What are Nakamotoan cryptocurrencies good for?
Many use cases have been proposed by crypto enthusiasts. After all, Nakamoto aimed to disrupt money and reinvent everything. Suffice it to say that there are, as yet, the most hyped use cases (retail commerce, serving the “unbanked”, remittances) have yet to become real.
For example, there have been a number of real world experiments, from China to Iran to Venezuela. In each case, Nakamotoan cryptocurrencies have been seen as censorship proof, stable tokens, that can rescue people from government repression and mismanagement. But this has yet to work.
Why?
This month Diana Aguilar reports that, despite a long running political economic insanity compounded by geopolitical conflict, Bitcoin and other cryptocurrencies have found few users in Venezuela [1]. Suffering from economic collapse and hyperinflation, the people are struggling to survive. Many are fleeing the country, and there are many who wish to transfer money home to their families.
In this human made disaster (probably mostly man made, in fact), cryptocurrencies could play a vital role both as a stable currency (that retains a value for more than a few hours) and as a simple mechanism for remitting earnings from overseas. Furthermore, to the degree that Nakamotoan cryptocurrencies are pseudonymous and difficult to “censor”, they can continue to work in the face of strong government efforts at repression.
In short, Venezuela is a perfect real world cryptocurrency experiment.
But, as Aguilar reports, for most “crypto payments are merely a last resort”. (Granted, Venezuelan is in dire straits, and many are on their last resorts.)
Cryptocurrency does seem to be useful for refugees, who have little money or legal status in their sanctuaries. It is also useful for sending home money, especially by refugees with limited legal standing and in the face of government resistance.
However, cryptocurrency is little used in everyday commerce, unless there is no other choice.
Unless the grocery store will take Bitcoin (which implies that their suppliers, workers, utility companies, etc. will take Bitcoin from the merchant), then you probably have to convert Bitcoin into locally acceptable currency.
Legitimate currency exchanges are usually expensive and may be hard to find. And remember, for remittance, you probably need to exchange twice, at the sender (into crypto) and the receiver (into local currency).
There is also an end-to-end problem. While the Nakamotoan cryptocurrency may be decentralized and “trustless”, remittance requires a chain of trust that includes the exchanges and any other parties involved.
If you can’t use formal banks, or do not trust formal banks, then you need to deal with a party you do trust. In some cases, there are local, trusted agents. In other cases there are reliable, legal services if you can afford them. And, unfortunately, there are also swindlers who will steal your money.
Worse, in a police state like Venezuela, mafias and/or the police may monitor exchanges, and might extort, confiscate, or punish users. In a lawless environment, crypto users are on their own, and it can be very difficult to establish trust.
Finally, I’ll note that the case for cryptocurrency is so compelling that the Venezuelan government has floated its own cryptocurrency, the Petro, along with associated exchange and remittance services. Technically, this is technically similar to Bitcoin and other Nakamotoan currencies, but, unsurprisingly, has not been widely accepted because people don’t trust the government. (In addition, the United States and other governments have done what they can to interfere with the Petro.)
The overall lesson here seems to be that Nakamotoan technology may be useful but is not sufficient to solve the remittance problem or to replace fiat currency even in the most dire situations. There needs to be trust in the financial system, and this means trust in people, which cannot be achieved by technology alone.
Venezuela is in a crisis of confidence. Nakamotoan technology alone cannot create confidence.
- Diana Aguilar (2019) Venezuelan Migrants Are Using Bitcoin for Remittances, But There’s a Catch. Coindesk, https://www.coindesk.com/venezuelan-migrants-are-using-bitcoin-for-remittances-but-theres-a-catch
Cryptocurrency Thursday
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