Former senior economist for International Affairs on the White House Council, Nouriel Roubini discusses why he believes the ‘crypto-bubble’ has burst for good.
Famed for predicting the 2007 Global Financial Crisis and Credit Crunch, Nouriel Roubini has predicted two of the biggest bubbles in the 21st century. He is now turning his attention to the cryptocurrency markets and has been highly critical of not only the currencies but the technology behind them, blockchain.
Roubini is a well-respected Professor of Economics at New York University’s Stern School of Business and the Chairman of Roubini Macro Associates, a global macroeconomic consultancy firm in New York. From serving as the Senior Economist for International Affairs on the White House Council of Economic Advisors, to advising the International Monetary Fund and The World Bank, Roubini is thought of as a highly esteemed economist.
Cryptocurrencies have been in steady decline since their peak in January 2018. Do you think this market is capable of ever reaching its original glory or has the bubble well and truly burst?
I have called crypto-currencies the mother and father of all bubbles now gone bust. The crypto bubble has burst for good and will not recover as these were assets with no intrinsic value. Since their peak in early 2018 Bitcoin has lost more than 80% of its value; the other top 10 crypto-currencies – such as ETH, XRP, etc – have lost over 90% of their value while 1000s of other “shitcoins” (a technical term of jargon for this garbage of pseudo-currencies) have lost between 95% and 99% of their value. This is no surprise as a study suggests that 81% of all Initial Coin Offerings (non-compliant securities illegally skirting all securities laws) were a scam in the first place, 11% are dead or failing and the remaining 8% traded on some crypto exchanges have lost over 90% of their value.
Crypto was the biggest bubble in human history as, compared to other historical bubbles – such as Tulipmania, the South Sea Bubble and the Mississipi Bubble, the parabolic price increase in the three years before the peak was much worse – at 60X price increase – than other bubbles (that increase at 10 to 30X rates) while its bust since the 2018 peak has been as fast and furious as any previous bubble (see the chart below). The Nasdaq bubble in the late 1990s was miniscule compared to the Bitcoin bubble as it increased 4X in the three years before the peak, not 60X. And this internet bubble included many real companies with real business plans, revenues and profits, not the scammy “white papers” of cryptocurrencies.
Comparing crypto-currencies to the early days of the internet is nonsense. A decade since the launch of the WWW in 1991 there were over 1 billion users of the internet, not the approximate 70 million wallets of crypto most of them dormant. A decade after the launch of the internet there were dozens of killer apps – such as email, web sites, etc – and exponentially increasing transactions in the billions of units; while in crypto there is not a single killer app – apart from useless “krypto-kitties”, Ponzi Pyramids and Casino Games with miniscule transactions – while total transaction volume has collapsed since 2018 by over 85%. And in successful real technologies like the internet or stock trading transaction costs collapse over time. Instead in crypto, transaction costs – measured as miners’ revenues divided by number of transactions – have skyrocketed since 2018. So any comparison of crypto to the early days of the internet is nonsense.
You publicly debated and criticised Ethereum with Vitalik Buterin, its founder. What do you think is the most flawed aspect of these cryptocurrencies in comparison to fiat currencies?
The most flawed aspect of so called “crypto-currencies” is that that they aren’t really currencies or moneys. For an asset to be considered a money or currency it must satisfy three criteria: it has to be the unit of account for all transactions and the single numeraire for pricing all goods, services and assets/liabilities. It must be a widely used and cheap means of payments. And it has to be a stable store of value and have stable purchasing power over goods and services. Bitcoin alone – let alone thousands of other “shitcoins” fails miserably on all criteria. It is not a unit of account and given the proliferation of thousands of “crypto-currencies” there is no single numeraire for all transactions. It is a lousy means of payments as the “proof of work” authentication method doesn’t allow more than five transactions per second; instead, for example, the Visa network allows for 25K transactions per second and growing. And the transaction costs/fees – as measured by miners’ revenues – are high and growing over time. And it is a very poor store of value as its price can fluctuate by 5% to 20% per days. So, any merchant accepting Bitcoin could lose all its profit margin in a day given the price fluctuations. Also, the supply of most cryptocurrencies – with the exception of Bitcoin – is increased and debased at will by its issuers; so price inflation and currency debasement in the crypto world is several orders of magnitude worse than fiat currency in stable low inflation economies like all advanced economies and most emerging markets.
These fundamental flaws of cryptocurrencies cannot be resolved over time given the famous Buterin “Inconsistent Trinity” principle: ie no cryptocurrency can be at the same time scalable (in terms of number of transactions), decentralized and secure. Fiat currencies and traditional banking system are scalable and secure but are centralized with reputable institutions that have decades long histories of trust, credibility and reputation (central banks, private banks, other financial institutions). Cryptocurrencies are not scalable and future solutions that may lead to scalability – such as proof of stake – would not be decentralized and would thus not be secure. Decentralization in crypto is a myth as miners are now a centralized oligopoly in shady jurisdictions with poor rule of law such as China, Russia, Belarus, etc.; trading is centralized as 99% of trading occurs in highly insecure and hackable centralized exchanges rather than decentralized exchanges that are all failing given no volume or liquidity. Wealth is centralized as the index of inequality for Bitcoin is worse than North Korea where Kim Jung Un and his lackeys control most of income and wealth. And developers are centralized too as Vitalik Buterin is “benevolent dictator for life” while developers are effectively police, prosecutors and judges as the myth of “the code is law” is over-turned when things go wrong – an hack – and a fork of a crypto-currency takes places on totally arbitrary terms.
It is clear that central banks are in talks about challenging current cryptocurrencies with central bank digital currencies. Do you think that central bank digital currencies could compete with our current cryptocurrencies and in what timescale?
A number of central banks are considering issuing central bank digital currencies – or CBDC – but such CBDCs would have nothing to do with crypto-currencies or blockchain while completely dominating such inferior assets. Starry-eyed crypto-fanatics have seized on policymakers’ consideration of CBDCs as proof that even central banks need blockchain or crypto to enter the digital-currency game. This is nonsense. If anything, CBDCs would likely replace all private digital payment systems, regardless of whether they are connected to traditional bank accounts or cryptocurrencies.
As matters currently stand, only commercial banks have access to central banks’ balance sheets; and central banks’ reserves are already held as digital currencies. That is why central banks are so efficient and cost-effective at mediating interbank payments and lending transactions. Because individuals, corporations, and non-bank financial institutions do not enjoy the same access, they must rely on licensed commercial banks to process their transactions. Bank deposits, then, are a form of private money that is used for transactions among non-bank private agents. As a result, not even fully digital systems such as Alipay or Venmo can operate apart from the banking system. By allowing any individual to make transactions through the central bank, CBDCs would upend this arrangement, alleviating the need for cash, traditional bank accounts, and even digital payment services.
Better yet, CBDCs would not have to rely on public “permission-less,” “trustless” distributed ledgers like those underpinning cryptocurrencies. After all, central banks already have a centralized permissioned private non-distributed ledger that allows for payments and transactions to be facilitated safely and seamlessly. No central banker in his or her right mind would ever swap out that sound system for one based on blockchain.
If a CBDC were to be issued, it would immediately displace cryptocurrencies, which are not scalable, cheap, secure, or actually decentralized. Enthusiasts will argue that cryptocurrencies would remain attractive to those who wish to remain anonymous. But, like private bank deposits today, CBDC transactions could also be made anonymous, with access to account-holder information available, when necessary, only to law-enforcement authorities or regulators, as already happens with private banks. Besides, cryptocurrencies like Bitcoin are not actually anonymous, given that individuals and organizations using crypto-wallets still leave a digital footprint. And authorities that legitimately want to track criminals and terrorists will soon crack down on attempts to create crypto-currencies with complete privacy.
Insofar as CBDCs would crowd out worthless cryptocurrencies, they should be welcomed. Moreover, by transferring payments from private to central banks, a CBDC-based system would be a boon for financial inclusion. Millions of unbanked people would have access to a near-free, efficient payment system through their cell phones.
What advice would you give to a business that are thinking of offering the possibility of transacting with their customers and clients in cryptocurrency?
First of all, almost no business accepts the use of crypto-currencies in transactions or as a means of payments. Not even crypto or blockchain conferences accept Bitcoin to register, they require hard dollars or euros. Second, any merchant using a cryptocurrency in transactions would be subject to massive market risk as the price of the cryptocurrency can change so fast that the entire profit margin of the business can be wiped out in minutes or hours by such price volatility.
Third and most important point, the business model behind firms requiring the use of cryptocurrencies to do purchases of goods or services is simply to rip off their customers. Indeed, in normal business transactions, customers can buy goods and service with conventional fiat currencies. But in an ICO, customers must convert that currency by buying into a limited pool of tokens in order to make a purchase. No legitimate business that is trying to maximize profits would require its customers to jump through such hoops. In fact, the only reason to restrict a purchase to token-holders is to create an illegal cartel of service providers who are safe from price competition and in a position to gouge their customers. Consider Dentacoin, a ridiculous cryptocurrency that can be spent only on dental services (and which almost no dentist actually accepts). It would be hard to come up with a better illustration of why business cartels are illegal in all civilized countries.
Of course, the crypto-cartels would counter that customers who incur the cost of buying a token will benefit if that token appreciates in value. But this makes no sense. If the price of the token rises above the market value of the good or service being provided, then no one would buy the token. The only plausible reason for forcing the use of a token, then, is to hike prices or bilk investors.
Beyond facilitating illegal activity, crypto-tokens obfuscate the price-discovery benefits that come when a single currency operates as a unit of account or numeraire. In a crypto-utopia, every single good and service would have its own distinct token, and average consumers would have no way to judge the relative prices of different – or even similar – goods and services. Nor would they have any real certainty about a token’s purchasing power, given the volatility of crypto-token prices.
Imagine living in a country where instead of simply using the national currency, you had to rely on 200 other world currencies to purchase different goods and services. There would be widespread price confusion, and you would have to eat the cost of converting one volatile currency into another every time you wanted to buy anything.
The fact that everyone within a given country or jurisdiction uses the same currency is precisely what gives money its value. Money is a public good that allows individuals to enter into free exchange without having to resort to the kind of imprecise, inefficient bartering on which traditional societies depended.
That is precisely where the ICO charlatans would effectively take us – not to the futuristic world of “The Jetsons,” but to the modern Stone Age world of “The Flintstones” where all transactions occur through the barter of different tokens or goods. Even the Flintstones had a more sophisticated financial system than the barter of crypto: they used shells as coins for payments and as a numeraire. Crypto instead takes us back to pure inefficient barter. It is time to recognize their utopian rhetoric for what it is: self-serving nonsense meant to separate credulous investors from their hard-earned savings.
Can we expect Blockchain to disrupt the finance industry over the next 10 years?
Blockchain will not disrupt the finance industry over the next decade. There is indeed a revolution in financial services, but it has nothing to do with crypto or blockchain. This revolution is called “FinTech” and is based on three related elements: Artificial Intelligence/Machine Learning (AI), Big Data (BD) and the Internet of Things (IoT). It will revolutionize digital payment systems, credit allocation, insurance, asset management, capital market activities, risk management, etc. In the payments sphere you already have digital payment systems used by billions of individuals in billions of transactions a day that have nothing to do with blockchain or crypto: they are Alipay and WeChat Pay in China; UPI- based systems in India, M-Pesa in Kenya and all over Africa; PayPal, Venmo, Square and many other ones in the US and Europe. So, there is a revolution in the provision of financial services that will disrupt many traditional banks and providers of financial services, but it has nothing to do with a decentralized blockchain.
Blockchain is also failing to deliver solutions for both financial services firms and for corporations, non-profit organizations and governments in spite of the myth that blockchain will revolutionize all sorts of financial and corporate transactions. Indeed, faced with the public spectacle of a market bloodbath in cryptocurrencies, boosters have fled to the last refuge of the crypto scoundrel: a defense of “blockchain,” the distributed-ledger software underpinning all cryptocurrencies. Blockchain has been heralded as a potential panacea for everything from poverty and famine to cancer. In fact, it is the most overhyped – and least useful – technology in human history. In practice, blockchain is nothing more than a glorified spreadsheet.
But it has also become the byword for a libertarian ideology that treats all governments, central banks, traditional financial institutions, and real-world currencies as evil concentrations of power that must be destroyed. Blockchain fundamentalists’ ideal world is one in which all economic activity and human interactions are subject to anarchist or libertarian decentralization. They would like the entirety of social and political life to end up on public ledgers that are supposedly “permissionless” (accessible to everyone) and “trustless” (not reliant on a credible intermediary such as a bank). Yet far from ushering in a utopia, blockchain has given rise to a familiar form of economic hell. A few self-serving white men (there are hardly any women or minorities in the blockchain universe) pretending to be messiahs for the world’s impoverished, marginalized, and unbanked masses claim to have created billions of dollars of wealth out of nothing. But one need only consider the massive centralization of power among cryptocurrency “miners,” exchanges, developers, and wealth holders to see that blockchain is not about decentralization and democracy; it is about greed.
As for blockchain itself, there is no institution under the sun – bank, corporation, non-governmental organization, or government agency – that would put its balance sheet or register of transactions, trades, and interactions with clients and suppliers on public decentralized peer-to-peer permission-less ledgers. There is no good reason why such proprietary and highly valuable information should be recorded publicly.
Moreover, in cases where distributed-ledger technologies – so-called enterprise DLT – are actually being used, they have nothing to do with blockchain. They are private, centralized, and recorded on just a few controlled ledgers. They require permission for access, which is granted to qualified individuals. And, perhaps most important, they are based on trusted authorities that have established their credibility over time. All of which is to say, these are “blockchains” in name only. It is telling that all “decentralized” blockchains end up being centralized, permissioned databases when they are put into use. As such, blockchain has not even improved upon the standard electronic spreadsheet, which was invented in 1979.
No serious institution would ever allow its transactions to be verified by an anonymous cartel operating from the shadows of the world’s authoritarian kleptocracies. It is no surprise that whenever “blockchain” has been piloted in a traditional setting, it has either been thrown in the trash bin or turned into a private permissioned database that is nothing more than an Excel spreadsheet or a database with a misleading name. Indeed, a recent study of 43 experiments trying to use blockchain for development and non-profit purposes (remittances, refugees identities and services, banking the poor and unbanked, and other lofty philanthropic causes) has shown that zero out of 43 experiments have had any success; so blockchain experiments have had a 100% failure rate.
Do you believe that once the flaws and shortcomings surrounding security, scalability and of cryptocurrencies have been addressed, it would make more sense to transact using it?
I do not believe that the problems of security and scalability of cryptocurrencies can ever be resolved. At the conceptual level security and scalability are incompatible with the decentralization that crypto and blockchain claim to want to achieve. And if you have a system that gets you scalability and security with centralization you are back to traditional financial systems and/or their modern evolution that is non-blockchain based FinTech. The problems of security in cryptocurrencies are extremely severe and cannot be resolved. If you take traditional financial systems based on central banks, fiat currencies and commercial banks you have significant amounts of security. You have deposit insurance for your deposit; you have lender of last resort support by central banks in case of destructive runs; you have support of systemically important financial institutions; you have supervision and regulation with liquidity and capital requirements. And when something goes wrong – like fraud on your credit card balances or bank account – it takes one phone call to block or reverse such fraud and being issued a new credit card or bank accounts. Of course, the provision of such public goods of financial security comes at a modest price of some reasonable fees for the safety of your financial assets, accounts and transactions.
In crypto-land you have instead a total Wild West of financial insecurity; no deposit insurance, no lender of last resort, no support of systemically important institutions, no proper regulation and enforcement of security laws. If an exchange is hacked your money is gone for good as scores of episodes of centralized exchanges being hacked show. If you are subject to a crypto-robbery as someone hacked your computer, or tablet or smart-phone your financial wealth is gone in the black-hole of crypto. If there is a “51% attack” – a form of crypto-robbery that is very common among smaller crypto-currencies your wealth is gone for good. If you lose your private key or someone steals it from you your crypto assets are gone for good. The only safe solution is “cold storage”, the equivalent of hiding your crypto wealth in a cave and hiding on a piece of paper your private key for good and not being able to transact your crypto-assets. It is a return to stone-age financial technology.
There is a reason why all societies rely on trusted institutions with a history of reputation, credibility and redress of fraud to ensure the safety and legality of financial and other transactions. The utopia of having decentralized, permission-less, trust-less algorythms that replace trusted and reputable institutions is a delusion that technology can provide a solution to fundamental problems of trust that only human institutions that have developed for millennia can resolve. There is no decentralized trust-less security or scalability in crypto and there will never be one.
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