Universities tend to have the image of old buildings that are full of books and people who are very into their scientific work, but a little bit out of touch with the rest of the world. We talked to Assistant Professor Mike Seiferling from the University College London. Our phone call with him not only dismantled any prejudice about universities and the people who are working there, but also provided us his highly interesting insights into his research about cryptocurrencies, stablecoins and CBDC. We talked about his work and the work of his team at the IE University’s Center for the Governance of Change and their recent findings researching these topics in different countries.
Have cryptocurrencies failed their own vision? Are we better off with digital currencies issued by central banks? And who should govern the very foundation of money?
Motivation for Research on Cryptocurrencies and CBDC
How did you come to research cryptocurrencies?
One of my projects is about the fundamentals of money. How do we think about it? How do we perceive the transfer of wealth and transactions in general? And even more important, how do we improve the landscape in which we make those transactions?
That led me to working with the IE University’s Center for Change and to hire an excellent research team with world class expertise in computer science, economics and also cryptocurrencies.
But why cryptocurrencies? How did you get personally involved with it?
We still have a system where a lot of middlemen are involved in monetary transactions. And a lot of those middlemen are not necessary with all the technological advances that we have. So, if we lived in a world with benevolent people or an efficient way to hold people accountable, we could move away from systems where we have middlemen who may be take advantages of information asymmetries when ensuring trust.
Blockchain technology – as it was proposed by Bitcoin – negates that effect, because you have everybody’s balance sheets shared in a common decentralized ledger. Everybody has access to all the balances and the trust is built in the protocol. Which is fantastic, because if you don’t lose need expensive middlemen, then you can do more productive things for society with these savings.
So, that is what got me into it. Seeing all these rectifiable inefficiencies and knowing that we didn’t really learned or solved anything since the crisis in 2008. In fact, now with the corona virus pandemic and the resulting economic crisis we are doing the same thing as in 2008, but this time on steroids.
It seems to me that you are agreeing with Satoshis plan and certain ideals. Is that the case?
Yes, in theory, of course. There was a wonderful paper written by Narayana Kocherlakota at the Federal Reserve Bank of Minneapolis with the basic idea that money is just memory. If we could imagine a mental balance sheet and you are simply memorizing all the transactions, then we wouldn’t need money at all.
So, to me there are theoretical aspects Nakamoto drew on, but unfortunately a lot of the things that happened after Nakamoto were driven by a very small niche community of people who were more aligned with cryptography and computer science. They were really good at what they are doing, but didn’t manage to reach out to people with a background in finance, monetary economics, or public relations in order to make all these ideas more appealing to the general public.
Today, when you approach mainstream macro economists or people in finance it is still not appealing, because now it is only associated with speculations.
Social and technological problems
You talked about cutting out the middleman, which is in fact one of the basic ideas behind cryptocurrencies. Still, it is producing a dilemma. On the one hand you get less dependent, but on the other hand you have to face full responsibility. All transactions are final. If you somehow lose your money from your account you can talk to the bank and get it back. But if you lose your Bitcoin, then it’s gone.
Is there a way to resolve this and get both advantages?
The movement towards stablecoins and having asset backed currencies solves a lot of the initial problems in terms of volatility and in assuring that there is some value in that coin. The solution to the problem is that there needs to be an identifiable backer. One solution could be a stablecoin like Libra.
The problem and one of the key findings of our study is, that companies are not trusted by the public and had poor PR when it came to advertising the advantages of privately issued currencies. Facebook failed in explaining why Libra is better than what people have now. Their failure shows why it is so important to educate the public about this new type of technology. Why is it better? What advantage does it have over, say the US-Dollar?
This is really interesting. Most news and reports in the field of cryptocurrencies are driven by PR and marketing. Do we really need more marketing or should we focus more on the education about money and particularly about cryptocurrencies?
It is very important to educate the general public. Cryptocurrencies are split in two worlds. One is driven by enthusiasts, who are extremely dedicated and have gathered a lot of specific knowledge. And the other one is the general public who has almost no awareness and don’t know much.
Most people will turn off if you mention blockchain, because they think it is computer science. So even if we focus on blockchains application as money or payment system it is still complicated. But it doesn’t have to be if you the language used is targeted to the audience..
Let’s say you live in country that has faced hard times because of a draught and now the UN has to buy rice for its population. In order to make that transaction possible they may have to use different currencies and each swap between them comes with a spread. The spread are potentially unecessary middlemen fees that won’t help the people who are affected by the crisis.
A stablecoin like Libra would solve this problem. We are talking of huge amounts of money that are not going improving social welfare or making society better off.
Do we need Libra or could it be any other stablecoin? Does it have to be Facebook?
No, Libra is a sophisticated stablecoin, but in principle we could use any other stablecoin with similar or better qualities. It seems that Facebook is facing a lot of distrust worldwide, but especially in the advanced world. In our report, we found that in Germany, the UK and in the US, people tend to trust the central banks or the ECB much more than Facebook.
It seems that this distrust is well earned. They produced more than one scandal since they started their social media business. One could argue that it is their business model to sell out their users. Why should we trust those people with our money? The companies behind Libra could bring digital currencies to maturity and this could cause indeed a worldwide financial revolution. The question is, do we want a revolution driven by people who are evidently only focused on their own profit?
This is indeed the question. Especially if you think about the fact that their first proposal of Libra included a basket of underlying assets and they get to decide what’s in the basket and what they are going to disclose about their decisions in public. In the end we would trust them to facilitate all transactions.
But isn’t Bitcoin the solution to this problem? The trust is within the protocol. Many people don’t trust Facebook, others might have repercussions against banks or perhaps their own government. In fact, many governments are totalitarian. Do we need something like Bitcoin, but with less volatility?
I think it would be hard to construct a stablecoin with a decentralised network and full transparency. In a fully decentralized system the collective is effectively also the issuer. In this sense the people are the issuer and the holder,with full accountability to each other and full transparency. There is a lot of merit within that solution, but there are a lot of challenges, too. How much privacy do we want? This is an issue for many societies. There are cultures who will hate to engage with technology that will take away even a portion of their privacy. Even if they are all law-abiding citizens.
A successful digital currency also needs to function like money. You need to preserve a stable price and if you don’t have somebody controlling the supply, then you can’t have a stable price. If the collector is the issuer, then the collector needs also to manage the supply. But you can’t have everybody manage the supply of the currency. You need to have some kind of board which would need to be centralized.
Even in decentralized networks you have decisions made by small groups of people. And I’m still not sure if they are always acting benevolent or properly.
But the Bitcoin developers are managing it very well. There will be only 21 Million BTC coming into existence. If they are not going fork Bitcoin, these and other fundamentals are set in stone.
The main questions we need to ask revolve around the strategy of the manager and who should be the manager. What degree of transparency do they provide to users? How are they accountable to the holders of that currency? Aside from that point we can also take a look at their strategy which should be based on long lived monetary economics foundations.
A fixed supply of money will lead to price instability. That is not an efficient system. You don’t want to pay 1 Dollar for milk this week and next week it is going to be 10 Dollars. However, the stability could be managed by some kind of algorithm which takes something like CPI into account. So, it could be theoretically solved by the protocol.
Requirements for the new money
So, cryptocurrencies aren’t sound money, because the are not flexible enough. They do not fit to the demands of the real world. Is that the point?
Right, all human behaviour is not fixed. Those fluctuations need to be accounted from the supply side to maintain price stability. If you just have this crude fixed amount of money and a fluctuating demand for money, then price levels ultimately will vary.
That is what we don’t want and the past has taught us that is not an optimal system. You have to manage the supply responsibly in order to have price stability.
The findings in your study revealed a lot of scepticism against Bitcoin and cryptocurrencies in general. According to your report cryptocurrencies have failed their own vision. People involved into crypto are highly sceptical, too.
Who funded your work? Are banks behind this?
It is excellent that your readers and people who are involved in cryptocurrencies are looking at who are the funders. But I hate to disappoint that we have been given absolute free range on this. The funder was the Inter-American Development Bank (IDB) in Washington D. C..
So, they are not affiliated with Libra for instance. In fact, our finding on Libra were very negative. We kept our questions as objective as possible in the survey that we carried out in different countries.
We got many answers that we did not expect, but our research is the messenger. We are not the creator of the message.
One of the key findings was that people in western societies are less sceptical of their banks and more sceptical on cryptocurrencies. While people in Latin-America seem to distrust their banks and trust cryptos.
Do we need a crash in order to realize what’s going on? Are cryptocurrencies the fallback mode for the downtrodden?
Always learn from a tragedy. If we hadn’t had the crash in 2008, Bitcoin wouldn’t have become as big as it did. I think people are angry in general about how the financial system works and are still upset about bailing out rich bankers in 2008.
We didn’t learn anything from the crisis in 2008 and the respond to it. In my opinion we are at least as bad off in terms how finance works as we were in 2008. I think we have seen enough crisis for the time being. We need to create plausible and responsible solutions that makes currently systems of finance obsolete.
We talked about Libra, we talked about central banks and trust in protocol. One of your team’s findings was that, quote: “Cryptocurrencies have the potential to vastly improve systems of payments if designed and implemented correctly”.
That seems to be a very broad sentence. What is the correct implementation?
I think the best implementation comes from the entity that we are can trust the most to maximize social welfare rather than enriching themselves . Our research has shown that most people in the western world, trust central banks more than any private institutions. A more general concern is accessibility – how and where can we use that currency
So, the best implementation needs to provide price stability, high accessibility wherever people like to use it and it needs to be built on widespread trust. I know that this is a very simple answer and that there are many reports focusing on the technical implementation and the design of CBDC or a cryptocurrency.
But to me the most important aspects are: Can people to use it to make transactions? Is it a store of value? Are they able to get some benefit using it over any other form of money? Is the issuer trustworthy to act in the public interest?
Central banks in countries with stable political systems have earned trust premiums and more importantly they continue to reach out to, and consult with, the general public.
But looking closer at CBDCs reveals also a dangerous side of it. There are totalitarian governments and they could take even more control over the lives of their citizens. How do we prevent that?
There are two sides to that problem. I know that people value their privacy even if they are law abiding. With CBDC they lose the ability in doing quasi anonymous transactions that are possible with, say Bitcoin. Is that a bad thing in dictatorships or authoritarian regimes? Yes, that is a problem in those countries!
On the other hand, losing this ability comes with a great benefit. Think about all the corruption, illicit trade, money laundering, etc. in the world that is made much easier to get away with using completely anonymous money like the USD or Euro.. Those things could be more detectable with blockchain technology which would improve societies to a large extent. The magnitude of corruption and money laundering using cash is huge! This includes all the officials from poorly governed countries who are, for example laundering natural resource revenue to buy expensive real estate in London or Berlin.
To me it is more important to have the ability to prevent these types of activities than the privacy of people in well-established democracies who can hold the institutions accountable.
One could argue that such a system will never come to existence. In fact, Panama papers have revealed that there are indeed powerful people trying to operate from the shadows. Perhaps they will prevent such CBDCs or at least build in a backdoor for themselves.
That would be an argument for a complete decentralised ledger. Nothing is private, everybody has access and everybody can investigate potential fraud. To me that wouldn’t be a problem.
The older I get the more I realize that benevolence does not exist in the world. Even if you’re an elected official, power corrupts. This pattern can be found everywhere in the world. Who is winning from preserving privacy? Who might be profiting from keeping their secrets? The recent leaks that you mentioned demonstrate that a lot of financial privacy produces some very lucrative benefits to a small group of very wealthy individuals at the cost of everybody else.
About Robert Steinadler
Robert is the editor-in-chief of the German online magazine Bitcoin Kurier. He started his own journey with Bitcoin as a miner and is especially interested into privacy coins. The Bitcoin Kurier delivers news, articles, interviews and educational content to readers in Germany, Austria and Switzerland.
“Our goal is to spread not only knowledge about cryptocurrencies, but also awareness about privacy and security issues that demand the attention of the public eye.”
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