Yesterday I had an op-ed in the AFR:
Bitcoin investors have been on a bit of a roller coaster the last month or so. Since mid-April the price of bitcoin has dropped about $US20,000 ($25,000). You’d think that’s got to hurt, but the true believers will say “BTFD” (that’s “Buy the f—ing dip”).
The innovation that underpins bitcoin is far more interesting than the invention of a digital money. The blockchain – the decentralised ledger than keeps track of individual bitcoin and prevents double spending – industrialises trust. Trust is a valuable building block of both the economy and civil society.
At the moment, the main driver of bitcoin’s volatility seems to be Elon Musk’s tweets.
My RMIT University colleagues and I guesstimate that the trust underpinning the pre-COVID global economy was worth about $US29 trillion a year. All that trust was generated the old-fashioned way – personal relationships, organisational hierarchy, auditing and surveillance.
Many of the mechanisms and institutions that generate trust in an industrial economy can now be replaced by algorithms and smart contracts in a digital economy. The cost of producing trust has fallen, and we can expect to see a lot more of it.
Arun Sundararajan – professor of entrepreneurship at New York University – has argued “every time there was a big expansion in the world’s economic activity, it was generally induced by the creation of a new form of trust”.
The industrialisation of power led to a period of astonishing economic growth and human flourishing. It is early days, but just imagine what the industrialisation of trust could achieve.
It’s not surprising that bitcoin and many cryptocurrencies are valuable, but why are they so volatile?
At the moment, Elon Musk’s tweets seem to drive bitcoin’s volatility. Musk is what the late Joel M Stern would have labelled a “lead steer” – a person whose views and opinions are important enough to move markets.
Recently, Musk’s company, Tesla, had acquired a large stock of bitcoin and announced that it would be accepting bitcoin as payment for its vehicles. This was seen within the context of mainstream acceptance of bitcoin as a workable and viable currency. Prices went up.
Then it appeared Musk changed his mind – he indicated that bitcoin’s carbon footprint was too high for his liking and Tesla would no longer accept bitcoin as payment for its vehicles. Prices went down.
Musk has also been promoting an alternative cryptocurrency known as dogecoin. This token was literally started as a joke. Yet the joke is on everyone else – dogecoin’s market capitalisation is over $US40 billion.
Musk is almost certainly multi-tasking. He has positioned his company into the cryptoeconomy. He is probably engaging in some impact investing, as many people are concerned about bitcoin’s carbon footprint.
He is also trolling bitcoin true believers, and US regulatory authorities too.
Blockchain business models are not going away. What they need now is official recognition, and to be brought into the formal economy.
Musk is not alone in trolling the true believers. George Selgin – emeritus professor at Georgia University and now at the Cato Institute – has been engaging them too. Most of his criticisms of bitcoin maximalists are valid. It is unlikely that bitcoin will emerge as the only money being used in a global digital economy.
That is all theatre. It ignores the main game.
In the background, there are scores of start-ups – many in Australia – that are quietly working on business models that rely on industrialised trust. In the same way Uber disrupted the taxi industry, many of these start-ups will disrupt the services economy.
This will have profound implications for business. Size will no longer be a defence against competitors. In same way anyone with a nice car could become an Uber driver, anyone with a computer and internet access will be able to become an entrepreneur, a day-trader, a broker, and, in time, a bank or insurance company.
To be fair, Australian political and regulatory elites have been somewhat distracted over the past year. They have been open-minded about blockchain technology and the challenges it poses in their areas of interest. Andrew Bragg’s Senate Select committee is looking into Australia becoming a technology and financial hub. This is all good work, but time is of the essence.
Even if we are experiencing another bitcoin bear market, blockchain and blockchain business models are not going away. What they need now more than ever is official recognition, and to be brought into the formal economy. This is so they can be recognised as being legitimate businesses with need of other business services.
Ironically, the industry that will one day disrupt the banking and insurance industry is currently in need of banking and insurance services from established banking and insurance companies.
That requires legislative changes to the Australian regulatory framework. That will be hard work. In the meantime follow Elon Musk on Twitter. The fireworks are very entertaining. But remember he is actually a visionary.
This morning Andrew Bragg had a response – also in the AFR:
The opportunities are endless if handled properly. Digital identification could allow the world’s “unbanked” population to have direct access to financial services.
But one of the first problems we have to overcome in this digital space is its image.
Even respected Sky News presenter Laura Jayes reflected a common perception and put to me recently that “cryptocurrencies are just the domain of tech heads and criminals”.
There’s nothing about cryptocurrencies that makes them vulnerable to this characterisation.
Second, it’s important that we have a consumer protection framework in place.
This is the argument put forward on these pages by RMIT economist Sinclair Davidson who said: “What [blockchain business models] need now more than ever is official recognition, and to be brought into the formal economy … so they can be recognised as being legitimate businesses with need of other business services.”
This isn’t a problem of market failure, but where policy and regulation need to catch up to innovation.
Speaking of real-world impact, this very nice story appeared in the Campus Morning Mail yesterday (emphasis original):
Way before bellhops got into Bitcoin RMIT researchers were researching and developing the transformative power of the blockchain
Melbourne firm AEM launched accounting software for crypto-currency the other day and thanked the RMIT Blockchain Innovation Hub for “access to research and academics, providing internships and industry experience for students and ultimately employment for a number of students.”
This has to score points for RMIT with the National Priorities and Industry Linkage Fund (insofar as anybody is across how it works, (CMM October 2).
But there is way more to what RMIT has achieved. The Blockchain Hub demonstrates how basic research works with industry – the government’s core objective for university links with business.
RMIT economist Jason Potts, with colleagues from RMIT and Curtin U, recognised five years back how research published on a blockchain can could replace journals (CMM April 26 2016).
With Chris Berg and Sinclair Davidson (also RMIT) he scaled-up the suggestion in 2017, arguing the blockchain could go aways to reduce the role of government, now needed for “record keeping, validation and verification of transactions in property rights,” (CMM October 30 2017).
The trio pulled their big ideas together in their book, Understanding the Blockchain Economy: an introduction to institutional crypto economics (CMM September 6 2019).
The research rolls on and so does teaching and industry partnerships. Nothing crypto about the intellectual currency of this work.