Speaker 1: It's a combination of a bubble, a Ponzi scheme, and
Speaker 1: an environmental disaster. That's how one of the world's leading
Speaker 1: authorities on finance and economics described bitcoin earlier this year.
Speaker 1: On this week's episode, will explore the world of cryptocurrencies
Speaker 1: and dig into why they're unlikely to live up to
Speaker 1: the hype, where cryptocurrencies might actually hold some promise, and
Speaker 1: how bitcoin might end up breaking the Internet. Welcome to Benchmark.
Speaker 1: I'm Scott Lanman, an economics editor with Bloomberg News in Washington.
Speaker 1: On this episode, we head across the Atlantic to talk
Speaker 1: with our guests, who's based in Switzerland at the Bank
Speaker 1: for International Settlements, which is essentially a cential bank for
Speaker 1: central banks. Jon Song Shin is the head of Research
Speaker 1: at the BIS. Previously, he was a professor Sir at
Speaker 1: Princeton University and the London School of Economics. Dr Shinn,
Speaker 1: thank you for joining us on Benchmark. Thank you, Scot,
Speaker 1: it's good to be on the on the show now, Jean,
Speaker 1: it was actually your boss, Augustine Carston's the head of
Speaker 1: the b i S who made that comment about bitcoin
Speaker 1: being a bubble, a Ponzi scheme, and an environmental disaster.
Speaker 1: You recently had a chapter in the bi S Economic
Speaker 1: Report and made a speech on the topic that we're
Speaker 1: a bit less sensational, though still critical of the limits
Speaker 1: with bitcoin and cryptocurrencies. Before we get into those issues,
Speaker 1: let me ask you why do you think bitcoin and
Speaker 1: cryptocurrencies have gotten so much hype and attention and hit
Speaker 1: a nerve with some people as the next big thing.
Speaker 1: I think it's the promise of technology solving one of
Speaker 1: the basic problems and economics, which is to generate trust
Speaker 1: in a very decentralized way. And to re address that question,
Speaker 1: it's worth thinking about what money is. And money is
Speaker 1: a social institution where I accept money as payment in
Speaker 1: the expectation that others will accept money. And in that sense,
Speaker 1: money itself is a worthless token, and that's true whether
Speaker 1: it's a piece of paper with a face on it
Speaker 1: or whether it's the digital token. But the fact that
Speaker 1: others accept the money gives it value. And in that sense,
Speaker 1: although the tokens are intrinsically worthless, it becomes something of
Speaker 1: value because of the social conventions that back up the
Speaker 1: use of money. And I think what's really captured the
Speaker 1: imagination is that bitcoin and other cryptocurrencies have come along
Speaker 1: which promise money like acceptability, but without the backing of
Speaker 1: a central authority like a central bank. That's right, and
Speaker 1: I found that history of money in your chapter very fascinating,
Speaker 1: and I agree that it is kind of avoiding the
Speaker 1: use of authority, this anti authority streak that runs through
Speaker 1: some veins of our world, that's probably driving that. Let's
Speaker 1: just talk about the use of bitcoin for a moment.
Speaker 1: How does buying something with bitcoin compare or contrast with
Speaker 1: a regular online transaction that I might do with a
Speaker 1: credit card. Yes, so I think it's worth looking at
Speaker 1: some of the some of the basic concepts here when
Speaker 1: anthropologists have looked back and looked at early human society
Speaker 1: is without money, with the conjecture that you know, goods
Speaker 1: were provided for the promise of someone to return their
Speaker 1: favor in the future. And in that sense, money can
Speaker 1: be seen as a kind of record keeping device where
Speaker 1: we keep tabs on who's paid whom and who I
Speaker 1: was what to whom, and rather than having a tangle
Speaker 1: of io us, money is a kind of summary of
Speaker 1: the services that you've provide others in the past and
Speaker 1: gives you an entitlement to goods and services with respect
Speaker 1: to others in the future. Now, the way that cryptocurrencies work,
Speaker 1: in particular a blockchain based cryptocurrencies work, is that it's
Speaker 1: an ecosystem which has the users who make and receive payments.
Speaker 1: But then you need others to maintain the system. So
Speaker 1: there are the bookkeepers who record the transactions. And what's
Speaker 1: very distinctive about bitcoin and other similar cryptocurrencies is that
Speaker 1: the register is maintained by broadcasting the transactions to every
Speaker 1: node in the system. That's to say, every there is
Speaker 1: a network of bookkeepers and the ledger is updated simultaneously
Speaker 1: so that every ledger is identical, and in that sense,
Speaker 1: there is no need for a central authority. So if
Speaker 1: I were to make a transaction, what would happen is
Speaker 1: I will record the transaction, make a payment to let's
Speaker 1: say a vendor, and then the the bookkeeper who who
Speaker 1: will update the leisure, will then broadcast that transaction to
Speaker 1: every other bookkeeper and all the books, all the ledgers
Speaker 1: are updated simultaneously, and so when everyone accepts that transaction,
Speaker 1: that would be a value transaction within the system. And
Speaker 1: that's different from a traditional system, the current system where
Speaker 1: it's really a central authority like the central bank, that
Speaker 1: would validate the transaction. Correct, that's right. So under the
Speaker 1: conventional system, what would happen is that I have a
Speaker 1: deposit in the bank and then I make a payment
Speaker 1: by instructing the bank to make the payment to a vendor.
Speaker 1: What the bank would do is then to debit my
Speaker 1: account and credit the account of the vendor and in
Speaker 1: the payment system as a whole all. Ultimately, what would
Speaker 1: back up the system is that these transactions are then
Speaker 1: settled on the central banks balance sheet. Now, when you
Speaker 1: talk about how everybody has to keep this ledger, this
Speaker 1: gets to the issue of why bitcoin or why cryptocurrencies
Speaker 1: can only get so big. You really get to this
Speaker 1: issue of what you call scalability. What would happen if
Speaker 1: if bitcoin or cryptocurrency were to become so widely used
Speaker 1: that it were kind of like a global currency and
Speaker 1: it would require tons and tons of computing power just
Speaker 1: to process each individual transaction. Is that where we get
Speaker 1: into the environmental disaster part of what Mr Carson said, Yes,
Speaker 1: I think this goes to the ecosystem that I discussed earlier.
Speaker 1: So there are the users who make and receive payments,
Speaker 1: but then there are the bookkeepers, and the way that
Speaker 1: the system works is to use the individual incentives of
Speaker 1: the bookkeepers so that they have an incentive to maintain
Speaker 1: the system, and they have an incentive to maintain the
Speaker 1: system that keeps the records faithful to the intentions of
Speaker 1: the users. And the way that it works in the
Speaker 1: case of bitcoin is that the miners compete to scoop
Speaker 1: up the transactions that are waiting to be processed, and
Speaker 1: they compete by solving mathematical puzzles using computing power at
Speaker 1: their disposal, and the solution of the puzzles do not
Speaker 1: serve any particular purpose in itself other than to select
Speaker 1: a minor to update the payment and um. The natural
Speaker 1: question then is what is in it for the miners?
Speaker 1: What are the incentives for the miners to engage in
Speaker 1: this kind of activity, And the answer is, of course,
Speaker 1: that they receive a reward for engaging in mining and
Speaker 1: engaging in updating the ledger, and the reward comes in
Speaker 1: two forms. One is a reward in terms of the
Speaker 1: of the bitcoin itself, so there's a block rewards are called,
Speaker 1: but that part is due to be phased out over time.
Speaker 1: But the other part, which is A crucial part is
Speaker 1: that the users pay a voluntary user fee, So they
Speaker 1: pay a fee so that the transactions are processed. And
Speaker 1: because it's voluntary, it really depends on how much the
Speaker 1: system is being used at that time. So if there
Speaker 1: is a lot of congestion in the system where many
Speaker 1: users are trying to have their transaction process, then you're
Speaker 1: you're competing with other users who are also paying their fees.
Speaker 1: So um, when you have a lot of congestion, you
Speaker 1: can have episodes when the users have to pay quite
Speaker 1: a high fee in order for their transaction to be processed.
Speaker 1: At some point last year in December, you had to
Speaker 1: pay in excess of fifty dollars per transaction in order
Speaker 1: to have your for a two dollar coffee, as you
Speaker 1: as you men in that paper right exactly. So if
Speaker 1: you bought a two dollar coffee and insisted on paying
Speaker 1: for it using bitcoin, you would have had to pay
Speaker 1: in excess of fifty dollars to have that transaction processed. Now,
Speaker 1: the natural question there is why don't you just increase
Speaker 1: the capacity, because that is simply a technical issue. But
Speaker 1: I think this is where the question becomes very interesting,
Speaker 1: because we need to think about not only the technology,
Speaker 1: but also the economics, because the question down is what's
Speaker 1: in it for the minor when you increase the capacity, Well, there,
Speaker 1: because the user fee is voluntary. If you increase the
Speaker 1: capacity to such an extent that there is no congestion,
Speaker 1: then the users really have no incentive to pay a
Speaker 1: volunteer user fee, and then there are no rewards there
Speaker 1: to be collected by the miners, and the bookkeepers themselves
Speaker 1: will have no reward worts to sustain, you know, their activity.
Speaker 1: So I think this is a case where the economics
Speaker 1: really bump into the the technology. How do you get
Speaker 1: from here to where you say that it could break
Speaker 1: the Internet if it's too big. I think that's really
Speaker 1: about the specific workings of of a particular type of cryptogramesy,
Speaker 1: which is which is bitcoin, and the the idea is
Speaker 1: that once the transactions accumulate over time, and the and
Speaker 1: the value of a system like this is that the
Speaker 1: whole history of transactions are recorded, and everyone is carrying
Speaker 1: around the ledger of all the past transactions, and the
Speaker 1: size of the transactions become larger and larger. And if
Speaker 1: you imagine lugging around a very large ledger of the
Speaker 1: history of all transactions and that ever occurred, then these
Speaker 1: files can become larger and larger, and it could become
Speaker 1: a very big burton on on the capacity of the
Speaker 1: system to actually maintain. But of course this is particular
Speaker 1: to a specific cryptocurrency, which is bitcoin. It's not a
Speaker 1: general point about cryptoccorencies that may rely on alternative ways
Speaker 1: of keeping records. So let's talk about the other issue,
Speaker 1: another major issue that you discussed, and that's the finality
Speaker 1: of transactions. Can you talk a little bit about about
Speaker 1: this hurdle that someone might be able to actually go
Speaker 1: back and maybe erase the transaction you made to to
Speaker 1: falsify the ledger. Isn't that a major weakness of cryptocurrencies? Yes,
Speaker 1: And I think this, uh, the issue of finality goes
Speaker 1: back to what a payment system is. So finality is
Speaker 1: the idea that once you've made a payment, it's final,
Speaker 1: so that no one can go back and alter the
Speaker 1: facts to to you know, distort history as it were.
Speaker 1: And so the technicalist you're here is that because what
Speaker 1: is a valid payment depends on what the bookkeepers agree
Speaker 1: is a valid payment. It is the result of the
Speaker 1: collective decision of the bookkeepers themselves, and just as there
Speaker 1: is a an interaction between the users, there is also
Speaker 1: an interaction between the miners. And the way that a
Speaker 1: block chain based cryptocurrency works is that what is the
Speaker 1: truth depends on what is the current valid chain of
Speaker 1: the blocks of transactions, and theoretically it is possible for
Speaker 1: a group of the bookkeepers to clude and hitch the
Speaker 1: latest transaction to a block that is further up the chain,
Speaker 1: rather than follow the rules and hitch the block to
Speaker 1: the longest chain. And if that happens, the branch that
Speaker 1: consists of the transactions recorded in the block that comes
Speaker 1: to a dead end become all void. So you may
Speaker 1: have thought that you have brought something and paid for it,
Speaker 1: but then if it is part of a branch that
Speaker 1: dies off, it no longer becomes valid. And so um,
Speaker 1: if your transaction ends up in one of these dead
Speaker 1: end chains, your payment, which you thought you had made,
Speaker 1: turns out not to have been made after all. And
Speaker 1: so although it's very likely that when your transaction is
Speaker 1: accepted and hitched to the latest chain that your payment
Speaker 1: is valid, it's not valid. It's valid with a very
Speaker 1: high percentage, but not exactly. And once UM you allow
Speaker 1: the possibility that a payment may not be final with certainty.
Speaker 1: What you might come across is a case where you
Speaker 1: would like to make a payment which which is conditional
Speaker 1: on another payment. So if it's a very large payment,
Speaker 1: I don't have money in my account at the moment,
Speaker 1: I am relying on receiving a payment in order to
Speaker 1: make my own payment. Well, imagine that we have an
Speaker 1: economy where there is a large network of these very
Speaker 1: complex payments. If it turns out that some of the
Speaker 1: payments in the past are declared null and void, then
Speaker 1: there will be a cascade of payments which were relying
Speaker 1: on that payment which become undermined as well. So you
Speaker 1: could have another twist to what is a fairly familiar
Speaker 1: problem in systemic risk, where could have a cascade of
Speaker 1: defaults where one payment being declared void will mean that
Speaker 1: other payments are declared void as well. Now it doesn't
Speaker 1: sound like a very stable system, or or at least
Speaker 1: something with a lot of holes that you're describing. Probably
Speaker 1: why central banks have been fairly downbeat on on cryptocurrencies
Speaker 1: as as something that you know could actually be used
Speaker 1: in the world, and the Bank for International Settlements view
Speaker 1: is uh you know, it's partly because as a bank
Speaker 1: that kind of gathers central bankers together, institution that gathers
Speaker 1: them together. You often talk about these kinds of regulatory issues.
Speaker 1: Is there any way that this world can potentially be
Speaker 1: regulated by any institution which you basically have to create
Speaker 1: a new global regulator out of whole cloth if this
Speaker 1: were to become something that was that was more widely used.
Speaker 1: I think to some extent, the whole nature of cryptocorencies
Speaker 1: is that they were designed to lie outside any particular jurisdiction.
Speaker 1: But I think the issue of regulation, you know, need
Speaker 1: not become a big issue unless it affects, you know,
Speaker 1: other aspects of economic activity. I think what what has
Speaker 1: generated some disquiet is the fact that cryptocurrencies piggyback on
Speaker 1: the conventional monetary system. I mean, it's it's really the
Speaker 1: price in conventional money of cryptocurrencies which has grabbed all
Speaker 1: the headlines, and it's the way in which it has
Speaker 1: taken on some of the appearance of financial assets that
Speaker 1: has I think also generated some some concerns. So it's
Speaker 1: the fact that they are intertwined with the conventional monatory
Speaker 1: system and they have a price in terms of conventional money,
Speaker 1: which you know, gives it another dimension, and um, I
Speaker 1: think there is a larger debate about whether cryptocurrencies have
Speaker 1: taken on more of a character of an asset where
Speaker 1: people pay to hold them rather than to use them
Speaker 1: as money. And I think it's the second aspect of
Speaker 1: you know, this attribute of cryptocurrencies as financial assets, which
Speaker 1: has I think generated a debate about whether about whether
Speaker 1: they should be regulated, whether consumers should be protected from
Speaker 1: fraud and market manipulation. And I think this is where
Speaker 1: the um the debates on regulation have become much more acute.
Speaker 1: And certainly the price of bitcoin has been a regular
Speaker 1: headline on Bloomberg for some years now. Now aside from
Speaker 1: how big bitcoin or cryptocurrencies would get, you know, we
Speaker 1: hear a lot about blockchain technology that you were discussing,
Speaker 1: and you know, how it could potentially be used in
Speaker 1: ways maybe outside of the cryptocurrency world. Is their promise
Speaker 1: for blockchain technology by itself, and in addition, are their
Speaker 1: potential uses for cryptocurrencies on a small scale that might
Speaker 1: be vow that might actually help some corners of the
Speaker 1: financial system. I think it's a definitely the case that
Speaker 1: the technology itself has many useful applications. The the general
Speaker 1: version of blockchain is what's called distributed ledger technology, and
Speaker 1: the idea there is that among many dispersed individuals, they
Speaker 1: can keep a record of the current state of a
Speaker 1: complex system by updating in um in real time the
Speaker 1: ledger of all the transactions, so that everyone can have
Speaker 1: the same view of where things stand. So this is
Speaker 1: an idea with with many applications, for example, within a
Speaker 1: single firm, where you have many decision makers within the firm,
Speaker 1: but you know they may be separated by distance, and
Speaker 1: they may be separated by different time zones, but you
Speaker 1: can always keep track of where things stand, where you
Speaker 1: stand with respect to the system. And this is just
Speaker 1: like any other database where you know you can update,
Speaker 1: you know who's paid whom, where the goods are, where
Speaker 1: the next input needs to be made, and so on,
Speaker 1: and the technology itself can be maintained without any particular
Speaker 1: use as as currency. It's just like it's just like
Speaker 1: updating an Excel spreadsheet, but making sure that everyone has
Speaker 1: exactly the same copy of that spreadsheet. I think where
Speaker 1: it becomes much more difficult is when the technology takes
Speaker 1: on this attribute of a financial asset which then masquerades
Speaker 1: as a currency. Uh, and then you know, gives rise
Speaker 1: to promises that may not be full of fulfilled, you know,
Speaker 1: given the some of the underlying flaws of the economics. Now,
Speaker 1: to wrap up in your speech, you conclude that cryptocurrencies
Speaker 1: quote fall a long way short of being able to
Speaker 1: sustain a monetary system. After all we've discussed here, is
Speaker 1: there any chance that we're all wrong and will wake
Speaker 1: up one day and it will be central banks who
Speaker 1: are the relics and bitcoin that's replaced the dollar as
Speaker 1: the world's leading currency. I think the bar for that
Speaker 1: is quite high. If we think about the way that
Speaker 1: the monitor system works. It's underpinned by trust, and the
Speaker 1: promise of cryptocurrencies is that you can deliver that trust
Speaker 1: in a decentralized way while at the same time having
Speaker 1: the scale to accommodate you know, very large transactions by
Speaker 1: very many people in a flexible way, and something which
Speaker 1: gives certainty. And it's certainly possible that the technology will
Speaker 1: advance that will iron out some of the wrinkles. But
Speaker 1: one of the things that we tried very hard to
Speaker 1: do um in the special Chapter of the Annual Economic
Speaker 1: Report is to point out that the underlying economics are
Speaker 1: really quite challenging, and no matter how advanced the technology becomes,
Speaker 1: the underlying problems innate in the economics look like you know,
Speaker 1: quite insurmountable problems. Okay, John song Shin, head of Research
Speaker 1: at the Bank for International Settlements in Basel, Switzerland, Thank
Speaker 1: you very much for being with us on Benchmark. Thank you,
Speaker 1: scot Benchmark will be back next week. Until then, you
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Speaker 1: Thanks for listening. See you next time.