Kevin Dowd is a professor of Economics and Finance at Durham University. A libertarian and fierce advocate of private money over government-issued and controlled alternatives, Dowd has written extensively about Bitcoin, in addition to presenting on the issues surrounding it.
Dowd is no evangelist, however; he recognizes the frailties of Bitcoin in its current form, and considers its continuing evolution to be endangering its innovative principles.
Cointelegraph reached out to Professor Dowd for a greater understanding of his stance on Bitcoin today, and whether he has had to change his perspective over the course of the year.
CT: You are an avid advocate for private money. What exactly is private money in relation to traditional money that is issued by governments or central banks?
KD: Private money is money issued by any private – non-official, non-governmental – organization. As such, most money is actually private – think of bank deposits, which comprise the greater mass of the money supply, and which are issued by commercial banks, as opposed to the base money or currency issued by central banks.
However, the private money that I and other libertarians are interested in is privately issued unregulated (or loosely regulated) currency, NOT money issued by a non-governmental entity. Freedom from regulation and government control is much more important.
Private money in this latter sense has profound implications, as it has the potential to transform the relationship between the state and the individual: money would be liberated to open competition, and the ability of the state to abuse our money would be eliminated, or least greatly reduced.
CT: Is Bitcoin private money and what is your problem with Bitcoin?
KD: Is Bitcoin private money? Well, it has certainly been private (up to now) but Bitcoin does not satisfy all the classical features of money. For example, it is a means of payment but does not function too well as a store of value, and definitely not a universally accepted medium of exchange. However, on balance, I would be happy to regard it as private money for the sake of discussion and I wouldn’t want to argue the toss on mostly semantic issues, not least because Bitcoin itself proves that the notion of money is evolving, as it should.
Your second question is more interesting and much harder to answer. I like the fact that Bitcoin is a privately issued and a (mostly, still) unregulated currency. However, I think it is losing its key attractions: its decentralization, its anonymity, and its freedom from regulation. I have tried to address these issues in my papers, presentations (e.g, here) and blog postings (here and here), but the hard questions for Bitcoiners are simply these: are these key attractions, Bitcoin’s value proposition, intact and likely to remain so? And if not, why continue to use it?
My answers are: No, and (therefore) Don’t.
Let me put it this way. I advertise, say a vacuum cleaner and it does what it says, nothing else to match it. Then it becomes apparent that that is no longer true, for whatever reason. It no longer has any advantage over other models. And has no resale value once everyone else realises that. Would you sell it now or hang on to it?
CT: A while ago, you wrote a piece titled “Bitcoin is bust: Why investors should abandon the doomed cryptocurrency,” where you argued that the role of miners reintroduces trust into the system putting it at risk of monopolistic practices and economies of scale. Do you still hold this view?
KD: Yes. I could consider this two ways and still get the same answer.
From the perspective of market structure economics, I believe that Bitcoin mining has the industrial structure of a natural monopoly, and this would suggest that it cannot be sustainable, because the atomistic mining competition on which it relies must give way – and is giving way - to centralization.
In any case, we are already at the point where distributed trust has gone: we can no longer rely on competitive mining to maintain the integrity of the system, but are now dependent on the goodwill of big miners not to abuse their market power. I realise that many Bitcoiners hate this but I would simply say either there is distributed trust or there isn’t.
My answer: there was, but it is gone.
CT: The risk of a 51% attack was talked about a lot in the spring when GHash was approaching the mark. However, the mining community appeared to “self-correct” since then redistributing the hashing power to smaller pools. Thus, aren’t all miners that are invested in Bitcoin incentivized to avoid monopolies since network users could just jump to another coin?
KD: It’s not just the risk of a 51% attack, but the dangers posed by any large mining pool with the potential to corrupt the block validation process, and these are innumerable. Did the community self-correct? I think not – or at least not convincingly. Yes, GHash didn’t proceed to take over the system, but unlike BTC Guild earlier, when a similar problem arose, it also refused to play by the rules of high-level Bitcoin idealism. This tells me that the system has all the stability of a Roman triumvirate and is breaking down: the Bitcoin mining oligopolists will keep trying to patch things up, but the current oligopoly is unstable and therefore unsustainable.
Are all miners incentivized to avoid monopolies? No. Let me give you a counterexample: we might all agree that theft is a bad thing, but theft still occurs because some people believe it is still a rational decision to steal. As a Bitcoin miner, GHash is an attractive proposition whatever threats it might pose to the system. In any case, ASIC miners have a short life so a miner might rationally want to extract as much value as possible as quickly as possible and let others worry about the longer-term consequences to the system as a whole. The underlying issue here is that we cannot assume that the Bitcoin system as now is fully incentive-compatible: no market is.
CT: Mining aside, are you familiar with other protocols such as Proof-of-stake? This alternative is a bit more “democratic” for network users who are rewarded just for holding coins similar to a company shareholder and doesn’t require PoW mining to secure the network.
KD: I am aware of POS and I think this is a promising way forward. At first sight it would appear to address my centralization concerns with Bitcoin. However, I don’t think anyone can be sure just now what will succeed but this type of innovation is much to be welcomed – maybe POS might not work either, I don’t know, but the point is that we need innovation and experimentation to find what works.
And what works down the road might or might not be crypto – it might be something else: it could be something more basic, such as gold or some crypto-gold hybrid, or it might be something we haven’t even imagined yet. That is the way competitive innovation works: it is very hard to predict in advance, and almost everyone who tries is proven wrong.
However, I will stick my neck out on this: Bitcoin won’t survive long term.
CT: In your report titled New Private Monies, you stated that “Bitcoin is ideally suited to a niche market driven by legal restrictions.” However, the majority of the Bitcoin transactions right now consist of charity donations and tipping. Are we to believe that the 2 niche markets for Bitcoin are illegal and altruistic activities?
KD: I think the days of Bitcoin anonymity (and hence illegal activities) are not just numbered, but effectively almost gone as law enforcement gradually ensnares Bitcoin and its users in their web: this is a shame. Just as well I didn’t get any dope from Silk Road.
Yeah, Bitcoin is still good for (some) altruistic activities, but for how much longer will you be able to pay Wikileaks in Bitcoin without getting a lot of flak from the government?
In all honesty, this area is moving so fast it is very difficult for anyone to keep up. When I wrote the earlier drafts of New Private Monies I hadn’t appreciated two points. The first was the way in which the appearance of anonymity was being rapidly unraveled to make Bitcoin transactions much more open than they first appeared to be. The second was that I failed to appreciate the importance of the centralization tendencies built into the Bitcoin protocol, which I now believe to be fatal flaws.
CT: What is your opinion of the proposed regulations currently being discussed (NY BitLicense) and do you think it’s technically possible to regulate Bitcoin?
KD: The regulations in NY regarding BitLicense are a kiss of death. Once the government gets you in its snare in such matters, there is no escape. In this sense, Bitcoin going mainstream (i.e., in the regulatory sense) kills the whole point of it, not least as there are more efficient payment systems available depending on where you are or were (e.g., the Liberty Dollar, or e-gold or its successor COEPTIS, or PayPal, or M-Pesa, or Hawalla). Also, as Bitcoin gets regulated, it ceases to have the attractions of ‘real’ private money as I mentioned in answer to your first question: it becomes just another regulated currency – and an inefficient one too, all that wasted Proof-of-Work activity etc – as if we didn’t have enough of those already.
To Bitcoin supporters in the US, there are also another 49 states to go before you can operate safely from regulatory attack, if then. I respectfully suggest you study the cases of the Liberty Dollar and e-gold – which also happen to be covered in my monograph New Private Monies.
CT: If not Bitcoin, are you a believer in some cryptocurrency potentially becoming the modern version of private money?
KD: I believe in private money and the right of the individual to self-determination. I don’t ‘believe’ in any particular private currency because I am not smart enough to know what will work long term or what will not.
I think there may be a future in crypto but I definitely not Bitcoin: too many problems and the history of industrial innovation suggests that the pioneers rarely survive long term. Maybe some other crypto but it niggles me that it has no crypto has ‘intrinsic’ value and this particular niggle never goes away. Give me gold …