Bank CEOs – although the few I have met personally have all been delightful – are not normally noted for the bitingly controversial nature of their public statements. Anodyne CEO sentiments about ‘tactical downsizing’ or ‘seizing new growth opportunities in China’ are par for the course. Coruscating attacks less so.
So it was refreshing to see that Jamie Dimon of JP Morgan has not held back in his opinion of bitcoin.
“If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than US dollars”, he said at banking conference in New York.
After thus casually ceding part of the US dollar’s currently dominant market share in the burgeoning ‘murderer market’, he went on to compare bitcoin with the favourite of all commentators on bubbles: the much maligned 17th Century Dutch tulip. Compare unfavourably, it must be said. “[Bitcoin] is worse than tulip bulbs”, was the precise quote.
Why so negative?
In part, it is probably the natural reaction of any middle-aged finance professional to seeing any novel asset gaining in value very rapidly without any visible means of support. We all remember the dot.com bubble. In comparison to bitcoin that bubble almost made sense: at least the companies involved did something that was meant to raise revenues (eventually). I mean, Pets.com was nuts, but we’ve all seen dogs with our own eyes.
Bitcoin on the other hand is more nebulous and is seemingly conjuring value out of thin air. This partly explains Dimon’s disquiet.
But, say the backers of the idea of Cryptocurrencies, isn’t that exactly what ‘normal’ fiat currencies are? Pounds, Dollars, Yen and so on? Isn’t it the case that all of these familiar currencies are created – out of ‘thin air’ as it were – by commercial banks like JP Morgan when they make loans? Aren’t these currencies just entries on computer systems in exactly the same way as bitcoins are? By this reckoning, profits made on a rampant bitcoin price (expressed in USD or other currencies) are just like the killings made on an FX trade when one currency (in this case bitcoin) rallies against another.
Up to point I think this view is right. Certainly, 90% or more of the stock of normal currencies is created in computers by commercial banks. (The Bank of England produced an excellent paper explaining the mechanics of how this works that I link to here).
But GBP and bitcoin are fundamentally different. Not because I can more easily pay for things with GBP than with bitcoin. That is purely a matter of the degree of market acceptance of the bitcoin as a mean of exchange, not a fundamental difference between the two currencies. If we all collectively decided to, we could theoretically all accept cowrie shells as means of payment like some South Sea Islanders used to. But it would far easier to imagine a world in the future where everyone had bitcoin wallets to make payments.
No. The fundamental difference between the two currencies is that I can pay my taxes with GBP and I cannot with bitcoin. The GBP (phantom and computer generated though it mostly is) has the backing of the UK State with its national monopoly of deadly force that – ultimately – it can use to make me pay my tax bill. And not just me as private citizen – it is the means by which companies pay too.
Bitcoin, on the other hand, floats free of any national government. Thus for every tax paying citizen in every country on earth it is like a foreign currency that must be FX’ed into local units before money can be presented to the State.
Of course, this is part of bitcoin’s appeal: its statelessness. But as well as its appeal it is also its drawback. The drawback stems from the reasons people choose to use it. In fairness, some reasons are purely practical: no FX conversions; global reach; no bank accounts etc. Seen in this light, Dimon’s motivations in trashing bitcoin are purely selfish – he’s worried about being disintermediated by a technology that doesn’t need his gigantic bank to prosper.
But another large driver of bitcoin’s rise is that it suits people who don’t want to be monitored by the State.
Now most users’ motivations for not wanting to be monitored by the State are no doubt benign, even if, at least to my eyes, they seem a tiny bit kooky: Libertarian ideas of living out of the vision of Big Brother; Syndicalist visions of a cooperative, ‘bottom up’ economy.
But some users’ motivations are definitely malign. What better means of exchange than a stateless currency for the financing of drugs or of terrorism? Thus, bitcoin has a somewhat sleazy reputation – one that Mr. Dimon is fully aware of.
And this, ultimately, is where I think Dimon, although extreme in his language, has got a point. The rise of Cryptocurrencies will always be limited as long as States do not accept them for taxes. Thus, stateless, they will always carry the taint of lawlessness. It’s built into the design of Cryptocurrencies like the red jam in raspberry ripple ice cream: it’s integral, inseparable.
That taint of lawlessness (although in the future possibly ill-deserved) will dissuade the mainstream commercial world from embracing Cryptocurrencies wholesale since, in a world of multi-billion dollar fines for corporate wrongdoing, which CEO wants to put themselves at risk? Even potential bad publicity could be a problem.
Ultimately, I am sure Cryptocurrencies will survive (and will consolidate around one or two global standards which may or may not include bitcoin) but the very essence of their design means that they will remain on the fringe of things until the time that I can wire them to the tax folk at HMRC every April.
I think I’ll be dead and buried before that ever happens.