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    Bitcoin Faces Its Critics

    Written by

    Alec Liu


    The panel. From left to right: Brett Gordon, Reuben Grinberg, Yifu Guo, and Alex Pasternack. Courtesy World Science Festival

    While robots played a friendly game of soccer on the lawn of NYU Poly’s MetroTech campus in downtown Brooklyn this past Saturday, a legal expert, finance professor and bitcoin entrepreneur gathered in Dibner Hall to discuss the future of the digital cryptocurrency at the World Science Festival’s Innovation Square.

    On a day that celebrated the disruptive potential of science and technology, between the first demonstration of quantum levitation and a video game planetarium hosted by DIY gaming collective Babycastles, the topic of bitcoin was fitting. It’s the future of money, as some would like to believe. After all, a widely used digital currency is the stuff of William Gibson novels, as the panel’s moderator and Motherboard editor at large Alex Pasternack noted.

    But bitcoin is real, a semi-anonymous, decentralized currency that sometimes seems stranger than science fiction. Is this the beginning of the internet-of-finance? Or is it a cypherpunk pipe dream?

    And really, who is Satoshi Nakamoto, the open source project’s mysterious creator? (He wasn't any of the panelists, despite some facetious remarks.)

    Our panelists searched for these answers in what turned out to be a dynamic discussion. As always, the topic of bitcoin can be polarizing. “The value of a currency is based on trust,” said Brett Gordon, a professor at Columbia University. “Why should I trust bitcoin?”

    “The system is fully transparent,” explained Yifu Guo, a former NYU Poly engineering student who left the school prematurely to commit to bitcoin fully. His company Avalon has produced the world’s first specialized bitcoin computer, a mining rig that can literally print money, at least in ones and zeros.

    In the end, it will always be society that decides what has or doesn’t have value.

    With bitcoin, what you see is what you get, Guo explained. “You have the option. You can choose to use it or not.” As the price of bitcoin hovers around $120, there’s clearly more than a few people who trust the burgeoning system.

    In the end, it will always be society that decides what has or doesn’t have value, explained Reuben Grinberg, a lawyer in the financial institutions group at David Polk. Grinberg, who has previously invested in bitcoins, offered the example of the Iraqi dinar, which were originally Swiss printed. Due to UN sanctions in 1991, Saddam Hussein was forced to replace those notes with new ones, produced using “inferior technology.” This meant the new dinar was highly susceptible to counterfeiting and as such, less trustworthy, Grinberg explained.

    But the original dinar continued to circulate. Compounded by Hussein’s excessive printing of the new notes to fund the war effort, many Iraqis, especially those in the Kurdish region, preferred instead to use the old currency, which became known as the Swiss dinar, even though technically, it was no longer backed by any government. The same goes for bitcoin. As long as people expect it to have value, it will. And like the older dinar, bitcoin is technologically sound. Four years after its creation, there have been no incidents of counterfeiting.

    Bitcoin, however, is more than just about money. As a potentially transformative technology, it comes with a sense of idealism.

    Given the housing crash and the ensuing Great Recession, many bitcoin advocates, especially those who lean libertarian, view the currency as the perfect foil to a naughty banking system gone awry. No governments, no central banks. It’s a math-based system that self-regulates, one that circumvents human intervention and thus the possibility of corruption. It’s a romantic thought, that bitcoin is the solution for a broken system, but it’s also one of the central fallacies of the movement, argued Gordon.

    Mainly because “the current system works,” Gordon said, even if it isn't perfect. And there’s a reason why the system works the way it does—so that the Federal Reserve can step in when the market goes haywire, as it did in 2008, and continues to do so today on the road toward economic recovery. Plus, there’s really no reason to believe that Ben Bernanke is an evil dude.

    “If you can buy one coffee today with bitcoins, but you know you can buy four coffees tomorrow, you’re less likely to buy today." — Brett Gordon

    With the ability to add or reduce the amount of money in circulation, the Fed is able to “target inflation and minimize unemployment,” added Grinberg. Bitcoin has no such monetary mechanisms. New coins will continue to be released into the wild at a predetermined pace, similar to gold. This creates a deflationary environment, meaning that, as bitcoin adoption increases, the price, too, will continue to rise, due to inherently limited supply and growing demand.

    For those with a stash of bitcoins, this has obvious benefits, since the value of your coins will most likely be worth more tomorrow versus the US dollar, which, because of inflation, generally loses value over time as more and more money is added to the system. But from an economic perspective, a deflationary currency isn’t a good thing, explained Gordon. “If you can buy one coffee today [with bitcoins], but you know you can buy four coffees tomorrow, you’re less likely to buy a coffee today,” he said. That’s detrimental to an economy that relies on spending.

    This is exactly how things played out during the last bitcoin bubble, when the price skyrocketed from about $20 to $270 in a matter of months before crashing. During the latter stages of its ascent, “10 percent of transactions on the Silk Road were canceled,” Grinberg said, referring to the notorious darknet marketplace that uses bitcoins to trade drugs, guns, and sometimes rare animals. With a deflationary currency, there’s less incentive to spend.

    That’s not to say the concept doesn’t have merit. “Bitcoin is a currency, but it’s also a payment system,” said Guo, citing the cryptocurrency’s inherent value. And instead of replacing the current system outright, bitcoin could complement existing fiat currencies, a notion Grinberg concurred, where the technology is so seamless, “users don’t know they’re using bitcoins,” he said.

    With its peer-to-peer ledger, known as the blockchain, what Guo refers to as an “audit system,” bitcoin also reduces economic friction by cutting out middlemen like Visa or PayPal. Traditionally, such companies mediate transactions by setting up customer accounts. This becomes unnecessary with bitcoins since transactions are tied to digital keys instead of people. On the one hand, this can reduce fees for merchants. On the other, individuals can now essentially send cash to anyone in the world in an instant.

    This, of course, lends bitcoin to money laundering and other criminal activity, since transactions are more or less anonymous, no longer tied to a name. With new technology comes uncertainty, as government regulation scurries to catch up. The topic of Mt.Gox is broached, the largest bitcoin exchange, which recently had its funds seized by the Department of Homeland Security as an unlicensed money transmitter.

    For the panelists, there’s two key lessons here. In light of recent guidance by the anti-money laundering arm of the US Treasury, known as FinCEN, explained Grinberg, any company dealing with digital currencies in the US will have to follow the rules. The other is how governments will react to a system believed to fund criminals or terrorists, short of an outright ban. They might not be able to stop it completely, given bitcoin’s decentralized nature, but by cutting it off from the international financial system, bitcoin becomes a lot less useful. As Gordon notes, “you can’t pay your taxes in bitcoins.”

    How appropriate, of course, that one of the last questions of the day turns out to basically be “Wait—what is bitcoin?” Even as this illuminating discussion begins to pierce through the fog, most people still don’t know what it is or what it might mean for the future.

    In a way, it’s because bitcoin is at the same time nothing, but also everything. Nothing, because even with a market worth $1 billion dollars, these are still nascent stages. “The market for US dollars is $14 trillion,” said Gordon, noting bitcoin's economic irrelevance. Everything, because of its limitless potential to shake things up.

    “Bitcoin is a lot of things to a lot of different people,” said Guo, a testament to a technology that is forcing us to rethink the idea of money in the age of smartphones and our always connected networks. For now, it remains a compelling idea, one that still might need a bit of tweaking, but also one that doesn’t look like it’s going away anytime soon.


    More on bitcoin:

    Bitcoin Grows Up

    Who Is Satoshi Nakamoto, the Creator of Bitcoin?

    Who's Building Bitcoin? An Inside Look at Bitcoin's Open Source Development