesting example is in international trade. This is very complex because trading with people far away involves great risks. In this field, blockchain seems to facilitate a significant simplification of transactions. There are further examples in the financial sector. One of the things being tested here is how to create simpler procedures for clearing or collection points through crypto-assets, which would make the system more efficient. I think the technology is very useful. That is not my criticism. My criticism is solely of its application to cryptocurrencies, which I do not see any use for. There do however seem to be very valid uses in the financial system as well as in international trade.

Interview in German, translated into English

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