Two economists at the New York Federal Reserve Money and Payment Studies discuss bitcoin and other cryptocurrencies capability to solve a problem of making payments in trustless environments; however, they argue it’s not clear it’s a problem that needs to be solved.
In a Q&A style blog Michael Lee and Antoine Martin, economists in the New York Fed’s Money and Payment Studies function lay out a guide on the purpose of digital money and what it’s future may look like.
Cryptocurrencies are fairly special in that like any functioning form of currency they facilitate payments between parties and provide a store of value but digital coins can do this in both environments where there is trust and a lack of it.
Everyone trusts the system that allows us to exchange payment for items because we are trusting intermediaries such as banks when we use a credit or debit card to make a payment. The authors argue that even cash transactions requires trust in that as a form of payment parties expect it will retain its value and not be eaten away by inflation. Lee and Martin contend “It’s trust that the “worthless” piece of paper is actually worth something to other people that makes it an acceptable medium of exchange.”
A mug's game?
How acceptable digital money will become is the question. Cryptocurrencies still face an image problem of money laundering as they remain ideal for circumventing legal or regulatory authorities, precisely because they don’t have any regulatory oversight.
However, the argument returns to trust again. The price of bitcoin fluctuates with news about vendors or firms accepting or declining bitcoin as a mode of payment. The more widely adopted it becomes as a payment option, the greater the worth of cryptocurrencies. However, their future will depend on how they stand up against rivals such as cash, debit and credit cards and PayPal to name a few.
In addition, there Lee and Martin concede that while cryptocurrencies solve a problem of payments in a trustless environment. It’s less clear how that solution stacks up in say the US where trust is established. Further, they argue if this was solved there are other barriers to surmount such as scalability, convenience and extreme volatility which gives them less utility because bitcoin's value can swing sharply with demand.
Still Lee and Martin haven’t ruled them out adding caveats: “Bitcoin and other cryptocurrencies are trying to improve scalability and convenience so perhaps in the future one of these cryptocurrencies could realistically compete with current payment methods. But, fundamentally, we wonder whether a payment method designed to function where trust in institutions is completely absent can ever be as convenient as one where trust is required, but also already exists.”