Nouriel Roubini’s testimony on cryptocurrencies : let’s rationalize

 

 

To read Roubini's testimony for the Hearing of the US Senate Committee on Banking, Housing and Community Affairs

 

The famous economist Nouriel Roubini provoked virulent reactions within the crypto community after his (no less) virulent statements before the US Senate on the 11th of October.

 

According to Roubini Bitcoin is “the mother of all scams” and blockchain “the most hyped technology ever.”, mining is bad for the environment, decentralization is ridiculous, most tokens are non-compliant securities, utility tokens take society back to the stone age, blockchain is no better than spreadsheets, and no corporation or government would like to run a state on a public ledger, or Bitcoin transaction fees have reached $55, and it cannot scale to cater for global financial volume.

 

Roubini is highlighting some facts and issues which are true in this young and nascent industry, but some of his arguments are also to taken with precaution as he is not a technologist and does not necessarily apprehend all the technical dimensions and possible evolutions of that new and complex technology, e.g. the scaling problem : there are already a few solutions being developed that could scale to Visa levels within the next two years.

 

Here are a few points made by Roubini we would like to discuss in order to bring more clarity and open-mindedness to this debate.

 

1. An ordinary spreadsheet ?

 

The blockchain is useless for applications where any ordinary spreadsheet or database will be enough.


Blockchain is indeed overhyped, it has applications and it remains to be seen whether or not it is indeed a superior solution.

 

It is just a ledger, that solves a certain problem (the 3 byzantine generals) : https://en.wikipedia.org/wiki/Byzantine_fault_tolerance

 

Blockchain decentralization might make sense when:
1. disrupting or strengthening central points of friction or failure.
2.wanting to know or proving that some information or process is true.

 

The applications (based on public blockchain) are now numerous in many sectors, with solutions perceived as being useful and meaningful (see for example www.bcdiploma.com using Ethereum to certify diplomas).

 

Of course, as pointed out by Roubini, there are also many “Distributed ledger technologies” (DLT) being developed by enterprises in a closed environment (so-called private blockchains) , but they are like “intranets” compared to the public “internet”.

 

Both (private and public) approaches might have their utility and it is premature to draw conclusions.

 

2. Bitcoin Mining centralisation

 

“ … And since its mining is now massively centralized — as an oligopoly of miners now control its mining — its security is at risk. …”

 

Indeed, this issue must be under scrutiny. The crypto community says that such oligopolies have a vested interest in not causing 51% attacks on Bitcoin, because if they do it will harm their business as well, since Bitcoin’s price would go to 0.

 

3. Exchange security and market manipulation

 

And the breaches of security are massive and escalating. It is now clear that while Bitcoin has not been hacked yet the centralized exchanges that hold the cryptocurrencies of millions of depositors can be and have been hacked on a regular scale.” “ Massive manipulation: pump n dump, spoofing, wash trading, front running, exchanges conflicts of interest, tether scam

 

It is true and stricter exchanges regulations are needed, not only regulations against money laundering and price manipulation but also regulation for money insurance (Coinbase, which has never been hacked, is covered by an FDIC insurance. This could be made mandatory for all exchanges).

 

Now a few exchange platforms are regulated in the USA. In Europe, the 5th AML directive applies to exchanges that will have to conduct mandatory KYC-AML procedures. And countries like Malta and France are adopting “anti market abuse” législations.

 

4. ICO’s

 

ICOs are not compliant securities when they aren’t outright scams …”

 

In the USA it is true as the SEC sees in most tokens a security. In Europe the regulatory framework is different and most “utility tokens” are not seen as securities. Though Ico’s may be scams or deceptive and legal principles will apply to protect the buyers (misleading advertising, contract law etc.).


Some EU countries are now legislating to bring more protection to the investors, like Malta (bill on cryptofinance comes into force on the 1st of November) and France (draft bill). The European Parliament is also willing to submit ICO’s to the scope of the future EU regulation on crowdfunding. It is a needed evolution.

 

5. Environmental impact

 

The energy consumption of crypto is an environmental disaster...

 

According to this link (source by Morgan Stanley) https://www.marketwatch.com/story/in-one-chart-heres-how-much-it-costs-to-mine-bitcoin-in-your-state-2017-12-15 it is about as 2 million US homes.

 

Indeed something needs to be done about it, and new eco-friendly technologies are already arising to solve this eventually.

 

6. Scalability

 

Throughout his testimony, the economist avers when it comes to “decentralization, scalability, and security,” blockchain protocols have difficulty simultaneously achieving more than two of the three.


He seems to ignore that the community of developpers have already released working solutions to cater to larger transactional volumes : Lightning Network (Bitcoin) and sharding (Ethereum).

 

Again, it is an evolving technology, developed by a large community of developers in an open source context. It is certainly premature to draw conclusions on its scalababilty at this stage.

And this debate refers only to the currently “dominant” public blockchains, Bitcoin and Ethereum. Other public blockchains are coming, with different technological configurations where the scalability issue is supposed to be solved. Again it is a technological evolution that nobody can anticipate at this stage.

 

7. Cold storage

 

Or spend a fortune to put your crypto assets into “cold storage”, ie a digital storage that is disconnected from anything online… But leaving aside the cost of such stone age security solutions the implication becomes that your crypto wealth — hidden in deep cold storage — cannot be easily traded or used for transactions of any sort. This is the contemporary equivalent of mining gold deep from the ground and then hiding it in the form of gold ingots back deep in the ground.”

 

The two most popular cold storage wallets are the Nano Ledger and Trezor; they cost $100 and $80, respectively. Anyone who’s used cold storage knows it’s still fairly easy et fast.

 

8. Bitcoin the mother of all scams

 

“… It is clear by now that Bitcoin and other cryptocurrencies represent the mother of all bubbles …”

 

There is manifestly a bubble phenomenon with the cryptosphere due to the nature of most crypto-currencies. Same with so-called ‘tokens’ , which are basically “vouchers”.

 

But in a number of cases the tokens or coins might make sense and prove to be useful or to be the only way to provide the promised service, or even bring a solution to a systemic problem.

 

Examples :

- Oligopoly of booking platforms : the BTU protocol (www.btu-protocol.com ) which offers a normalized booking system through the blockchain for any decentralized application (dApp) or web site, an alternative to the oligopoly of booking centralized platforms. Bookings are made via the blockchain by an open source protocol, which considerably lowers the entrance barrier. A token is used to encourage participants to behave rationally according to aligned economic interests. Thus, a booker would have an interest to cancel its booking in time in order not to lose the guarantee deposit it had to do in “tokens”. On the contrary, s/he will win tokens for every booking s/he will have finalised. The hotelier will also be rewarded by the booker who could share with him/her his/her tokens in order to retain him/her, thus creating a virtuous circle instead of an unhealthy servitude. The BTU protocol is not limited to the hotelier sector and also brings the interoperability between applications which incorporate it, which could ease the reciprocal cross sales between different industries (website of office, car, restaurant booking etc..)

 

- GDPR, privacy by design and e-commerce : Uniris (https://uniris.io ) . A new blockchain protocol that embeds strong authentication via a biometric device specifically designed for ID purposes, providing unhackable authentications, communications and payments. A native “stable” coin will be used for the transactions. It is a very interesting solution as it provides a secure and GDPR compliant platform (the users own their data, are authenticated and remain pseudonymous for the merchant when identity is not needed to deliver the service).

 

- Dominance of social media and content platforms : With Blockchain, there is no third party and the users benefit from the value created. Today, when we publish content in Facebook, we make Facebook wealthier although we are the one creating the value. When an advertiser pays Facebook to ad, we are the ones looking at the ad, and still, it is Facebook who gets the money. With Blockchain, everything is a transaction, but with no third party to take the full value created. Any action brings value, from creating content to cure content to read content (could be an add). Example : www.get-hey.com

 

During the .com bubble (2000) more capital was wiped out than in the latest crypto-currencies bubble, not mentioning the 2008 subprime mortgage bubble where hundred of billions of USD were lost.

 

A bubble is not necessarily “evil and most bubbles tend to have a following correction period (see .com bubble) and some bubbles go back to zero (tulip mania) when they are based on hot air (which is not the case with the cryptosphere meaning something is happening there).

It is also interesting to refer to the conceptual framework elaborated by Prof. Bernard Lietaer, ex central banker and now chairman of Bancor Foundation : alternative currencies are necessary to bring balance to the financial and monetary system, like chaos is necessary to balance too much order in a complex system (efficiency/resiliency, order/chaos, yin/yang).

 

9. Stable coins

 

And the biggest scam of all is the case of “stable coins” –starting with Tether –that claimed to be pegged one to one to the US dollar but are not fully collateralized by an equal backing of true US dollars. Bitfinex-behind the scammy Tether –has persistently refused to be properly audited and its creation of fiat Tether has been systematically used to prop up manipulate upward the price of Bitcoin and other crypto-currencies according to a recent academic paper.”

 

This is probably true. But many other so-called “stable coins” appear now on the market and it remains to be seen whether they will play a positive role, like a crypto means of payment for DAPPs without the risk of using volatile crypto’s.

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3èmes Assises des Technologies Financières - Jeudi 17 octobre 2019

26/07/2019

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