Op-Ed: Former IMF Chief Economist Fails to Understand the Basics of Crypto

Omar Faridi

Kenneth Rogoff, a well-known economist and chess Grandmaster, recently expressed his views regarding cryptocurrencies in an article  published in The Guardian.

Rogoff, an economics and public policy professor at Harvard University, wrote:

When it comes to new forms of money, the private sector may innovate, but in due time the government regulates and appropriates … just because the long-term value of bitcoin is more likely to be $100 than $100,000 does not necessarily mean that it definitely should be worth zero.

Cryptocurrencies Are Useful Everywhere, Not Just In “Rogue” States

Rogoff explained that he thinks of digital currencies as “lottery tickets” which could “pay off” if someone is living in a “rogue” state. While it’s true that cryptocurrencies have seen increased adoption in countries like Venezuela and Turkey (partly due to internationally imposed sanctions and internal socioeconomic and political factors), blockchain-based digital assets are also being used in nations where there is more stability.

As CryptoGlobe reported recently, 1,500 restaurants in Denmark currently accept bitcoin (BTC) payments. Restaurants and other venues accepting cryptocurrency as payment is not something new as many well-known retailers such as Overstock.com have been taking BTC since the past 4 years.

Everything Is Unpredictable Now, Nobody Knows What’s Going To Happen

Notably, there are many people who argue that digital currencies are mainly useful for people living in countries suffering from hyperinflation and severe political and economic restrictions. However, as we have seen recently cryptocurrency prices have become extremely volatile again as their market cap continues to decline sharply. This, right after bitcoin volatility levels had been at their lowest since December 2016.

As CryptoGlobe covered (on November 9th), bitcoin volatility had been even lower than that of major world currencies including the Brazilian Real (BRL) and the Mexican Peso (MXN). But just a few days later, bitcoin unexpectedly fell below the $6,000 mark and its price continues to fall sharply as it is now trading below $3,500. So, the argument that BTC would be a more effective medium-of-exchange (MoE) or store-of-value (SoV) in nations with high inflation rates may not necessarily be accurate as the flagship cryptocurrency itself has so far proven to be an unreliable asset.

While cryptocurrencies cannot be considered a “flight to safety” or a “safe haven”, recent world events have shown us that even the most developed nations in the world can become unpleasant places to live as their economies have also begun to fail.

At present, the citizens of France have been protesting against what they feel are unfair economic policies. The protests have turned violent and police officials are trying to bring things back under control. French citizens are demanding higher wages and they are fighting back against what they believe is an unfair taxation system as it does not require the wealthy people to pay their fair share of taxes.

Governments Cannot Ban Cryptocurrencies

Rogoff has also argued:

If governments ever make it illegal to use coins in retail stores and banks, their value must ultimately collapse.

He further noted that bitcoin is not “digital gold” even though its maximum supply has been “algorithmically capped” at 21 million. According to the former chief economist at the International Monetary Fund (IMF), bitcoin has no “real underlying value.” Then, without really explaining why the cryptocurrency does not have underlying value, Rogoff wrote that fiat money has practical value because “governments pay employees and suppliers, and demand tax payments in fiat currency.”

Although it does not require in-depth explanations and statements from a distributed systems and IT expert to refute these arguments, Bitcoin maximalist Andreas Antonopoulos has explained many times that to ban crypto, you would have to ban the internet. This, of course, would not be practical as the world’s economy is largely dependent on the internet.

Regulations for digital currencies may be effective in allowing authorities to have some control over their circulation, however regulatory oversight is limited because cryptos have no physical presence. Moreover, residents of countries like China, where user access to the internet is restricted, can and do easily bypass the government’s firewall by using cheap and effective VPN programs.

Rogoff’s other argument about cryptocurrencies not having intrinsic value is also suspect. He is right that fiat money has value because it’s used to pay salaries and collect taxes. But as most people following the crypto space know, governments around the world are beginning to accept taxes in cryptocurrency, they have started to tax capital gains on digital assets, and people have been receiving payment for their work in crypto as well (for a number of years).

"Too Soon To Say" What Will Happen To Digital Currencies

Fiat money has value because people use it. Fiat currencies are part of the engine that fuels the world’s economies. However, digital currencies are also being used in transactions. They’ve now been used by charitable organizations such as UNICEF, people are willing to sell their homes for crypto, car dealerships have started accepting major digital currencies, and the list goes on. 

Unlike renowned economist Nouriel Roubini, Rogoff does not think cryptocurrencies will definitely fail. He does however, make some interesting points which any crypto enthusiast should consider:

It is too soon to say how the new world of digital currencies will play out. Central banks will get into the game (their reserves are already a form of wholesale digital currency) … Like lottery tickets, there is a high probability that they are worthless. There is also an extremely small outside chance that they will be worth a great deal someday, for reasons that currently are difficult to anticipate.