Applying old thinking to new systems can often be a recipe for disaster. BNP Paribas apparently went down that perilous road. On an article published by Yahoo Finance on November 20th, 2017, titled “Future of Bitcoin limited by having no lender of last resort, BNP Paribas claims”, BNP incurs in logical folly, showing a lack of economic understanding. The article also shows how this French bank is still stuck in the that notion that there should be institutions and businesses deemed to be “too big to fail” despite the dangerous behavior those governmental stop-gap measures encourage. It is evident that this “captain” of the financial industry just fails to grasp how much the system has changed and how to take advantage of this change, or is simply engaging in a campaign of misinformation. In any case, BNP’s arguments are not new. Numerous Bitcoin critics have used them before.
Bitcoin Critics: Point by Point
Cryptocurrency enthusiasts, are already used to Bitcoin critics spreading misinformation, either purposefully or because of a lack of fundamental understanding. It also seems that these bitcoin critics tend to follow a discernible pattern of fallacious arguments to present their case. Usually – as in Jamie Dimon’s case for instance – their argument is to simply equate bitcoin’s meteoric rise with some kind of bubble, usually the Dutch Tulip-Mania. In this case, BNP Paribas tries to be a little more sophisticated, while not ruling out the bubble argument. BNP’s arguments on the Yahoo Finance article can be summarized as follows:
- Adoption of Bitcoin and other cryptocurrencies can be stymied by a lack of a lender of last resort.
- Replacing traditional currency with Bitcoin is risky and can undermine monetary policy.
- No central authority can provide overview of financial services and products created using Bitcoin.
- Huge fluctuations in price show Bitcoin is not a reliable store of value.
- A deflationary asset is not suitable to sustain economic growth.
- Central banks have no power over cryptocurrencies and governments must regulate to mitigate the risks involved.
- There are fears of money laundering, tax evasion and the loss of revenue to governments from the issuing money.
Defeating Bitcoin Critics Point by Point
These arguments that BNP Paribas puts forward, are logically flawed and fail to grasp the changes in the system. However, they serve to highlight some of Bitcoin’s positive characteristics. They also serve as a good basis to defeat Bitcoin critics in any debate based on economics. Here is how these arguments fall, point by point.
Lender of Last Resort Argument
Usually, a lender of last resort comes to the aid of big institutions, failing to protect lower net-worth citizens. These lower net-worth private citizens therefore need a hedge to protect themselves from the excesses of the lender of last resort. Bitcoin fits the bill, and the lack of a lender of last resort is irrelevant to them; they wouldn’t get a bail out from any institution in most cases anyway. This will never endanger adoption.
Monetary Policy Control Argument
It is strange to see that BNP Paribas, a French bank, would use a monetary policy control argument. France gave up monetary policy control in favor of a supranational monetary policy structure when it joined the Euro. So did Greece, and we all know how that turned out. Criticizing the lack of monetary policy control is therefore puzzling, but in this case, it is a classic example of old thinking applied to new systems. Giving up monetary policy altogether and entrusting it to an algorithm, seems to be working better for the Bitcoin economy than invoking a supranational organization to administer it. Code gets rid of special interests by making the rules of the game clear to the user. Millions of people in the Euro block can now see the value of code and a clear set of rules instead of supranational organizations dominated by the politics of old. In any case, thinking that Bitcoin will replace traditional currency altogether is somewhat far-fetched. This one is at best a moot argument.
Central Authority Overview Argument
Bitcoin critics love this argument although it is logically flawed. Central authority overview has failed to prevent every single economic melt-down in history and a myriad of financial scams – Bernard Madoff is a shining example. In the end there is no one out there keeping an eye on those who are tasked with keeping an eye on the markets. That is exactly how the 2008-09 meltdown happened: extremely complex and incredibly faulty financial products were engineered to trigger a domino effect that the world has not recovered from yet, all under the watchful eye of regulators worldwide. Bitcoin’s lack of institutional overview – its overview is hard-coded into the system – is not a problem.
Price Fluctuations and Value Argument
Bitcoin prices fluctuate a lot, but they also seem to eventually advance to a higher price point in any case. That is not poor store of value, it is just a different kind of store of value, one that markets are not entirely used to yet. Bitcoin’s value derives from being everything the traditional financial system is not. It is therefore a great hedge against traditional store of value assets that constantly underperform even in a low interest environment. Bitcoin protects wealth from the inflationary forces that central banks worldwide unleashed in the aftermath of the 2008-09 economic meltdown with their historically low interest rates. It is even possible to argue that those inflationary forces and excess liquidity are part of the reason why Bitcoin prices tend to grow. After all, investors, flooded with liquidity and low returns elsewhere, should flock to the most profitable asset available.
Deflationary Currency Argument
Bitcoin critics consistently present this cryptocurrency as a deflationary currency, which has obvious implications on the potential for economic growth. The economics here are unequivocally clear. Deflationary currencies stymie expenditure given that consumers will wait for their money to appreciate before buying anything unless it is critical. But Bitcoin is not necessarily a currency, although it is scarce and if used as a currency, will have deflationary effects. Bitcoin is also unlikely to become the main medium of exchange in any country not named Venezuela or Zimbabwe – countries that are famous for hyper-inflation, so their economies are probably in need of some deflationary forces.
Bitcoin is a counter-balancing force to inflationary pressures and Bitcoin critics should view it as such. The funny part of this argument is that Bitcoin critics will say a deflationary currency is bad, but will not recognize the mechanics of its deflationary nature when they declare it as a bubble. Price tends to increase on deflationary assets given sustained growth on the demand side. Bitcoin critics should really keep that in mind before they recur to the bubble argument.
Regulating Cryptocurrency Argument
Bitcoin critics generally fail to see that cryptocurrencies themselves are a parallel financial system. They are therefore completely out of the reach of governments. No one can regulate Bitcoin; the only place where regulation can take place is at the gateway between Bitcoin and the traditional financial system. Governments can place a regulatory roadblock there, which will serve to increase demand for Bitcoin and other cryptocurrencies even more because it will boost the perception of safety in the eyes of investors.
Criminal Activity Argument
This one is probably the most logically flawed argument Bitcoin critics anywhere can use. Money laundering, tax evasion and criminal activity pre-date Bitcoin. Virtually every government on earth deals with tax evasion, money laundering and other criminal activity carried out with the currency that the government itself issues. The Panama papers are probably the most glaring example. The Panama papers scandal also shows – again – how regulatory bodies fail consistently.
Bitcoin Critics Seem to Come Out of the Woodwork When Prices Go Up!
Logic is not the only way to prove these arguments wrong. Market forces have proven these flawed arguments wrong time and again, yet financial institutions, Nobel prize-winning economists and other influential figures and institutions keep using them. In fact, as prices go up, more Bitcoin critics seem to come out in force, peddling the same arguments without pausing to think how flawed they might be. It is not surprising that this article came out as Bitcoin surpassed the $8,000 USD mark. Nevertheless, people should think objectively about Bitcoin and other cryptocurrencies before they dismiss it as a bubble or start using these flawed arguments against it. BNP Paribas’ analysts and its management should at least consider objectivity, instead of showing the public how skewed their thought process is. Old thinking doesn’t necessarily apply to new systems, especially when that old thinking is flawed.
Click here to read the Yahoo Finance article.