THIRD WORLD Economics TRENdS & ANAlySiS Published by the Third World Network KDN: PP 6946/07/2013(032707) ISSN: 0128-4134 Issue No 663 16 – 30 April 2018 Study highlights trust deficiencies of cryptocurrencies Are cryptocurrencies a viable form of money? Delving into this question, a study by the Bank for International Settlements (BIS) finds several shortcomings associated with these digital currencies, not least of which is the fragile foundation of trust in their value. ● The trust limitations of cryptocurrencies – p2 Also in this issue: Investment treaty-making sees IMF needs different mindset turning point than its modified neoliberalism p7 p12 UNCTAD releases policy tool to US protects home market, wants help LDCs meet SDGs more access from South for GSP p9 p15 No 663 Third World Economics 16 – 30 April 2018 1 CURRENT REPORTS Cryptocurrencies THIRD WORLD Economics The trust limitations of Trends & Analysis 131 Jalan Macalister cryptocurrencies 10400 Penang, Malaysia Tel: (60-4) 2266728/2266159 A study that “looks beyond the hype” associated with cryptocurrencies Fax: (60-4) 2264505 points to the fragility of trust in the value of and operational backing for Email: [email protected] an instrument that aspires to be a new form of money. Website: www.twn.my Contents by Chakravarthi Raghavan GENEVA: In less than 10 years since their it needs to efficiently scale with the CURRENT REPORTS inception, cryptocurrencies have economy and be provided elastically to 2 The trust limitations of emerged from obscurity to attract intense address fluctuating demand. cryptocurrencies interest on the part of businesses and These considerations have led to spe- consumers, as well as central banks and cific institutional arrangements – the 7 Investment treaty-making sees other authorities, but their decentralized emergence of today’s independent and turning point creation has inherent limitations in main- accountable central banks, after episodes tenance of trust in value and involves of individual private banks performing 9 UNCTAD releases policy tool to vast energy use presaging an environ- this role. help LDCs meet SDGs mental disaster and the potential to bring As for cryptocurrencies, they entail the Internet to a halt. economic limitations inherent in the de- 12 IMF needs different mindset than These are some of the conclusions of centralized creation of trust. For the trust its modified neoliberalism the Bank for International Settlements to be maintained, honest network partici- (BIS) in its in-depth study of pants need to control the vast majority 15 US protects home market, wants cryptocurrencies and whether they could of computing power, and each and ev- more access from South for GSP play any role as money. Titled ery user needs to verify the history of “Cryptocurrencies: looking beyond the transactions. And the supply of the hype”, the study is part of BIS’ Annual cryptocurrency needs to be predeter- Economic Report 2018 and was pre-re- mined by its protocol. Trust can evapo- leased on 17 June ahead of the 24 June rate at any time because of the fragility publication of the full report. of the decentralized consensus through THIRD WORLD ECONOMICS is published fortnightly by the Third World The study notes that cryptocurren- which transactions are recorded. Not Network, a grouping of organisations and cies garner attention because they prom- only does this call into question the fi- individuals involved in Third World and development issues. ise to replace trust in longstanding insti- nality of individual payments, but it also tutions, such as commercial and central means that a cryptocurrency can simply Publisher: S.M. Mohamed Idris; Editor: Chakravarthi Raghavan; Editorial Assistants: banks, with trust in a new, fully decen- stop functioning, resulting in a complete Lean Ka-Min, T. Rajamoorthy; Contributing Edi- tralized system founded on the loss of value. tors: Roberto Bissio, Charles Abugre; Staff: Linda Ooi (Administration), Susila Vangar (Design), blockchain and related distributed led- Evelyne Hong & Lim Jee Yuan (Advisors). ger technology (DLT). Institutional monetary arrangements ● Annual subscription rates: Third World coun- However, the BIS study warns, tries US$75 (airmail) or US$55 (surface mail); cryptocurrencies are a poor substitute for Money, the BIS notes, plays a crucial India Rs900 (airmail) or Rs500 (surface mail); Malaysia RM110; Others US$95 (airmail) or the solid institutional backing of money, role in facilitating economic exchange. US$75 (surface mail). cannot scale with transaction demand, Before its advent millennia ago, goods ● Subscribers in India: Payments and enquiries are prone to congestion, and come with were primarily exchanged for the prom- can be sent to: The Other India Bookstore, Above poor efficiency and vast energy use that ise to return the favour in the future Mapusa Clinic, Mapusa 403 507, Goa, India. could presage an environmental disas- (traded IOUs). However, as societies ● Subscribers in Malaysia: Please pay by credit ter and bring the Internet to a halt. card/crossed cheque/postal order. grew larger and economic activity ex- Nevertheless, says the BIS, the un- panded, it became harder to keep a ● Orders from Australia, Brunei, Indonesia, Philippines, Singapore, Thailand, UK, USA: derlying technology could have promise record of ever more complex IOUs, and Please pay by credit card/cheque/bank draft/in- in other applications, such as the simpli- default and settlement risks became con- ternational money order in own currency, US$ or euro. If paying in own currency or euro, please fication of administrative processes in the cerns. Money and the institutions issu- calculate equivalent of US$ rate. If paying in US$, settlement of financial transactions, ing it came into existence to address this please ensure that the agent bank is located in the USA. though this still remains to be tested. growing complexity and the associated The BIS notes that many past epi- difficulty in maintaining trust. ● Rest of the world: Please pay by credit card/ cheque/bank draft/international money order in sodes of monetary instability and failed Money has three fundamental and US$ or euro. If paying in euro, please calculate currencies illustrate that the institutional complementary roles as: (i) a unit of ac- equivalent of US$ rate. If paying in US$, please ensure that the agent bank is located in the USA. arrangements through which money is count; (ii) a medium of exchange; and (iii) supplied matter a great deal. The essence a store of value, enabling users to trans- Visit our web site at http://www.twn.my. of good money has always been trust in fer purchasing power over time. To fulfil Printed by Jutaprint, No. 2, Solok Sungei Pinang the stability of its value. And for money these functions, money needs to have the 3, Sungai Pinang, 11600 Penang, Malaysia. to live up to its property to act as a coor- same value in different places and to © Third World Network dination device facilitating transactions, keep a stable value over time. However, 2 Third World Economics 16 – 30 April 2018 No 663 CURRENT REPORTS Cryptocurrencies maintaining trust in the institutional ar- of means, including regulation, supervi- By contrast, systems based on account rangements through which money is sion and deposit insurance schemes, money depend fundamentally on the supplied has been the biggest challenge. many ultimately emanating from the ability to verify the identity of the ac- Around the world, in different set- state. count holder. tings and at different times, money As part of fulfilling their mandate to started to rely on issuance by centralized maintain a stable unit of account and The emergence of cryptocurrencies authorities. It evolved from the stamp of means of payment, central banks take an a sovereign certifying a coin’s value in active role in supervising, overseeing and Cryptocurrencies aspire to be a new transactions, to bills of exchange interme- in some cases providing the payments form of currency and promise to main- diated by banks developed as a way for infrastructure for their currency. The cen- tain trust in the stability of their value merchants to limit the costs and risks of tral bank’s role includes ensuring that the through the use of technology. They con- travelling with large quantities of coin- payment system operates smoothly and sist of three elements: first, a set of rules age. seeing to it that the supply of reserves (the “protocol”), computer code specify- However, historical experience also responds appropriately to shifting de- ing how participants can transact; sec- made clear an underlying trade-off: cur- mand, i.e., ensuring an elastic money ond, a ledger storing the history of trans- rencies that are supplied flexibly can also supply. actions; and third, a decentralized net- be debased easily. Sustained episodes of Thanks to the active involvement of work of participants that update, store stable money are historically much more central banks, today’s diverse payment and read the ledger of transactions fol- of an exception than the norm. “In fact, systems have achieved safety, cost-effec- lowing the rules of the protocol. With trust has failed so frequently that history tiveness, scalability and trust that a pay- these elements, advocates claim, a is a graveyard of currencies.” ment, once made, is final. Payment sys- cryptocurrency is not subject to the po- History proves that money can be tems are safe and cost-effective, handling tentially misguided incentives of banks fragile, whether supplied through pri- high volumes and accommodating rapid and sovereigns. vate means in a competitive manner, or growth with hardly any abuse and at low Cryptocurrencies are digital, aspir- by a sovereign as a monopolist supplier. costs. In today’s sophisticated economies, ing to be a convenient means of payment Government-backed arrangements have the volume of payments is huge, equal and relying on cryptography to prevent not always worked well either.