Dr. Doom is at it again. American economist Nouriel Roubini, given the nickname for predicting the US subprime crisis, has now taken aim at another bubble. His testimony before the US Senate Committee on Banking, Housing and Community Affairs regarding cryptocurrencies and blockchain is weaponized contempt. The title of his testimony says it all: “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”. Is such scorn justified?
On cryptocurrencies, there is ample room for scepticism. As Roubini points out, “A chart of Bitcoin prices compared to other famous historical bubbles and scams—like Tulip-mania, the Mississippi Bubble, the South Sea Bubble—shows that the price increase of Bitcoin and other crypto junkcoins was 2X or 3X bigger than previous bubbles and the ensuing collapse and bust as fast and furious and deeper.” Bitcoin started 2017 at $1,000, ended it at $20,000 and has since collapsed to around the $6,000 mark.
And then Roubini slips on the knuckle-dusters, noting that “a 70% capital loss was a “good” deal compared to thousands of alt-coins (otherwise better known as shitcoins) that have lost on average 95% of their value since the peak. Actually calling this useless vapourware garbage a “shitcoin” is a grave insult to manure that is a most useful, precious and productive good as a fertilizer in agriculture.” Such volatility is not the only problem. Nor is it that hucksters populate the crypto landscape and fraud is widespread. There are more deep-seated problems of design.
Widespread use of cryptos would create headaches for central banks first and foremost. Managing the money in the system becomes that much more difficult when part of the supply can’t be regulated. This is a feature, not a bug. While crypto advocates come from all sections of the ideological spectrum, Roubini is right in arguing that there is a strong element of extreme libertarianism in the crypto community. Governments, central banks and financial institutions are thus untrustworthy and to be bypassed as far as possible. Such thinking makes for entertaining barroom debates. It is less effective when it comes to monetary management and stability. And it doesn’t do much for financial intermediation and investment either.
Is blockchain, divorced from its primary usage of underpinning cryptocurrencies, more bankable? Roubini thinks not. If he had his druthers, he would end the hype about technology that is “effectively no improvement over using an Excel spreadsheet rather than hogging more energy than most large-sized economies to put private information on millions of computers all over the world.” Governments in the states and at the Centre in India beg to differ. Union finance minister Arun Jaitley talked up blockchain technology in his budget speech this year. And Niti Aayog is working on the ‘IndiaChain’ initiative, meant to be the country’s largest blockchain initiative.
A look at what the states are doing with blockchain shows what Jaitley might have meant when he talked about it as the foundation of the country’s digital economy. A number of them—Telangana, Andhra Pradesh, Maharashtra, Goa, Uttar Pradesh—plan on using it for land records. Educational certificates are in the mix as well, as is intellectual property management. However, all of this is easier said than done. Most of these projects are yet to make any headway. Some of it is down to the pain of migrating from old technological systems to new, of course. But that isn’t all of it.
Blockchain currently has a scalability problem. The costs per transaction are high. So is the pace of these transactions. Increasing the size of a blockchain network will introduce more latency into the system. The decentralized nature of blockchain—where each node keeps a copy of the transaction ledger—means that there are physical bottlenecks to do with storage, bandwidth and power as well as the network size increases. By choking the cryptocurrency ecosystem—for understandable reasons—the Reserve Bank of India has made it that much harder to find solutions. Initial coin offerings, after all, were a major source of funding for blockchain startups.
There are other problems as well. For instance, the blockchain ecosystem is currently splintered when it comes to protocols. Interoperability will not be easy. Take the financial sector; if banks wish to adopt blockchain technology, the only practical way would be to form a consortium. Such a process and technology switch has costs, financial and opportunity.
All of this said, we are not quite as pessimistic as Roubini. Blockchain is new technology. Its evolution will come in fits and starts. Its shape may very well change along with that evolution. It seems likely, for one, that it won’t be quite as entirely trustless and decentralized as it is hyped to be. Less trust and somewhat decentralized, with only some parties allowed to run nodes, seems more viable for banking and the like. It is no silver bullet as its evangelists claim. But “most over-hyped technology ever”? That remains to be seen.
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