Cryptocurrencies, and the variety of impressions they make are back in the news.
On Friday, at the inaugural Scottish Economics Conference which brings together students from six universities, Mark Carney, the governor of the Bank of England, revealed his thinking.
Over the weekend, in Iceland, the police detailed the theft of some 600 computers. 600 is a large enough number to steal. But these were computers with a difference. They were cryptocurrency mining computers.
Mark Carney on cryptocurrencies
At Edinburgh University, the Governor of the Bank of England covered many dimensions in his speech. His topic was ‘the future of money’ and he started with Adam Smith’s definition (from The Wealth of Nations) of how money works in society as a:
- store of value with which to transfer purchasing power from today to some future time;
- medium of exchange with which to make payments for goods and services; and
- unit of account with which to measure the value of a particular good, service, saving or loan.
After discussing in more detail the Bank of England’s role, he continued onto cryptocurrencies and considered their place when measured against Adam Smith’s ‘criteria’.
“The long, charitable answer is that cryptocurrencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. The short answer is they are failing.”
Store of value
“Cryptocurrencies are proving poor short-term stores of value. Over the past five years, the daily standard deviation of Bitcoin was ten times that of sterling. Consider that if you had taken out a £1,000 student loan in Bitcoin in last December to pay your sterling living costs for next year, you’d be short about £500 right now.
“If you’d done the same last September, you’d be ahead by £2,000. That’s quite a lottery. And Bitcoin is one of the more stable cryptocurrencies. Indeed, the average volatility of the top ten cryptocurrencies by market capitalisation was more than 25 times that of the US equities market in 2017.
“This extreme volatility reflects in part that cryptocurrencies have neither intrinsic value nor any external backing. Their worth rests on beliefs regarding their future supply and demand—ultimately whether they will be successful as money.
“Thus far, however, rather than such a sober assessment of future prospects, the prices of many cryptocurrencies have exhibited the classic hallmarks of bubbles including new paradigm justifications, broadening retail enthusiasm and extrapolative price expectations reliant in part on finding the greater fool.
“Far from being strengths, the fixed supply rules of cryptocurrencies such as Bitcoin are serious deficiencies. Fundamentally, they would impart a deflationary bias on the economy if such currencies were to be widely adopted. …
“In the short run, the fixed supply of Bitcoin has fed a global speculative mania that has encouraged a proliferation of new cryptocurrencies. As my colleague Agustin Carstens has argued, this surge of competitors and the “forking” of Bitcoin echoes the debasement of private monies in the past.”
Inefficient media of exchange
“The most fundamental reason to be sceptical about the longer term value of cryptocurrencies is that it is not clear the extent to which they will ever become effective media of exchange.
“Currently, no major high street or online retailer accepts Bitcoin as payment in the UK, and only a handful of the top 500 US online retailers do.
“For those who can find someone willing to accept payment for goods and services in cryptocurrencies, the speed and cost of the transaction varies but it is generally slower and more expensive than payments in sterling.
“That’s because the more heavily used cryptocurrencies face severe capacity constraints compared with other payment systems. For example, Visa can process up to 65,000 transactions per second globally against just 7 per second for Bitcoin.
“And if you use a debit or credit card in the UK, the transaction is completed in seconds and without exchange rate risk. In contrast, Bitcoin users can face queues of hours. Those wanting to get to the front to make time-pressing payments – for last orders, for example – need to offer up a transaction fee sufficiently large to persuade Bitcoin “miners”, who verify and process transactions, to do so quickly. The fees paid vary through time, but reached £40 in late 2017. Fees are currently around £2, but even that is expensive relative to cash, cards or online payments which cost the retailer around 1.5 pence, 8 pence and 19 pence respectively.
“Over time, Bitcoin transaction fees could rise further because the subsidy miners enjoy by being partly paid with rewards of new units of currency, will decline given the total supply of Bitcoin cannot exceed 21 million.
“Furthermore, the costs of Bitcoin mining are enormous. Its current annual electricity consumption is estimated by some to be up to 52 terawatt hours, double the electricity consumption of Scotland.
“In comparison, the global Visa credit card network’s energy use is less than ½ of 1% of that of Bitcoin, despite processing 9000 times more transactions.”
Virtually non-existent units of account
“Given that they are poor stores of value and inefficient and unreliable media of exchange, it is not surprising that there is little evidence of cryptocurrencies being used as units of account.
“Retailers that quote in Bitcoin usually update at very high frequency so as to maintain stable prices in traditional currencies such as US dollars or sterling. The Bank is not aware of any business that accepts Bitcoins in payments that also maintains its accounts in Bitcoin.”
Pointing to the future
“I trust you have gathered by now that for many reasons the crypto-assets in your digital wallets are unlikely to be the future of money.
“But that is not meant to dismiss them. Their core technology (blockchain) is already having an impact. Bringing cryptoassets into the regulatory tent could potentially catalyse innovations to serve the public better. Indeed, crypto-assets help point the way to the future of money in three respects:
- “by suggesting how money and payments will need to adjust to meet societies’ changing
preferences, particularly for decentralised peer-to-peer interactions;
- “through the possibilities their underlying technologies offer to transform the efficiency, reliability and
flexibility of payments; and
- “by the questions they raise about whether central banks should provide a central bank digital
currency (CBDC) accessible to all.”
The Icelandic heist
According to the Associated Press, some 600 computers used to “mine” bitcoin and other virtual currencies have been stolen from datacentres in Iceland in what police say is the biggest series of thefts ever in the North Atlantic island nation. After eleven arrests, including a security guard, in what Icelandic media has dubbed the “Big Bitcoin Heist,” a judge at the Reykjanes District Court on Friday ordered two people to remain in custody.
The powerful computers, as yet unfound, have a value of almost $2 million. If, however, the thieves use the stolen equipment for its original purpose — to create new Bitcoins — the new ‘owners’ could mine a massive profit in an untraceable currency.
“This is a grand theft on a scale unseen before,” said Olafur Helgi Kjartansson, the police commissioner on the southwestern Reykjanes peninsula, where two of the burglaries took place. “Everything points to this being a highly organized crime.”
Three of the four burglaries took place in December and a fourth took place in January (but the Icelandic authorities did not make the news public earlier in hopes of tracking down the thieves, possibly by heavy electricity usage) because miners enable the Bitcoin ledger through computational power. The latter demands lots of computers — and electricity.
That desire for energy has created a gold rush in Iceland. Traders searching for cheap, renewable energy have flooded onto the island to exploit its geothermal and hydroelectric power plants. Police tracking the stolen computers are monitoring electric consumption across the country in the hope that the thieves will give their own show away.
What does this mean
Mr Carney’s speech addresses the cryptocurrenct dilemma for central banks, and indeed banking. While not welcoming Bitcoin and cryptocurrencies and preferring a ‘CBDC (or central bank digital currency), he continued: “the technologies underlying crypto-assets, particularly distributed ledger, can:
- “increase the efficiency of managing data;
- “improve resilience by eliminating central points of failure, as multiple parties will share replicated
data and functionality;
- “enhance transparency (and auditability) through the creation of instant, permanent and immutable
records of transactions; and
- “expand the use of straight-through processes, including with “smart contracts” that on receipt of new information, automatically update and if appropriate, pay.”
The cryptocurrency mining computer theft highlights three other considerations:
- cryptocurrency operations – mining – require scale to pay their way
- those operations, or the physical equipment, is increasingly attarctive and may in themselves attract criminal actvity (beyond how an owner might use a cryprocurrency)
- the cost in electricity, and thereby CO2- even in Iceland, has become absurd – and even globally threatening.
Indeed, the case for Mr Carney’s CDBC may grow and grow, to inhibit or even prevent cryptocurrencies ‘melting’ the world.