Bitcoin Developers and Miners are Central Bankers
April 8, 2021
Finance Professor Mark T. Williams, also known as the guy who thinks bitcoins is the best crypto to buy and will trade for around $10 by mid-2014, recently wrote an article for Business Insider where he claimed Bitcoin has the power to “harm nations, economies, and global commerce”. The basic premise of the article is that central bankers are “needed to spur economic growth” in various countries around the world. It seems that the former Federal Reserve Bank Examiner thinks the world would evolve into a dystopian civilization from a sci-fi movie if Bitcoin were to gain more recognition from the general population. While I disagree with the economic arguments he makes throughout the article, I felt it would be more constructive to point out that Professor Williams seems to be misinformed when it comes to many aspects of the Bitcoin protocol. Here are the various discrepancies I found sprinkled throughout the entire piece. There were a lot of sprinkles.
Bitcoin Developers and Miners are Central Bankers
Under the Bitcoin model, those who create the software protocol and mine virtual currencies would become the new central bankers, controlling a monetary base. Their decisions would directly impact the Bitcoin economy and spill over to well-established currencies.
This is not true. The real analogy is that there is no central banker. The creation of each bitcoin is controlled by the Bitcoin source code. 25 bitcoins will be created roughly every 10 minutes for the next 132 weeks. After that period of time, the number of bitcoins created every ten minutes will be halved. This halving process will continue on a schedule written in the original Bitcoin source code. It’s true that changes can be made to the protocol, but the problem there is that the Bitcoin ecosystem has to accept those changes. People have already forked the Bitcoin source code many times, but none of these altcoins have really had that much success (when compared to Bitcoin).
Bitcoins are Too Volatile
Compared to fiat currency, virtual currency has several distinct weaknesses. As proven recently, it is more susceptible to destabilizing cyber-attacks, weak exchange controls, market illiquidity, asset bubbles, and sudden price swings that could destroy investor confidence and wealth, triggering cascading economic damage.
Obviously, bitcoins have a long way to go when it comes to price volatility. Having said that, the price has become less volatile with each passing year. Regulatory uncertainty is definitely playing a role when it comes to the bitcoin’s inability to find a stable price. There are some nations around the world where bitcoins don’t seem like a crazy option compared to their local fiat currency. Bitcoins are not going to replace US dollars in the near future, but there are over 200 other fiat currencies around the world. Bitcoins are now a new option when the people in those countries want to opt-out of government-enforced inflation and economic controls. I’m not sure if Professor Williams was expecting bitcoins to be stable from day one, but it’s going to take more than a few years for the world’s first major decentralized cryptocurrency to find a stable price in a free market. Give it a second.
Bitcoin Has a Software Flaw
A week in the Bitcoin world is like a decade in other markets. Up until recently, Bitcoiners pointed to open source code and five years of existence as proof that software was failsafe. However, in recent days cyber hackers proved otherwise by cracking the code, exploiting a software flaw, triggering a chain reaction, forcing three of the largest exchanges — representing over seventy percent of all trading volume — to halt investor withdrawals.
Again, not true. Transaction malleability is a software flaw that only affected certain exchanges. The flaw was not in the underlying Bitcoin protocol. This is a “flaw” in certain implementations of the Bitcoin software that has had its own page on the Bitcoin wiki for years. Some of the most reputable companies in the Bitcoin space, such as Coinbase, Blockchain, and Kraken, were not affected by this glitch in any way. You can give MtGox your bitcoins just like you can give Bernie Madoff your dollars. Having said that, there is still no proof that MtGox is actually insolvent. The companies that weren’t prepared to handle transaction malleability now have hurt their own reputations, while the better-prepared companies can rise to the top.
A Cyber Attack Triggered a Flash Crash Down to $102
I’m not sure how this is supposed to be an argument against Bitcoin. First of all, the price crashed down to $102 on one exchange, BTC-e, because of the incompetence of some Bitcoin traders and their bots. Trading bots have been known to have detrimental effects in more traditional financial markets too. To say the real price of bitcoins actually dropped down to that price is a bit disingenuous. The price didn’t get anywhere near $102 on any other exchange, MtGox included.
The Associated Press’s Twitter account was hacked in April 2013. This tweet by the hacker caused a flash crash on the DOW.
Bitcoiners are Commodity Traders
Complicating monetary matters, Bitcoin owners practice extreme hoarding. Over 90 percent of all Bitcoins are retained, leaving only a small portion available to facilitate trading, market liquidity, and commerce.
I agree with Professor Williams here. Bitcoin is currently a commodity, and no one should expect it to be a currency until it reaches a stable price. The disagreement I have with this quoted section is that hoarding should not be a problem once a stable price is reached. The main reason that people are holding bitcoins right now is that they think they’ll be worth much more in the future. Bitcoins cannot work as money until the price is higher because it will then take much larger amounts of cash to move the price on one of the exchanges. In other words, it doesn’t really make sense to use bitcoins as currency until that stable price point is reached. Where that exact price point is and whether or not it will be reached is up for debate, but saying that bitcoins are all a bunch of hoarders right now doesn’t really hurt its future use as a currency.
Bitcoin is Illegal in China, Iceland, Russia, Thailand, and India
Responding to Bitcoin risk, many countries including China, Iceland, Russia, Thailand, and India have already spoken out against the dangers of virtual currencies, deeming them illegal.
This statement is just blatantly false. Bitcoin is still legal in China, Thailand, and India. One might say that Thailand only legalized bitcoins after Professor Williams wrote his article, but the reality is that bitcoins were never really banned in Thailand in the first place.
Bitcoin is for Money Laundering and Tax Evasion, Not a Failsafe Financial Innovation
In its short experimental history, Bitcoin is better known as the designer-currency-of-choice for money laundering, tax evasion, and other unlawful acts, than as a failsafe financial innovation that will improve the global financial markets.
I suppose people like Chris Dixon, Marc Andreessen, and Chamath Palihapitiya are into Bitcoin because it allows them to launder money. They certainly don’t see any innovative aspects of the technology behind the Bitcoin protocol. As Andreas Antonopoulos would say, Bitcoin is a technology and currency is just the first app. At its core, the Bitcloud protocol allows for a system of decentralized trust. Bitcoins are simply the units of account on the Bitcoin ledger. In addition to payments and currency, this technology can disrupt asset exchanges, online marketplaces, centralized voting, online identity systems, DNS, email, and much more.
Bitcoin Has Flawed Software, Has No Trading Infrastructure, and Should Be Tightly Controlled
Recent market events — including hyper-price instability, market illiquidity, flawed software, and the instability of existing trading infrastructure – reveal the possibility that virtual currencies may not be a safe, stable, or usable currency. But if analysis can prove Bitcoin offers clear economic and societal benefit, then its use should be regulated and tightly controlled by sovereigns and managed through well-established and tested banking channels. Nations, their regulators, and financial protectors have an obligation to ensure that the virtues of Bitcoin and other virtual currencies are utilized, but only if its major flaws are eliminated.
The flawed software and instability of existing trading infrastructure have nothing to do with the Bitcoin protocol. Bad exchanges and online wallets fail, while reputable Bitcoin companies will be able to stand the test of time. There’s a reason the price of bitcoins on MtGox is currently half of what it is everywhere else.
As for regulating and tightly controlling Bitcoin, that line of thinking just doesn’t make sense. As I’ve noted in the past, Bitcoin regulation gets much trickier when you realize that people can just stay within the Bitcoin ecosystem. You can choose squashing innovation over preventing money laundering or a dystopian future for civilication all you want, but that doesn’t mean you’ll actually be able to do anything about it. Gavin Andresen even mentioned that regulating Bitcoin would be possible in a place like North Korea but more difficult in free societies when he was questioned about Bitcoin regulation at the CFR.
Lastly, Bitcoin’s “major flaws” will be eliminated. It’s not like the development of the Bitcoin ecosystem stopped in 2013. It needs to become easy for everyone and their grandmother to use Bitcoin, and we’re not there yet. New hardware and applications for Bitcoin will get us there. The Internet was flawed and had its early detractors too, but now basically everyone in the United States is connected to the Internet at all times through their mobile devices. The development process for Bitcoin is happening at an even faster rate because everyone who holds bitcoins basically holds stock in the entire Bitcoin ecosystem.