Do We Need Central Banks? (2017)

Bitcoin's transation rate and energy use are a big deal.

But Bitcoin does solve the problem of the central bank itself creating too much money, which has been an issue in the past and is generally recognized to be a big temptation on the part of governments in general.

I'm not saying it's going to replace any major currency, just that there is a goal Bitcoin is meeting not mentioned above.

The bulk of the article is an elaborate straw man followed by cherry picked statistics.

I can't count how many people there are who assume that because the problem is too hard for them, they need the government to intervene.

> but at 1000x the energy expenditure and with no guarantee of avoiding a 51% attack by a coordinated network of rogue actors.

Was double-spending a major problem prior to 1917? No, because there were assets that couldn't be double spent to move around (cash) as well as a somewhat decentralized trust-based system between banks that didn't fail just because the government wasn't there to hold your hand. We don't need cryptocurrencies for decentralized banking transactions, but they could definitely optimize the system and bridge the gap for the modern world, where money moves to the other side of the world frequently (not v0 Bitcoin-based protocols like you are familiar with, but assets which use a combination of proof-of-stake and master nodes which prioritize reputation in the system over computational power -- Dash is one example, although not yet good enough for this purpose). I suspect the environmental/economic cost of maintaining such a network would be much less than physically moving cash or gold around for backbone transactions.

One somewhat useful (although still not without controversy) function central banks perform (and really, it's mostly the US Fed for most of the world's financial system) is indeed clearing bulk transactions between banks worldwide. However, the true value is the ability to reverse "mistakes" or theft -- for a VERY short time, we should note -- although this is also a negative if you are on your government's naughty list. Cryptocurrencies enable both more autonomy (the Saudi government wouldn't necessarily be able to freeze the assets of a dissenting citizen who is trying to escape, for example), and less ability to reverse mistakes, so I am torn on whether or not any existing cryptos would be ideal for this role, although I'm sure emerging cryptos/upgrades will continue to be better suited. In any case, it's kind of a tangent to the whole central bank discussion.

And the governing body of a central bank will likely have an agency problem. There is a significant incentive to capture some of the growth in the markets that use the currency via manipulation of the money supply. The market would prefer that nobody be in a position to capture that growth, because then everybody wins in an expansion, but then the downside is that everybody loses in a contraction. But then again, the market also prefers a currency with a stable value.

The fixed coin-creation schedule in Bitcoin was intended to remove any central authority for currency creation. But as it turns out, it's really hard to predict the demand for a currency that far into the future.

For a long time, the old standard, gold, was mined, refined, and coined at roughly the same rate as economic growth. The world economy grew by 2-3% per year, and the total gold supply grew by 2-3% per year. So gold was a very stable currency. It took large movements of metal, such as Mansa Musa going on Hajj, or the exploration and exploitation of the Americas, to push the markets out of tolerance.

Central banks have the capability to replicate that stability. But they do not. They skim off the top with monetary inflation that outpaces economic growth, to make currency that is held slowly lose its buying power, and prices slowly rise over time. The public justification is that currency that appreciates in value is spent less frequently, but that buying power has to go somewhere. It doesn't go to the people already holding currency. It goes to the one that creates the new money.

I'm not certain that cryptocurrencies have the ability to mint new coins at exactly the rate of economic growth and also distribute the new coins fairly. At the least, spends within the system could be gamed to simulate growth that does not actually exist, and at the worst, someone could figure out how to profit from that.