Trust in crypto-‐currencies?

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Trust in crypto-‐currencies?

Jack Birner

University of Trento

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Trust in crypto-‐currencies?

What is trust in money based on?

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What is money?

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For an answer, turn to economics!

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For an answer, turn to economics?

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Standard (macro)economics:

FuncBons of money.

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FuncBons of money:

-‐ Medium of exchange -‐ Unit of account

-‐ Store of value

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FuncBons of money:

-‐ Medium of exchange -‐ Unit of account

-‐ Store of value

-‐ Means of deferred payment

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Related quesBon:

What is the funcBon of banks?

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Banks invent new forms of money.

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But so do non-‐banks: shadow banking system.

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Banking system, new forms of money, shadow banking system: compeBBon, supervision, trust.

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Arbitrage between money as medium of

exchange and as store of value (Hicks 1935, porRolio approach).

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Arbitrage between money as medium of

exchange and as store of value (Hicks 1935, porRolio approach).

PorRolio decisions both influence and are influenced by inflaBon/deflaBon.

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Effects of inflaBon and deflaBon:

-‐ distribuBonal: money as store of value

-‐  transacBonal: money as means of exchange and unit of account

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Bitcoin:

-‐  deﬂaBonary bias

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Bitcoin:

-‐  deﬂaBonary bias: sBmulates hoarding

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Bitcoin:

-‐  deﬂaBonary bias: sBmulates hoarding -‐  high volaBlity

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Bitcoin:

-‐  deﬂaBonary bias: sBmulates hoarding -‐  high volaBlity: due to hoarding

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Bitcoin’s volaBlity is bounded on the down side by the cost of mining, which is technology

dependent.

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Bitcoin’s volaBlity is bounded on the down side by the cost of mining, which is technology

dependent.

Hoarding may be discouraged by incorporaBng an inﬂaBonary bias (demurrage: deliberately

reducing the value of stock of money): Freicoin.

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Trust in crypto-‐currencies depends on these and similar features, balanced against safety

aspects.

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Trust in crypto-‐currencies also depends on the ease with which they can be converted into

tradiBonal currencies.

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tradiBonal currencies: thus they beneﬁt from the trust in tradiBonal currencies.

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tradiBonal currencies: thus they beneﬁt from the trust in tradiBonal currencies, while being perceived as an alternaBve in case tradiBonal currencies are less trusted.

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tradiBonal currencies: thus they beneﬁt from the trust in tradiBonal currencies, while being perceived as an alternaBve in case tradiBonal currencies are less trusted. An asymmetrical advantage!

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Advanced (micro)economics:

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General Equilibrium Theory (GET)

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General Equilibrium Theory (GET),

or rather, as money involves Bme (store of value, means of deferred payment):

Intertemporal General Equilibrium Theory (IGET)

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IGET is the most sophisBcated theory in all of economics.

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IGET, some presupposiBons:

-‐  decision makers have full informaBon -‐  instantaneous adaptaBon to changed

circumstances -‐  etc.

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IGET, some presupposiBons:

-‐  decision makers have full informaBon -‐  instantaneous adaptaBon to changed

circumstances -‐  etc.

A perfect world.

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IGET cannot account for money except as a unit of account. Even the Central Banks’ general

equilibrium models have no money in it!

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Why can’t IGET account for money in the funcBons that ma]er?

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Money is about social relaBons (exchange!)

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Money is about social relaBons, and these are rarely perfect or fricBonless.

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Money is about social relaBons, and these are rarely perfect or fricBonless.

In addiBon, IGET does not contain a model of

the structure of communicaBon and interacBon.

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This leaves IGET causally incomplete.

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This leaves IGET causally incomplete, unless a model of the network of interacBon and

communicaBon between agents is added to it (Alan Kirman*).

*Kirman used Agent Based Models for studying interacBon networks.

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In order for IGET to be able to deal with money, that network model has to allow for

imperfec,ons in the interacBons between agents.

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Ronald Coase: transacBon costs, or costs of using the price mechanism.

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Ronald Coase: transacBon costs, or costs of using the price mechanism:

-‐  search and informaBon costs -‐  bargaining costs

-‐  costs of monitoring and enforcing contracts

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IGET describes a barter economy (goods exchanged against goods).

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IGET describes a barter economy (goods

exchanged against goods) and barter involves very high search, informaBon and bargaining costs.

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IGET describes a barter economy (goods

exchanged against goods) and barter involves very high search, informaBon and bargaining costs. Money reduces these costs.

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So, money is a lubricant of the economy.

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Diﬀerent quesBon: Is money a good?

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It is not in the ordinary sense: you cannot eat money or dress in it.

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But what if money were a good?

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But what if money were a good?

Goods are what economists are relaBvely good at!

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Diﬀerent meaning of good: opposite of bad.

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Diﬀerent meaning of good: opposite of bad.

Good money vs. bad money.

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Giuseppe Boerio, Dizionario del diale,o veneto, Andrea San7ni e ﬁglio, Venezia 1829

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The ﬁnancial crisis made us discover that money, instead of lubricaBng the system of economic transacBons, obstructed it: bad money as a bad.

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The ﬁnancial crisis made us discover that money, instead of lubricaBng the system of economic transacBons, obstructed it: bad

money as a bad, which, moreover, aﬀects us all:

a collecBve bad.

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But if bad money is a collecBve bad, isn’t good money a collecBve (or public) good?

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excludable non excludable rivalrous or

subtractable PRIVATE GOODS

food, clothes, bicycles

COMMON POOL GOODS or RESOURCES

ﬁsh stock, clean water,

crude oil non rivalrous/

subtractable

CLUB GOODS theater shows, private parking

lots

PUBLIC GOODS naBonal defence,

lighthouses

How economists distinguish goods

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Money is heterogeneous: many levels of interacBon:

•  individual – individual

•  individual – bank

•  bank – bank

•  bank – naBonal central bank (CB)

•  ECB (Fed) – CBs of EMU member countries (federal states)

•  naBonal CBs – naBonal governments

•  ECB – naBonal EMU state governments

•  government – government

•  CB – internaBonal monetary insBtuBons

•  internaBonal monetary insBtuBons – naBonal EMU-‐state governments

•  etc.

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According to the level of interacBon at which it plays a role, money may have the characterisBcs of a private, club, common pool, or public good.

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excludable non-excludable COMMON POOL GOODS OR RESOURCES CLUB GOODS PUBLIC GOODS

LEVEL OF INTERACTION

individual - individual international organization – (inter)national organization

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€

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Bitcoin: interacBon between individuals. That suggests it is a private good.

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Bitcoin: interacBon between individuals. That suggests it is a private good.

What about other (including future) crypto-‐

currencies?

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By becoming involved in other levels of

interacBon, crypto-‐currencies may come to

share the characterisBcs of club goods, common pool goods, or perhaps even public goods.

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All this leaves the quesBon what the trust in money in general and in crypto-‐currencies in parBcular is based on.

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If money is considered as a common pool good, then we can look for an answer in the work of Elinor Ostrom (Nobel prize in economics 2009):

stakeholdership, systems of governance, property rights.

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Ostrom disBnguishes diﬀerent kinds of property rights or stakeholdership:

-‐  access

-‐  withdrawal -‐  management -‐  exclusion

-‐  alienaBon

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Various mixes of the rights to accede, withdraw, manage, exclude and alienate deﬁne diﬀerent governance structures.

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Various mixes of the rights to accede, withdraw, manage, exclude and alienate deﬁne diﬀerent governance structures, and these co-‐determine trust.

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Various mixes of the rights to accede, withdraw, manage, exclude and alienate deﬁne diﬀerent governance structures, and these co-‐determine trust.

That applies to tradiBonal currencies (or rather, payment technologies – Curzio Giannini) but

also to crypto-‐currencies.

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“Network eﬀects” are crucial in the acceptance of, and trust in money.

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“Network eﬀects” are crucial in the acceptance of, and trust in money. They are the opposite of the tragedy of the commons (“comedy -‐ or

opulence -‐ of the commons”).

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Governance, mixes of property rights, network eﬀects: suggest we reconsider if BTC and other crypto-‐currencies are private goods, or rather have more of the characterisBcs of club goods, common pool goods, or perhaps even collecBve goods.

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In economics, the argument what determines trust in currencies is waiBng to be further

developed.

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What does sociology have to say on trust?

Trust in crypto-­‐currencies?