Are cryptocurrencies and blockchains the solution to the problem laid bare by the Covid-19 bailout of the financial system? No.

I have been discussing what the bailouts of the financial system in response to Covid-19 means for the future of the financial system. We have a clear idea of what the financial authorities are thinking, I have guessed what a libertarian or socialist might make of it.

There are more voices with strong opinions, like those cryptocurrency enthusiasts who see the bailouts as signalling the failure of the entire infrastructure of the financial system. Such opiners are not interested in preserving the system but changing how it is controlled.

No, they want a new operating system. Rip out state controlled fiat money and payment systems and even the banks and replace the whole shebang with new technology — blockchains, cryptocurrencies or central bank digital currencies.

Now, the vast majority of cryptocurrency investors don’t care about any of this, all they want is to ride the bubble and make money. Sensible enough in the short run, so long as they manage to get out in time. I am not talking about such people here. Cryptocurrencies are lousy long term investments.

There is a subspecies of cryptocurrency enthusiasts who see cryptocurrencies as a political mission. They are a broad church, and constantly fragmenting like all political ideologies and religions — hodlers, DeFi degens, yield farmers, etc. etc. As a catch-all term, I’ll just use crypto-technical for the lack of a better word. I am open so suggestions for better nomenclature. These are the people who see cryptocurrencies as a superior form of money and blockchains the way the system should operate.

So how do they fit in politically? They generally identify somewhere on the libertarian spectrum, usually the Austrian variety because of Hayek’s 1977 paper A Free-Market Monetary System on the failures of fiat money and the need for free-market alternatives. I think that is just wrong. The overlap between the libertarians and the crypto-technical crowd is coincidental and unlikely to last as I argue below.

So what does that have to do with the Covid-19 bailouts?

In the crypto-technical narrative, the problem with fiat is that corrupt states and central banks manipulate the money supply for the benefit of the insiders. The central banks pump in liquidity to bail out the insiders whenever they get into a spot of trouble. Like how a rich father bails out his teenage son out of jail when he crashes the Ferrari when high, and then buying him a new one to play with. Their bête noire is quantitative easing and bailouts and how fiat money doesn’t hold its value. And horror of horrors, the government even legally mandates a 2% depreciation in fiat’s value every year.

The Covid-19 bailout of the financial system is just yet another proof of how the fiat monetary system is just wrong.

Fortunately then, the solution is right in front of us: either replace fiat money with cryptocurrencies or central bank digital currencies (depending on the opiner) and certainly replace the payment systems with blockchains.


In the narrative, technology — cryptocurrencies and blockchains — are pure, unsullied by human corruption. It promises a stable store of value and efficient way of transferring money, away from the banks’ high fees and the authorities monitoring of undesirables.

So it’s a morality tale.

And just like religion and political ideologies, the crypto-technical narrative doesn’t survive reality — one has to believe. Two reasons why: one practical and other moral.

The practical reason is that for money to be useful, it really needs to have a relatively stable value. If I have 5 dollars in my pocket, I could buy a pint of beer last year, yesterday, today and tomorrow. There is a certainty. If I have the equivalent amount of bitcoin in my pocket today, it would’ve brought me 1 pint today, 1.03 pints last week, 0.69 pints last month and 0.39 pints last year. I have no idea how many pints my bitcoin will buy tomorrow or next year. It is that lack of predictability in purchasing power that makes bitcoin an inferior type of money, one reason I wrote a few years ago that Cryptocurrencies don’t make sense.

And then on to morality. The value proposition for bitcoin is that it displaces fiat money. I have calculated that there is about $31 trillion worth of M1 fiat money in circulation in the 20 largest economies today, and the total market value of bitcoin today is $320 billion. So, if bitcoin takes over from fiat money, the current holders will enjoy a 10,000% return. It will be the biggest transfer of a public good to a handful of private owners in the history of humankind. We’ll end up with a class of super-wealthy people who make Jeff Bezos look like a pauper by comparison. I discussed this couple years ago in a paper called Cryptocurrencies: Policy, Economics and Fairness.

How on earth can that be fair or acceptable?

The bitcoin enthusiasts will dismiss this argument, perhaps by saying that the technology cannot be stopped or the people will become so fed up with fiat that they will embrace bitcoin.

Doesn’t work.

We live in a democracy, and there is a reason why fiat money is called “legal tender”. It is within the power of the government to mandate the use of its fiat money in all legal contracts, like paying salaries, mortgages and buying beer.

Replacing fiat with cryptocurrencies requires the government to acquiesce and hence a popular mandate. Perhaps, if the central banks really screw up yes, but the ECB or the Fed are not exactly like El Banco Central de Venezuela, and the way the central banks manage money does not arouse public anger in most of the world.

To sell bitcoin to the general public as fiat replacement, the bitcoin investor has to say: “Give up your fiat money for bitcoin. You will be better off, and I will be a trillionaire.” Good luck with that.

That is the reason why I don’t think bitcoin+blockchain will ever replace the current fiat system.

The politics of the crypto-technicals

As I said above, I think the vast majority of bitcoin enthusiasts don’t care an iota about any of this. But those who opine tend to have interesting politics, worth getting into.

The rejection of fiat is what creates the coincidental overlap between libertarians and the crypto-technicals. Both think fiat money has failed — to Hayek in the 1970s it was stagflation and the crypto-technicals quantitative easing — and the marketplace should supply something superior. And that superior thing is bitcoin (or ethereum or …).

What unifies both groups is disdain for fiat.

I think their politics are fundamentally very different, and that in many ways the crypto-technicals are quite similar to communists — looking for a utopia governed by an algorithm. And, some of the most unequal societies of the world are or have been communist, like the Soviet Union, China and North Korea, so the bitcoin monetary system and communist states have that in common.

The main reason why the crypto-technicals are different from the libertarians is that the former are looking for technical efficiency, the latter freedom. And efficient technology does not guarantee freedom. It doesn’t care about freedom.

A technological solution is searching for an optimum, and an optimum can be reached by one technology that ends up being all dominating. The optimum can mean suppressing freedom. Perfectly acceptable to the crypto-technical crowd but not the libertarians.

Suppose we replace all the human decision-makers that now control the financial system — all with their inefficiencies, corruption and venality — with technology. Getting something like the Star Trek utopia, which even has the same morality tale.

That society is much akin to the communist utopias. Why the crypto-technicals are not libertarians.

Of course, crypto is not about to replace fiat, and it will not do so as long as the crypto-technical world is so marginal. Looking at the numbers, perhaps 0.1% of the population in a typical European country cares about fiat and pines for bitcoin. Contrast that with the other concerns like vaccines, inequality, environment, black lives matter, Covid 19, representation, etc. etc.

So something will have to change before those of us to live in Europe will embrace cryptocurrencies. And that exposes the inherent contradiction in cryptocurrencies. For crypto to become successful:

  1. The central banks have to become like their counterpart in Venezuela;
  2. The people who call fiat a failure and want crypto to take over, are the very people who will become trillionaires if crypto displaces fiat. Yes, they are conflicted, and their arguments are fundamentally self-serving;
  3. And that would mean a monetary system run by technology, communist style.

All three prospects are frightening.


I maintained in this series that the bailouts of the financial system in response to Covid-19 were quite unfortunate, creating moral hazard and long-term instability.

Then what is the solution? I think the financial authorities are on the wrong track, socialism is not the answer and neither is laissez-faire. The crypto-technical alternative is the worst of the lot.

So what to do? I discuss that in my next piece.



Several friends and colleagues have commented on this series. Robert Macrae and Nikola Tchouparov gave me excellent comments that significantly improved the pieces. We don’t always, or even usually, agree, and all opinions are mine alone.