"Cryptocurrencies: Irrational Exuberance or Brave New World?" Milken Debate

Vlad Costea
  • 7 May 2018
  • /
  • 383 views
  • /
  • In #Op-Ed
  • Titans of the financial world have once again met this year to discuss how their profits can make the world a better place, and one of the debates was about cryptocurrencies.
  • It was quite an intense debate with passionate exchanges on the part of Mr. Roubini.

Much like the World Economic Forum which is held in Davos every year, The Milken Institute Conference is considered to be one of the most important events in economics. Every year, the Milken Institute sends invitations to some of the richest people in the world to interact with government officials, celebrities, NGO representatives, and leaders of non-profit organizations. The topics chosen are usually of utmost relevance for the economic status-quo, and participation comes at a high cost: tickets this year were sold for amounts ranging from $12,500 and $25,000.

Given the meteoric rise of cryptocurrencies and the unprecedented mainstream adoption that these cryptographic financial inventions are receiving, it was natural for the Institute to show interest in presenting some of the most insightful opinions in the industry. The debate was entitled "Cryptocurrencies: Irrational Exuberance or Brave New World?".

On the side of the "coiners", we had Bill Harhydt (CEO and founder of Abra) and Alex Mashinsky (CEO of Celsius Network). On the other hand, the so-called "nocoiners" were Brent McIntosh (General Cousel at the US Department of the Treasury) and the world-famous economist Nouriel Roubini (Chairman of Roubini Macro Associates, University professor of economics, former advisor of the Clinton presidential administration, and long-time critic of Bitcoin). The moderator of the debate was Anna Irrera, FinTech correspondent for Thomson Reuters.

Q1: What happened in the last year? Is it the beginning of a new asset class or is it "the mother of all bubbles"?

Bill Barhydt: As a retail investing application for cryptocurrencies, Abra is often faced with this type of inquiry. One of the issues which causes this bubble to form and grow is the fact that the early investors don't sell their coins, so growth mostly occurs when new money gets thrown in. But after 5 to 10 years of volatility and technological improvement, the utility of cryptocurrencies will prevail over the speculative aspect and display the true value. According to Mr. Barhydt, the little institutional investments that the financial sectors from Japan and Korea have made resulted in a euphoria in USA and Europe which faded in time (thus explaining the price correction we've seen early this year). However, as adopters hold onto their assets, the prices are expected to keep on rising.

Alex Mashinsky: Cryptocurrencies are at the fore front of the battle between centralization and decentralization. The last 500 years of centralized capitalism have created a financial imbalance which allows corporations like Apple or Google to possess more capital than some of the bottom 50 countries in terms of GDP. Cryptocurrencies present an alternative to this evolutionary pattern. Consequently, the society as we know it can change thanks to this clash between centralization and decentralization, and cryptocurrencies can only become more valuable thanks to the limited supply.

Nouriel Roubini: It's not the nocoiners who spread FUD, but only those who have an interest in the business. As a personal note, the economist has no interest in any blockchain-related projects. He jokes that the best way for an employer to keep his crypto-billionaire employee is to wait one month, as the market is extremely volatile. During the fall of 2017, he would often get asked questions about Bitcoin investments by financially-illiterate people who can't tell the difference between stocks and bonds, but it turned out that the king of cryptos really was "the mother of all bubbles" as shown by the January price correction. 

Also, cryptos are not currencies because they don't have one of the three fundamental functions: medium of exchange, unit of account, and a store of value. He then goes on to address the scalability issues of cryptocurrencies and explains that decentralization comes at a high cost in terms of fast payment processing (as opposed to the more scalable credit card services). The economist also speaks about the relation between decentralization, security, and scalability: as the cryptocurrencies try to scale, they become more centralized and this hybrid destabilizes the security. 

He also says that decentralization is "bullshit", as the top 3 Bitcoin miners control 55% of the mining, while the top 3 Ethereum miners control 61% of the hashing operation. Mr. Roubini then goes on to tell a short anecdote about meeting the CEO of the biggest mining company in the world, who nonchalantly told him that he controls 25% of Bitcoin and 40% of Ethereum.

Alex Mashinsky: In 1993 the Celsius Network CEO contributed to the writing of the original patent of VoIP (Voice over IP). This protocol is the largest decentralized app which exists today which nobody has any control over, and which is used by companies to make million-dollar profits for offering zero-tax phone calls. WhatsApp is worth 20 billion dollars by offering VoIP, and the example is relevant in order to show how open-source protocols can still have successful businesses which make commercial use of them. 

According to Mr. Mashinsky, we're moving from the VoIP world to the MoIP world (Money over IP). He mentions that Satoshi Nakamoto has solved the crucial double-spending problem and allowed peer-to-peer transactions to be safe and immutable.

Q2: Can you elaborate a little more on the way you're decentralized since you're company CEOs?

Bill Barhydt: He has been involved in cryptographic affairs for 30 years - at the CIA, Goldman Sachs, Netscape (where he developed SSL) and eventually started mobile banking services where he worked with regulators around the world. By virtue of this experience, he can state with 100% certainty that cryptocurrencies can solve problems that no other invention are capable of solving. Examples include decentralized investing (as Abra has users in 75 countries who are empowered to make investments in innovative ways), global money transfers that can actually scale to Visa numbers through second-layer solutions and smart contracts, and consumer asset finance. "These are applications that can't be done any other way than crypto".

6 billion are going to use cryptocurrencies just like they use TCP/IP today. National currencies themselves will adopt the technology and allow payments through the blockchain, thus generating more decentralization. Through the same brilliant engineering which today allows us to watch Neflix via a TCP/IP connection without actually understanding the underlying processes, everyone will also use cryptocurrencies in the future. It's the same evolution in terms of decentralization of information (which the internet was meant to do) and cryptocurrencies will go on to solve bigger problems.

The discussion about mining centralization is utter nonsense, as there should be made a distinction between having an oligopoly in companies that develop ASIC miners and the great amount of people who buy and own mining rigs which might become part of larger pools.

Q3: From a government's perspective, can there be total decentralization of the money supply?

Brent McIntosh: He cites six experts who are involved in the cryptocurrency field and have reached the consensus that they don't know where this is going to end up in 20 years. However, there are rules that banking institutions are subjected to and cryptocurrencies should also comply to in the future, in order to prevent illicit financing. Drug trafficking, terrorist funding and money laundering aren't acceptable just because the inventions are cryptographic. Also, the nature of the cryptocurrencies doesn't remove government intervention and regulation - the example given is that of the Venezuelan Petro for which special guidelines were released. 

Alex Mashinsky: He completely agrees and thinks that everyone on stage is on the same page in regards to these official statements. Also, he adds that cryptocurrencies aren't meant to replace the dollar or competing with it, but to create a fairer environment where people can exchange value. In his opinion, banks have an opaque and unfair system which offers low interest rates while charging huge fees on those who lend the money that is deposited, and this problem can be fixed when people exchange cryptocurrencies. "It's about bypassing the banking system, but still being KYC compliant, not doing anything illegal but using an alternative mean." 

Nouriel Roubini: In order to make these transactions, you have to buy the coins from centralized exchanges which charge the same fees that banks do, so there is no decentralization involved.

Alex Mashinsky: The transfers are peer-to-peer, even though purchases for fiat have become centralized. You can transfer cryptocurrencies to another person without having any kind of centralized exchange in the middle. 

Q4: If something goes wrong with the transactions, whom do we sue?

Alex Mashinsky: Everyone who kept their cryptos safe in a wallet and took care of the private keys has had the funds in complete safety. There are no banks to get hacked in order to steal funds. Exchanges just cover their own losses for being centralized, but the world is now moving towards decentralized exchanges. Mining will also get replaced by Proof of Stake. This is a young industry, we have the answers and it will only take a few years to get to mainstream adoption. There is no problem with scalability, security, or centralization. Cryptos won't become a replacement for the financial system, as they only change the ways we transact with each other.

Q5: Why did so many people get into cryptocurrencies during the fall of 2017, was it just a gold rush or a strong desire for decentralization?

Bill Barhydt: Abra's average user age is 50, so they have to make sure that everything is very easy to use and understand. Recently, Abra has launched decentralized investing which uses smart contracts to give investors exposure to any asset class. By using Abra's smart contracts you can actually invest in stocks and bonds. The potential of cryptocurrencies hasn't yet been realized, but the liquidity is necessary to make these systems work. Also, Mr. Barhydt mentions that he knows lots of institutions that are looking to put a small percentage of their assets into cryptocurrencies, and the December price boom will be magnified.

Nouriel Roubini: There is a FinTech revolution which is completely changing financial services, which is based on 3 inventions: AI machine learning, big data, and internet of things. These three additions will revolutionize payment allocation, banking, insurance, and asset management. It also has zero to do with blockchain. Today we have payment systems like AliPay, WeChat, PayPal and others that are used by billions of people with very low transaction costs. So why are these companies not going into blockchain? Because it's not the future and the FinTech revolution has nothing to do with blockchain. 

Banks have security, reputation, offer deposit insurance, lender support, and protection against credit card frauds. When Mr. Roubini's credit card gets hacked, he can still get his money back, whereas having a crypto wallet hacked means that you're "screwed forever". 

Alex Mashinsky: He agrees that there hasn't been a Netscape moment in crypto to generate a killer app. However, there's more money being put in cryptocurrency start-ups than all venture money put together. Just like nobody believed that voice could be put over on the internet for communication, there will be a brilliant piece of engineering to make cryptocurrencies as accessible as WhatsApp and Skype. It took the internet about 10 years to discover that its killer apps are Amazon and Netflix (instead of 1995's sensations porn and travel reservations) and with cryptocurrencies it's going to be the same. Also, 5 to 10% of assets will be directed towards crypto, and that's a topic of paramount importance. 

Q6: How do governments protect investments but also make sure that they don't kill all innovation?

Brent McIntosh: There is an internal agreement that if financial regulation is to be implemented in cryptocurrencies, then certain core principles are going to be respected. First of all, more consumer choice is favoured and regulation should be tailored to their purpose. Regulated parties and regulators will be equally accountable for their actions. Also, the global competitiveness of US companies is taken into consideration.

Regulations have to be made in certain regards in order to prevent illicit activities, and actions should also follow the consensus of the United States' international partners. The Federal Government must also be kept in synchronization with all these regulatory initiatives for the sake of efficiency. He then goes on to say that there are many statements that are made along the way in order to clarify and build consensus on the way regulations will be implemented.

If the SEC calls ICOs securities, then they are legally treated as securities. Similarly, the CFTC has decreed that cryptocurrencies are commodities, and future contracts respect the guidelines that are established for commodities. Also, if you use exchanges and exchange cryptocurrencies with your wallet, then you are subjected to money laundering KYC rules. 

Here is the second half of the debate.