Roubini on Cryptocurrencies and Blockchain

Published by marco on

The following citations are from an interesting talk/paper, Testimony for the Hearing of the US Senate Committee on Banking, Housing and Community Affairs On “Exploring the Cryptocurrency and Blockchain Ecosystem” by Nouriel Roubini on October 2018 (U.S. Senate Banking Committee) (sub-titled: Crypto is the Mother of All Scams and (Now Busted) Bubbles While Blockchain Is The Most Over-Hyped Technology Ever, No Better than a Spreadsheet/Database).

He had good foresight in 2007, but I’m surprised to see how confident he is about the current system in that paper … maybe he’s just emphasizing more as compared to E-Currencies (and also he’s addressing Congress, who are a bunch of noobs anyway).

He gives an inordinate amount of trust to the current system where he seems to be able to see all of the holes in the E-Currency world. Why does he do that? He’s right that it fucks up less than E-Currencies are likely to, but I still think his view is too high-level and doesn’t take into account how rotten it all is, at the core. And likely to fail.

He cites numbers from sources that are known to be corrupt, but doesn’t acknowledge this. Is there any reason to believe LIBOR at this point?

Citations

On the utopian vision vs. the dystopic reality.

“So the utopian crypto future will be one of libertarian decentralization of all economic activity, transactions and human interactions. Everything will end up on a public decentralized distributed permissionless trustless ledger; or better millions of ledgers on computers that are now already consuming more energy than Canada to verify and confirm transactions without the use of evil centralized institutions.”
Location 195-198

On the degree of centralization in crypto vs. the purported advantage of decentralization. He makes an excellent point, in that the alternative to shady banks is even shadier crypto—which doesn’t mean that we should continue to trust in shady banks, though.

“First, miners are massively centralized as the top four among them control three quarters of mining and behave like any oligopolist: jacking up transaction costs to increase their fat profit margins. And when it comes to security most of these miners are in non-transparent and authoritarian countries such as Russia and China. So we are supposed not to trust central banks or banks when it comes to financial transactions but rather a bunch of shady anonymous concentrated oligopolists in jurisdictions where there is little rule of law? (Emphasis added.)”
Location 215-218

In this next point, though, he seems to be arguing against centralization specifically when it’s not in the U.S. That is, Chinese and Russian control is nefarious, but centralization would seemingly be OK if it were under American aegis.

“Everything that this study argues about the nefarious impact of China on Bitcoin can be said and applied to any other crypto-currency and to the role of Russia in the crypto eco-system.”
Page 227-228

Another good point is that crypto is yet another section of life that is non-democratic. Say whatever you want about the current system—it is, at least, run by ostensibly democratic countries. It’s corrupt as hell, but at least there’s some hope that we could influence it.

“[…] developers are police, prosecutors and judges: when something goes wrong in one of their buggy “smart” pseudo-contracts6 and massive hacking occurs, they simply change the code and “fork” a failing coin into another one by arbitrary fiat, revealing the entire “trustless” enterprise to have been untrustworthy from the start. (Emphasis added.)”
Location 233-235

The massive centralization in the crypto world leads to massive inequality.

“Fourth, wealth in crypto-land is more concentrated than in North Korea where the inequality Gini coefficient is 0.86 (it is 0.41 in the quite unequal US): the Gini coefficient for Bitcoin is an astonishing 0.88.”
Location 238-239
“So decentralization is just a total myth invented by a bunch of whales whose wealth is fake; now that the retail suckers who bought at the peak have literally lost their shirts these crypto “whales” are fake billionaires as liquefying their wealth would crash the price of the “asset” to zero.”
Location 243-245

He makes another interesting point about people who compare the initila Internet boom with the supposed boom of crypto.

“The WWW went live in 1991 and by 2000 – nine years later − it already had 738 million users; and by 2015 the number of users was 3.5 billion. […] And the number of crypto transactions has collapsed by at least 75% between 2017 and 2018.”
Location 252-253

I was more surprised to learn that half of all humans do not use the Internet at all. Our decisions affect them.

In the end, there is absolutely nothing to distinguish crypto from any other scam that the financial world has come up with.

“That is precisely where the ICO charlatans would effectively take us […] where all transactions occur through the barter of different tokens or goods. It is time to recognize their utopian rhetoric for what it is: self-serving nonsense meant to separate credulous investors from their hard-earned savings. (Emphasis added.)”
Location 315-319

In the next citation, I feel that Roubini is too generous to our current system.

“While price manipulation does occur in a variety of financial markets, there are strict laws against it and it is subject to draconian criminal prosecution; thus, it is the exception rather than the rule.”
Location 323-325

…unless you count the multi-trillion dollar and decade-long LIBOR scam. Any prosecutions there? No? I thought so.

At any rate, crypto is collapsing so fast that it’s hard to imagine that anyone is still supporting it—other than the people that had already bought it.

“In 2018 cryptocurrency values fell by 90% on average from their December peak. They would have collapsed much more had a vast scheme to prop up their price via outright manipulation not been rapidly implemented. But, like in the case of the sub-prime bubble, most US regulators are still asleep at the wheel while having started investigations months ago. (Emphasis added.)”
Location 327-330
“Without such outright criminal manipulation the price of Bitcoin would now be about 80% lower than its current value, ie about $1200 rather than the current $6500.”
Location 336-337