Bitcoin: French economist predicts day of reckoning
Cryptocurrency facilitates crime and is part of ‘libertarian offensive’ – Jean-Michel Naulot
A customer uses a Bitcoin ATM in Dublin in 2014. Photograph: David Sleator
It’s been called the “queen of cryptocurrencies” and the biggest bubble in the world. Bitcoin, launched in January 2009, has gained astonishing momentum this year.
More than 100,000 internet sites, including PayPal, WordPress and the US travel giant Expedia, now accept it and NGOs such as the Red Cross and Greenpeace accept donations in Bitcoin.
At the Maison du Bitcoin in Paris’s 2nd district, thee cyptocurrency can be purchased with a credit card and have the transaction recorded on a smartphone. Queues formed there during the last week of November, as the exchange rate for Bitcoin rose to an all-time high of $11,000.
Some 50 shops in the nearby Passage du Grand-Cerf, also known as “Bitcoin Boulevard”, post signs saying they accept the pseudo-money.
In the US, the Chicago Mercantile Exchange is to begin quoting futures contracts in Bitcoin this month. Goldman Sachs is considering providing Bitcoin to interested institutional investors, according to the Wall Street Journal.
The spike in the Bitcoin rate on November 29th led two Nobel prize-winning economists, Joseph Stiglitz and Jean Tirole, to issue grave warnings to speculators. Stiglitz told Bloomberg Television “it ought to be outlawed … It doesn’t serve any socially useful function”.
Tirole said investors, banks, insurance companies and pension funds should be prevented from building exposures to these instruments.
On Monday the chairman of France’s market regulator denounced Bitcoin as a “dangerous illusion” and a tool for criminals. “It’s a way to purchase illicit goods, it’s a way to launder illicit income, it’s a way to develop and pay for cybercrimes and it’s a pure empty commodity,” Robert Ophele, chairman of the Autorite des Marches Financiers, said in a Bloomberg Television interview from Tokyo. “If it were a currency, it would be a very bad one.”
The currency proved its extreme volatility by losing nearly 15 per cent of its value within 24 hours of the November 29th spike.
Investors in Bitcoins are ignoring warnings by European, US, Australian, French, Swiss and UK authorities. China, South Korea and Morocco have banned the currency. Japan, on the other hand, has enshrined Bitcoin as legal tender.
Myriam Roussille, a law professor who specialises in business and finance, calls Bitcoin “a legally unidentified object”. It does not fulfil criteria for legal currency, nor is it a digital currency, Roussille says.
Bitcoin transactions most resemble barter. Profits on Bitcoin speculation are in theory subject to capital gains tax in the US and Japan, while users are supposed to pay VAT on Bitcoin transactions in Europe. But it is difficult to imagine how tax regulations can be enforced when Bitcoin is held under pseudonyms.
So why are so many people buying Bitcoin? “They don’t want to miss out on a chance to make easy money,” says Jean-Michel Naulot, an economist and the author of Financial Crisis: Why Governments Do Nothing, and Avoiding Collapse.
Naulot says three characteristics make Bitcoin attractive to speculators: the currency’s perceived rarity, the fact it can be purchased anonymously, and the security of the blockchain, the high-powered algorithm that stores an accessible record of all transactions.
Bitcoin is believed to have been created by a Japanese man called Satoshi Nakamoto, whose very existence is questioned. Supply of the currency is supposed to be limited, with 16.8 million Bitcoin already issued.
At its creation, the monetary mass was capped at 21 million units. However, as Naulot notes, that limit is incompatible with Bitcoin’s stated aspiration to displace the dollar as the world currency.
As a former bank regulator, Naulot says he is “shocked that people can transfer capital from one zone to another, anonymously and with no surveillance whatsoever”.
Bitcoin platforms encourage money laundering and tax fraud, he says, quoting the IMF’s estimate that “shadow banking” now accounts for 40 per cent of world finance.
Even if Bitcoin crashes, economists predict, the blockchain, the distributed ledger technology that fostered it and that guarantees traceability, will survive. “Banking authorities, including the Banque de France, are exploring uses of the technology,” says Rousille.
Naulot believes Bitcoin is part of a “political and ideological offensive by libertarians to weaken states and the social and financial order. They consider the market is sacred and must develop without hindrance.”
If Bitcoin crashes, it will have been a painful lesson for speculators, Naulot says. If it continues, it must be addressed at the highest level, by the G20. Bitcoin and other cryptocurrencies undermine economic policy-making and social order, he warns. “They’re the mirror of the international financial situation today, when central banks are not playing their role as guarantors of financial stability.”
Central banks have issued far too much currency over the past 20 years, which has led to activities such as Bitcoin speculation, Naulot says. “Sooner or later, it ends up in a depression.”
Naulot recalls a scene in Goethe’s Faust, where the devil, disguised as a court jester, inundates the world with bank notes. “Everyone is drinking and partying, until the banknotes turn into beatles.”