Why Global Trade Won’t Depend on Bitcoin
Is Bitcoin really the currency of the future? Citibank seems to think so. Its new report on cryptocurrencies, detailed by the Financial Times, contends that Bitcoin could “become the currency of choice for international trade” in the next seven years or so. This report is one of the most ridiculous pieces of investment bank research I’ve ever seen.
Bitcoin, of course, has made headlines as the first and best-known cryptocurrency — a term coined (pun intended) to refer to digital currencies that are not issued by governments or central banks. Bitcoins are created by networks of computers that “mine” blocks of data that contain information about previous Bitcoin transactions. The appeal is mostly ideological: the creation, trading, and record keeping related to Bitcoin are entirely decentralized, and there is no central authority that can alter the amount in circulation. This feature excites people of libertarian inclination, anarchists, a few technophiles, and a surprising number of entrepreneurs who hype Bitcoin for profit. Whether the entities that dominate certain parts of the Bitcoin ecosystem are any more trustworthy than governments and central banks is another matter.
Why is Citibank so high on the potential for Bitcoin to become a medium for international trade? One main reason, according to the report, is that Bitcoin has a “lack of foreign exchange exposure.” If this were true, it would be a very big deal. Exchange-rate fluctuations can disrupt the world economy, and a sensible method of avoiding them would be extremely popular.
But the claim that Bitcoin is not exposed to exchange-rate fluctuations is nonsensical. It’s likely that not even the most fanatical Bitcoin miner lives in an all-Bitcoin world. If people who own Bitcoins wish to eat or pay the rent, they must transform their Bitcoins into dollars or euros or renminbi. With respect to Bitcoin, all of those are foreign currencies, and the Bitcoin owner must trade for them at the current market rate. That’s foreign exchange exposure in spades.
In theory, that foreign-exchange risk could be avoided if individuals and businesses are willing to do business with one another in Bitcoin. Citibank asserts that they are; a graphic in its report shows that “36% of small-medium businesses in the U.S.” were accepting Bitcoin in 2000.
This statement, it turns out, is based on a survey of 505 businesses selected in an undisclosed manner, conducted for a company that wants to sell businesses insurance against cyber fraud. The claim is simply implausible. When I drop by the dry cleaner or the hardware store or the donut shop in my neighborhood, I don’t find any of them accepting Bitcoin. In fact, the authors of the Citibank report are quite aware that Bitcoin is not widely used. As they write elsewhere in the report, “We do not know how many users — people and companies who send or receive transactions — the network has….”
People and businesses that are actively engaged in the global economy are exceedingly familiar with exchange-rate risk, and they are likely to understand full well that Bitcoin doesn’t make it go away. Citibank’s report sees the solution in something called “stablecoins,” a type of cryptocurrency that is backed by a “reserve asset” — something like dollars or euros, or perhaps gold or silver. Exactly how this is meant to work out, and who is meant to pay for the dollars and euros that supposedly guarantee the value of the cryptocurrency, is a bit unclear. As the Financial Times reported last week, the best-known company promoting stablecoins just agreed to pay a penalty to the New York State Attorney General’s office, which charged that the company “recklessly and unlawfully covered up massive financial losses to keep their scheme going and protect their bottom lines.”
So although Citibank opines that “Bitcoin may be optimally positioned to become the preferred currency for global trade,” you can count me as a nonbeliever. Globalization, as I’ve asserted elsewhere, is likely to have less and less to do with moving goods across borders and more to do with exchanging services and ideas. I expect it to have very little to do with cryptocurrencies.