Yes, we all know the recurring complaints: it’s volatile, it’s new and untested, it can be hacked, and it has no central bank backing it; most established pundits hate it – today’s comments by Warren Buffett are a case in point – and as Goldman writes in a note released today by its economic team, “cryptocurrencies can seem like a solution in search of a problem.”
Specifically, Goldman notes that “money derives its value from its usefulness in facilitating transactions and diversifying portfolios. The US Dollar serves both purposes relatively well—or at least better than the main alternatives—so it is in high demand around the world.”
Then again, the real reason why Goldman is unable to grasp the utility of Bitcoin, is that the bank – like so many of its peers – is unwilling and unable to admit that there is a problem which bitcoin is addressing, a problem which as Deutsche Bank’s Jim Reid and Macquarie’s Viktor Shvets explained back in September, is that “Modern Finance, Not Bitcoin, Is The Real Fraud.”
And yet, even without admitting that the entire financial system is a giant fraud, one which the central banks have spent tens of trillions in the past decade to keep alive, Goldman is willing to suggest that there is a “case for crypto” and that even in a world where the dollar is supposedly a much better currency, if one without central bank backing, bitcoin “could succeed as a form of money.”
Here’s why Goldman is not ready to fully close the book on bitcoin and crypto.
A Case for Crypto?
In practice, Bitcoin and other digital currencies face significant practical hurdles to their adoption as outside forms of money, and many of their possible benefits come with significant drawbacks—several of which were highlighted by our colleagues in an earlier report (Top of Mind: All about Bitcoin, March 11, 2014).
First, some features of cryptocurrencies that might make them competitive with alternative stores of value are also features that are likely to attract government scrutiny. In particular, the anonymity of many cryptocurrencies makes them a useful medium of exchange for criminal activities, including tax avoidance and the circumvention of capital controls. As such, it would be surprising if continued growth in their popularity did not eventually attract greater regulation and law enforcement action by government.
Second, the fact that cryptocurrencies function without central banks may make them valuable as inflation …read more