I was inspired to write this piece after reading an article from Bloomberg I saw posted on noise.cash by @cryptoph (they are here, too!). The article is entitled "Cryptos Won't Work as Real Currencies, UBS Economist Says." The economist in question, Paul Donovan, is Chief Economist of UBS Global Wealth Management. On his company website he says he that he "[believes] passionately that economics is something everyone can and should understand" and that it is his "job to help people realise what they probably already know."
Okay then. Tell us what we know Paul.
The article is brief, almost just a single pull quote stretched into 150 some words. Donovan advises caution, to the world I suppose, about crypto currencies because they cannot act like fiat currencies. Why not? Because, as he puts it,
"People are unlikely to want to use something as a currency if they’ve got absolutely no certainty about what they can buy with that tomorrow."
And that seems fair. We've seem many crypto projects start strong only to then tank into oblivion, leaving some sadly the poorer. There are risks in this space. Speculative interest and media crazes do not help. But somehow I don't think Donovan is thinking about those examples. His argument is based on something else.
To dive in further, I watched the short video listed as the source of the article. First, let me say that you can tell this is a bank's website because it is terrible, but I digress. The video makes the following points:
price volatility in crypto markets makes them risky
"proper" currencies should be a stable store of value
"proper" currencies should be a stable store of value
repeated bouts of hyperinflation have weakened the buying power of crypto
crypto has a "fundamental flaw" in its fixed supply, it cannot respond to a decline in demand
"proper" currencies should be a stable store of value
What a fun video! He even illustrated his points with PlayMobil toys (was that Honkler talking to the dinosaur?). Let's go through his points:
price volatility
I'm not going to argue but this was a gimme. Next.
"proper" currencies should be a stable store of value
I wasn't sure what he meant exactly by "proper" but thankfully a quick Google brought me to Wikipedia, which did not agree with Donovan's fundamental understanding. At least to the group of editors of the Currency Wikipedia page, a currency is "money in any form in use or circulation as a medium of exchange" and then goes further to say "a currency is a system of money (monetary units) in common use."
It makes sense that a medium of exchange needs to have value to both parties wishing to make an exchange, but this value is not all that money is. It is easy to be confused by this, especially given the histories of fiat currencies. We would all like to think that when we put a fun currency symbol in front of a number, valuation is done, $50 or €50 or ₱50 will always be the same value. This doesn't match up with most experience in modern society. But Donovan is helping us realise things we know, so maybe we've forgotten how money works.
Money is not just value, however, but value put to work. Storage of value become more important to those that have it in excess.
And yes, he harps on this point for most of the video, restating it different ways but it boils down to the same thing.
repeated bouts of hyperinflation have weakened the buying power of crypto
This one just seems like a jab. He doesn't explain it. It's mentioned in passing after he says we need to think about things "objectively." While this is certainly true for some projects—the recent infinite minting attack on Cover Protocol's token leaps to mind—framing it in this way is more scare tactic than useful commentary. This framing also makes it seem as if crypto is a homogeneous space, perhaps pegged to BTC, and we all realise how silly that sounds.
crypto's "fundamental flaw"
So here's where we get to the meat of Donovan's argument, what he calls its fundamental flaw, and again, this speaks more to his lack of understanding of crypto spaces than anything else as it ignores the fact that there are many different approaches to monetary policy here.
There are many different projects trying to solve many different problems through many different means. Yes, there is a lot of overlap between projects, and there most definitely should be, but to act like there is some sort of High Crypto Comptroller that is in control of all the monetary decisions is laughable.
This is just my subjective stance. Papa Donovan knows best, but I'll need to break down his statement further to figure out what I already know.
Fiat currencies are issued by central banks that work closely with government. These banks and their governmental advisors watch the economy through various measures, charts, numbers, and conversations with business leaders and other politicians, and then make decisions based on what they think is happening.
What doesn't then occur to him, and to me it's baffling, is that anyone can follow the same practice. In fact, those closest to the markets that matter most to them have the best sense of their own needs and would be best suited to devise their own value systems.
Donovan's argument is built on fiat currency thinking. An insistence on centralized control as "objectively" the best option because he believes centralized institutions are best suited to make those decisions. But he's ignoring a large part of what money is supposed to do. The sorts of boogie men of crypto he peddles are the same ones that haunt fiat currencies but he seems to think that for him, it's already been solved.
Note also that he said "proper currencies" but gave no successful examples!
And regarding his worries about fixed supply cryptos, he's obviously never heard of AMPL!
I'll leave you with one final piece of UBS wisdom: crypto can go to zero. You know, I knew that, but I never realised it. I always thought we were supposed to realise profits, not losses. Thanks UBS!
Lead photo by Ryutaro Tsukata from Pexels
