Cryptoassets (such as cryptocurrencies): Pyramid Schemes or Public Goods?
Channel: Sam Vaknin's Musings
Date: 2018-01-08

Cryptocurrencies represent a major revolution whose full implications are yet to be grasped. They challenge the paradigms underlying both the central banks’ money monopoly and public digital goods. 

Cryptoassets are digital goods, but they are scarce: they require “mining” and the total number of units in limited. Consequently, cryptoassets such as cryptocurrencies are rivlarous (there is a marginal cost associated with producing additional units) and excludable (access to and ownership of the cryptoasset is restricted).

Blockchain technologies – distributed, redundant, and autonomous self-updating, propagated electronic ledgers - present the first feasible solutions to counterfeiting, real-time transacting, scarcity management, monetizing intangibles, crowdsourcing, and a host of other hitherto intractable bottlenecks in business and finance.

The risks are as big as the promises and the rewards: from asset bubbles to money laundering, the financing of terrorism, cryptojacking, and threatening the foundations of the financial value chain. These threats are amplified by the recent introduction of exchange-traded bitcoin derivatives (options), ETFs and mutual funds which invest in cryptoassets, and sovereign cryptocurrencies (e.g. in Russia, Sweden, Venezuela), thereby granting putative future access and price-setting privileges and power to financial institutions and commodifying the underlying assets.

The main concern, though, is the fact that cryptocurrencies, though they do store value as investment vehicles, failed to become accepted means of exchange. In the absence of this crucial function, they are bound to wither and then vanish in a speculative boom and bust.

One possible solution would be to link cryptoassets to crowdfunding as its main form of “money”. Cryptocurrencies are actually crowdsourced and the underlying blockchain technology would introduce rigorous fraud control beyond the current rather flimsy peer-review cum peer-pressure mechanisms in place in P2P financing.