a new TV set. Even more important, Bitcoin cannot scale to deal
with the number of transactions a modern economy needs. The
system is limited to processing just 420 transactions per minute. Finally, there’s the fact that a remarkably small number of
people control a remarkably large percentage of all the bitcoins
in the world. That gives them the leverage to manipulate prices,
and makes it harder for Bitcoin to have the reach it would need
to become a real currency.
Choose your own currency!
OOF COURSE, BITCOIN IS FAR FROM THE ONLY cryptocurrency. Depending on how you count, there are now hundreds, if not thousands, of them. And
while they’re all built, like Bitcoin, on the blockchain, some have features that might seem to make them more
attractive as a potential global currency. Litecoin, for instance,
can process more transactions per minute. Monero and Zcash
offer genuine anonymity (as opposed to Bitcoin, where every
transaction is associated with a given key that can be tracked).
And not all cryptocurrencies have a rigid cap on the total number of coins. So perhaps a different cryptocurrency could replace
the dollar or euro or yuan—or, more plausibly, we could end up
with a system of lots of different private currencies, rather than
relying solely on a single medium of exchange.
There’s something appealing about the idea of everyone
choosing the currency that suits them best, and of cryptocurrencies competing against each other to win the loyalty of consumers
and businesses. But in fact the proliferation of cryptocurrencies
that we’ve seen over the past few years makes it less likely, not
more, that they will eventually replace fiat money.
The problem with a world in which there are lots of differ-
ent private currencies is that it massively increases transaction
costs. With a single, government-issued currency that’s legal ten-
der, you don’t have to think about whether or not to accept it in
exchange for goods and services. You accept dollars because you
know that you will be able to use them to buy whatever you want.
Commerce flows more smoothly because everyone has implicitly
agreed to use the dollar.
In an economy with lots of competing currencies (particularly
cryptocurrencies unbacked by any commodity), it would work
very differently. If someone wants to pay you in Litecoin, you
have to figure out whether you think Litecoin is a real cryptocurrency or just a scam that could shut down any day now. You have
to consider who else might accept Litecoin if you want to spend
it, or who would trade you dollars for it (and at what exchange
rate and transaction fee). Basically, a proliferation of currencies
tosses sand into the gears of commerce, making transactions less
efficient and more costly. And any currency that is hard to use is
less valuable as a medium of exchange.
Still great for money laundering
THIS ISN’T SPECULATIVE. WE ACTUALLY HAVE A historical example of how this works. In the United States in the decades before the Civil War, there was
no national currency. Instead, it was an era of what
was called “free banking.” Individual banks issued bank notes,
theoretically backed by gold, that people used as money. The problem was that the farther away from a bank you got, the less recognizable (and therefore the less trustworthy) a bank’s note was
to people. And every time you did a deal, you had to vet the note
to make sure it was worth what your trading partner said it was
worth. So-called wildcat banks sprang up, took people’s money,
issued a host of notes, and then shut down, making their notes
worthless. To be sure, people came up with workarounds—there
were volumes that were a kind of Yelp for banking, displaying the
panoply of bank notes and rating them for reliability and value.
But the broader consequence was that doing business was simply
more complicated and slower than it otherwise would have been.
The same will be true in a world where some people use Ethereum, others use Litecoin, and others use Ripple.
That doesn’t mean that cryptocurrencies are useless. On the
contrary, for transactions that one wants to keep hidden from
the government (or other authorities), they will remain useful.
Buying drugs, laundering money, evading capital controls, protecting your money in countries with hyperinflationary environments: these are all situations where cryptocurrencies can come
in handy. But the notion that private cryptocurrencies might soon
(or ever) be a meaningful competitor to fiat money for everyday
transactions is little more than a pipe dream.
James Surowiecki is the author of The Wisdom of Crowds and a
senior story producer at Vice News Tonight.
This doesn’t mean
useless. Buying drugs,
these are situations
where they can come