[Cryptography] Fun and games with international transaction settlement (was Re: IBM looking at adopting bitcoin technology for major currencies)

Ray Dillinger bear at sonic.net
Sat Mar 14 21:58:56 EDT 2015

On 03/14/2015 03:21 PM, Jerry Leichter wrote:

> It's not clear how Bitcoin would necessarily change any of this.  If
> Bitcoin somehow becomes completely independent of the existing
> banking system - and its hierarchy of backing mechanisms that go up
> to the largest nation-states and their productive capacity - it's not
> clear how it can ever be stable.  (Granted, the existing monetary
> systems have problems with stability, too - but we've more or less
> managed to keep them under control.  In fact, we kept them very
> stable - no major panics; they were once an
> every-decade-or-two-occurence - from the 1940's until 2008.)  It's a
> nice theory that, with a strictly limited quantity in circulation,
> and a strictly controlled growth rate, Bitcoins should act kind of
> like gold, and not be susceptible to inflation (or deflation).  The
> wild gyrations in the value of Bitcoins - and in the price of gold,
> for that matter - indicates just how little that theory tells us
> about the real world.

Bitcoin is essentially protocol over policy.  Some of the advocates
think that since nobody can be trusted to set policy, protocol is the
best a cryptocurrency can do.  The ideologues claim that anything
resembling policy or political input into monetary policy is
inherently evil and that protocol is superior because it is "fair."

The ideologues have forgotten the endless, predictable, painful
boom/bust cycles of the eras in which there was no such thing as
modern monetary policy.  While it's true that nation states still
mess up occasionally and produce a hot steaming deposit, those
of us who do not live in kleptocratic states are generally better
off for having a government that sets monetary policy, including
mild inflation.  By contrast, Bitcoin's monetary policy is a
dead hand on the tiller - it does not foolishly steer toward
cliffs as kleptocracies and noticeably stupid nations sometimes
do, but it will not change course either, regardless of whether
its economy is heading for a cliff.

Ultimately, the dollar is backed up by the productivity of the
American people and the ability of the government (via exercise of
its monopoly on legitimate use of force) to tax them.  There is no
productivity whatsoever associated with gold, or Bitcoin, or any
other asset which is valued only because of its rarity. No agency
is able to implement anything like monetary policy with respect
to it in order to protect participants from a boom/bust cycle,
or to stabilize or uphold the value of Bitcoins - hence, even
in the best case of complete adoption, wild fluctuations in value
relative to government-issued currency can be expected.

Also, it's a bit amusing to hear the cryptocurrency people
referring to government-issued fiat currency as "fiat" and not
noticing that Bitcoin itself is also fiat.  The difference is
only whether it is the issuing governments or the issuing
users whose fiat power (the ability to create value by simply
asserting that something has value) is being exercised.

And it is at this time still an open question whether someone
can meaningfully have fiat power at all if they do not have
the ability to tax or otherwise derive value from broad-based


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