Cryptocurrencies have often been depicted as worthless in the public sphere, sometimes by reputable investors or public institutions officials.
While the boom of tokens and NFTs led to numerous malicious, hype-based, or overly ambitious projects that can legitimately be compared to Ponzi schemes, the technology behind Bitcoin, Ethereum, and other blockchain projects solved real-world issues with innovative technology, unbeknownst to the general public.
This article is an attempt at explaining how these projects are technological and civilisational innovations, and to discuss their limits.
Introduction
I will describe and give examples about three main problems that cryptocurrencies solve:
- Effective Ownership in the current banking system.
- The risk of abusive regulations.
- The lack of transparency.
1) Ownership in Traditional Banking
The Sali Hafez case
On the 14th of September 2022 in Beirut, Sali Hafez entered the Blom Bank bank. Armed with a gun, she stood on the desk and made the following statement:
"I came here today [...] to get my sister's money. She is dying in hospital."
- Sali Hafez
This bank heist was a desperate attempt at recovering the money she and her sister had deposited to Blom Bank, which managed to lost all of its clients deposits and was not able let its clients withdraw anything anymore. The gun was fake, but she managed to be handed 13 out of the 20 thousand dollars on her bank account.
This dramatic events highlights an interesting fact that is often overlooked: you money does not "sit" in a bank, it is actively used and that is how our modern economy works.
This has the consequence that shady banks can lend, invest or steal deposits, and that these deposits can disapear as a consequence of it. Unfortunately, a lot of citizens from countries that are not as developed as the so-called "western" countries cannot safely hold money in a bank. But can westeners even do ?
The Greek case
In 2009, Greece went through a severe financial crisis related to its high debt, corruption level and deficit. In 2015, due to the financial uncertainty and to a bank run, the Greek government decided to limit the amount of money individuals could withdraw from their bank to €60 per day.
Individuals were effictively stripped off their financial freedom, and banks were closed for entire weeks.
Once again, the banking system showed how vulnerable banks were. One could argue that the Greek economy was poorly managed, but such failures are not isolated.
The occasional bank collapse
In 2008, toxic investments in risky credits lead to the collapse of multiple banks, as consumers were unable to repay the money the had been lended. Domino effect ensured and more than 165 banks failed just in the United States in 2008 and 2009. Meanwhile, still in the US, more than 200 billion dollars were injected into surviving banks as bailouts.
Banks failed all over the world, including in Europe. To allow banks to continue to operate, most governments decided to give the bank taxpayers or freshly printed money. Of course, this is highly unfair to the taxpayers, which were effictively stolen money and reimbursed with a line of credit on their own taxes, or from the inflation that is a consequence of money printing.
Is this uncommon ? No. On average, between 1980 and 1994, a US bank failed every three days. Banks routinely loose customers money as a consequence of their investments or poor management. Very few banks actually keep the money of their customers dormant, as it does not yield interest rates, and has the consequence of necessiting high fees to operate that customers may not be willing to pay. Furthermore, this is just how the economy works, citizens funds does not stay dormant and are reinvested in the economy.
2) Confiscations from the State
The case of authoritarian states
On the 30th of December 2014, in Russia, Alexei and Oleg Navalny were convicted of fraud and money laundering, in a case that was described by western medias as politically motived. Both had to pay a fine of 500 000 rubles and a compensation of 4 million rubles to companies that were allegedly defrauded. The case is quite complicated but money was effectively confiscated from Navalny's bank account.
This illustrates that in countries where the governement pursue and persecutes political opponents, the legal system can simply drain the individuals bank account. Due to most democraties being relatively fair, most people do not feel at risk. However, history shown that governments never fail to go authoritarion given a few dozen or hundred years.
Unfair regulations
An interesting case of unfair regulation is the simplified fine system in France. If you happen to pay a ticket for a public transportation, but run into technical issues that are the responsabilty of the public transportation company activating the ticket you bought, you might get a fine, not be able to dispute the claim on time, and get the money withdrawn from your bank account a few months later. All this despite being a honest citizen that paid for a ticket.
But unfair regulations can be tremendously more dangerous. In France, the now dissolved RSI was in charge since 2008 of handling social security for independant workers.
In practice, what I personally heard about this administration, is that it could compute the contribution of an entrepreneur which was just starting based on his past income. If that person had effectively no income on its first year of operations, but was paid a significant salary before, he would be required to pay dozens if not hundreds of thousands of euros of social security contributions. All that with no income.
In that situation, individuals were expected to pay, eventually taking a line of credit, and to have their contributions rebalanced in the upcoming years. If they did not pay, after some time, their assets would be seized, on their bank account, and physically.
I recall Edouard Philippe, by then prime minister of France, stating that that the RSI was dissolved partly because it could create desperate situation for entrepreneurs, and that it unfortunately led to a lot of suicides and life ruined.
3) Transparency Issues
With cash or bank accounts, there is no traceability or transparency regarding the inflow of money. The ledger is either private or inexisting. This makes it easy to use funds for illicit purposes, and makes it harder to track corruption and to have the public being aware of influx of money of entities they transact with.
How Bitcoin Offered to Solve these Issues
Ownership
A quote from The Times was inscribed in the first Bitcoin block ever mined, it reads:
"Chancellor on the brink of a second bailout for banks."
- The Times 03/Jan/2009
This gives away the fact that the anonymous Bitcoin creator published it as a response to banks that were loosing their customers deposits.
Indeed, Bitcoin is a decentralised peer to peer cash system in which a fleet of servers operated by individuals around the world validate transactions that can only be made if ownership of the funds is cryptographically provent by the spender.
Therefore, no third party can invest your money, and the custodial risk is removed.
Regulatory Risk
The fact that the network is operated by a fleet of servers around the world which need to spend computational or monetary resources to validate transactions makes the network resilient to any authority applying arbitrary rules. The only rules that can be enforced are rules that the majority of computers operating the network agrees on.
If a minority of the network wants to change the rule, they can clone the blockchain and operate it with their own specific rules, which hapenned in the History of bitcoin, but they are then unable to interract with the rest of the network.
However, the necessity for individuals to change cryptocurrencies for FIAT currencies to pay for their daily expenses creates a situation in which government can regulate exchange platforms, and effectively freeze funds while they transit there. This is a problem that will always exist as long as individuals do not use cryptocurrencies in their daily lifes.
Transparency
The distributed ledger of transactions that is the blockchain fully record pseudonymised accounts acitivity, and therefore has a satisfying level of transparency for licit activites.
For illicit activies, it makes it easy to label fraudulent entities and to monitor their activity.
This also unfortunately open the door to widespread surveillance, although most tech savvy individuals take care not to tie their crytocurrency wallet to their real identity.
Conclusion
Cryptocurrencies solve real world problems with innovative technologies, and no, they are not "worthless". Bitcoin itself is a bigger achievement than those of most tech startups, and has a solid market fit and user base.
The real value of cryptocurrency is the technology and freedom it makes available, not the speculation on its price.
Cryptocurrency offer an alternative monetary system, with its set of advantages, but also disadvantages when compared with the traditional one, like the inability to trustlessly lend money.
They are good for individual freedom and fairness, but cannot completely replace traditional banking and may be too complicated to use safely to the general public.