Bitcoin & Cryptocurrencies, a Monetary Paradigm Shift?

Interview originally published on 15 October 2019 by Sia Parners

Sia Partners: Can you elaborate on how you first became interested in Bitcoin?

Yorick de Mombynes: I studied and then lectured economics at Sciences Po (IEP Paris), and I became interested in the Austrian School of Economics. This school of economic thought is not widely acknowledged in France, but it offers a system of analysis and understanding of the economy and of human societies that seems very coherent and very convincing to me. I discovered Bitcoin in 2016 by chance, and knowing the Austrian School made it easier for me to measure its interest and to become acquainted with this “Unidentified Monetary Object.”

I wrote with Gonzague Grandval, in early 2018, the study, “Bitcoin, totem & tabou,” to explain the monetary revolution that Bitcoin and cryptocurrencies represent. We wanted to focus on the monetary phenomenon and its political, economic, and societal dimensions, which were underestimated in the public debate at the time. The general interest was focused on the “blockchain revolution,” which is a false lead from our point of view. This is also where the title of our study comes from, in reference to Freud’s book Totem and Taboo: the blockchain is deified as a totem, and Bitcoin remains a taboo.

It was an unforeseen success; the PDF has been downloaded thousands of times from the Institut Sapiens website. The monetary dimension of cryptocurrencies has attracted the public’s attention. This dimension has been overshadowed in the general discussion, but it is now reappearing with the emergence of Facebook’s cryptocurrency initiative, Libra.

Sia Partners: Why is the Austrian School of Economics so often mentioned to justify Bitcoin?

Today, the dominant economic thought claims that it is in the very essence of money to be managed by states. However, from a theoretical and historical point of view, this is highly debatable. Since 1971 and the end of the gold convertibility of the dollar, resulting from the Bretton-Woods agreements, we have entered a never-before-seen phase of history: basically, currencies are now only based on State authority and on law.

The Austrian philosophy was very influential at the beginning of the 20th century. Then, democratic states needed intellectual legitimacy for their increasing control over the economy, and they found it in Keynes’ writings. The conceptual framework provided by Keynesianism has been a tremendous success and has established itself as the dominant economic thought. On the contrary, that of Austrian economists had been gradually obscured and ignored because it had the wrong opinion of advocating the limitation of state power.

According to Austrian intellectuals, money is an object that is too valuable to be left to state monopoly. In fact, the monetary manipulations carried out by central banks over the past several years have been distorting the social, economic, cultural, and civilizational institution that is money. Hyper-expansionist monetary policies and quantitative easing create major risks for the global economic wellbeing. The emergence of negative interest rates seemed to be impossible a few years ago.

Austrian Economic thought has been experiencing a noticeable revival over the past 20–30 years. I believe that it provides an excellent analytical framework to interpret the rise of cryptocurrencies.

Sia Partners: Can Bitcoin resist States?

Yes, excessive regulations to prevent the use of Bitcoin could slow down its progress, but states will not effectively inhibit its development. As a peer-to-peer network, Bitcoin is beyond control: anyone can buy it without authorization and contribute to the system’s functioning and to bitcoin production without needing anyone’s permission. It is the most democratic currency that has ever existed. Overly restrictive regulations would probably only confirm its interest in the eyes of the public.

If states tried to block the entry points (trading and purchasing platforms, mining farms, etc.), the use of bitcoin would continue to grow on the black market and states would run the risk of fueling the exodus from their own currencies. This is an illustration of the antifragile side of Bitcoin, and how it is growing stronger and offers individuals a haven against the dissolution of their savings through monetary policies.

The realization that currencies could be issued beyond the state sphere was a painful intellectual and cultural shock for political leaders. Most of them are still in a phase of astonishment that is somewhat equivalent to denial in the five stages of mourning.

Sia Partners: In France, have we adopted appropriate measures to promote the adoption of blockchain and cryptocurrencies over the past two years? If not, what positions should the government and its institutions take?

If the purpose is to establish France as a dynamic country in this new industry that is emerging before our very eyes, there are regulatory and fiscal measures to be taken in order to promptly attract capital and entrepreneurs, and these have not yet been taken. France is in a global competition, in a field where competition is very fierce because tech entrepreneurs are even more mobile than in any other field, and the capital is also completely so. One of the levers to be used to overcome this competition is taxation.

Political leaders should adopt a sense of modesty in response to the growth of these complex technologies. They should facilitate experimentation rather than pretend to steer innovation. For example, the “sandbox” model adopted in some countries allows crypto/blockchain entrepreneurs to develop their projects without undue constraints, and governments to observe the situation and then build a more suitable regulatory framework.

In France, the priority has been to supervise the ICOs. However, to prevent massive outflows of entrepreneurs and investors from France, most of the work is probably overdue. There is still room for improvement in reducing taxation on capital gains made on cryptocurrencies, and in simplifying accounting standards for start-ups in this sector. For the time being, France is not particularly well-positioned in the global competition. Our belief in the state’s ability to shape the future and the underestimation of the perverse effects created by its actions are not assets to seize such a new and rapid revolution.

The decision-making process in the public sphere remains marked by a certain inertia, which is particularly problematic in the context of technological progress, whose pace is becoming exponential rather than linear. The summit of the government pyramid is still very helpless against the complexity and novelty of cryptocurrencies and blockchain.

Sia Partners: Could the French state use cryptocurrencies or blockchain in order to improve some of its processes?

These technologies could undoubtedly have many uses in the public sphere. A handful of projects are in progress, particularly in the field of radio frequency distribution, as well as the commercial register, or with the Banque de France for SEPA mandates. But this still doesn’t meet the challenge. It is expected that a significant amount of administrative processes, funds transfer systems, evidence and certificate records, etc. could be modernized by blockchain in general, and Bitcoin in particular, including the functions of data anchoring, data integration verification, and traceability of financial movements. All of this is relevant to the public sphere. Moreover, one can imagine that auditing professions (notably public auditing, and therefore the financial courts) would also be affected.

The optimal way forward would be to facilitate small experiments in the public area. Bitcoin has been in place for 10 years; we are now entering a phase where it should begin to be more straightforward.

Sia Partners: What do you think of Facebook’s cryptocurrency, the Libra project?

I went through several phases. First, I thought it was a gadget. Then I realized that it was an extremely interesting, complex, well thought out, and ambitious project. After that, I thought that there were some shadows, such as the promise of making the system “permissionless” (decentralized and open) within five years while confessing to not yet being sure how to do it technically.

Facebook has devoted significant resources to this project and is very clever in moving forward very gradually. Libra’s promoters are probably aware of the risks, of the sensitivity and of the monetary stakes that their project represents for some states.

In the United States, beyond the political and media turmoil brought by this project, if the dollar constitutes a major part of the currency and financial asset pool by which Libra is backed, one can imagine that the US authorities will perceive it as an interest in the global influence of their own currency. They would not be willing, at least in the short term, to threaten this instrument in the service of the monetary imperialism of the US Dollar.

With regard to the other countries, especially those with irresponsible monetary policies, Libra could allow savers to convert their assets to avoid the devaluation of their local currency. But it remains to be seen how these states will accept this threat without any response; Libra is yet vulnerable to public regulations.

It is also interesting to witness the regulators rushing towards Libra in order to impose constraints on it and to threaten it with prohibition, even though the system has not been put in place for the moment. As for Bitcoin, it has been running for the past 10 years, and regulators are beginning to realize that there is nothing they can do about it. This will make many people understand the difference between Bitcoin and a “pseudo-cryptocurrency” created on a “pseudo-blockchain” by a GAFA.

Similarly, there is a nascent trend in the development of Central Bank Cryptocurrencies, or “CBDCs.” If implemented, they would be used to facilitate the disappearance of cash, as well as the continuation of expansionist monetary policies, and also to reinforce the panoptic control over society by public authorities: precisely the same shortcomings that have led to the emergence of Bitcoin. If the latter is still in place to counteract these forces, it would be a real civilizational challenge.

Sia Partners: What other projects in the area of cryptocurrencies seem promising to you?

For a while, I was interested in anonymous cryptocurrencies, such as Monero or Zcash, as well as smart contract platforms, such as Ethereum, Tezos, Eos, Neo, and Cardano. Moreover, there is the possibility to develop smart contracts on Bitcoin using a side-chain with the RSK project, which I also find very interesting. I also find the use cases in the field of predictive markets, such as Augur and Gnosis, very intriguing. If these initiatives do succeed, there is the opportunity to fundamentally redesign some businesses, such as insurance and actuarial services.

Generally speaking, there is much discussion of the “blockchain revolution,” but the projects covered by this expression necessarily have a monetary dimension: the tokens they are using will represent a new form of currency that will be based on the efficiency and added-value of these newly created services. What is oversimplified as “blockchain” could thus lead to a monetary revolution with hard-to-imagine outcomes.

Sia Partners: What do you think of Bitcoin’s future? By which means will it develop?

Bitcoin is strengthening year after year. It’s the only blockchain that is no longer just a promising concept. With a 10-year record, despite being attacked day and night, Bitcoin has been surviving and growing.

I adhere to the notion that it is a protocol that will become the basis for services that we cannot yet imagine, in the same way that the Web was in the 1990s.

Its global spread continues, driven by both endogenous factors, such as technology and ease-of-use, as well as exogenous factors, such as regulation or macroeconomic and geopolitical crises.

For now, legislation is not designed to facilitate its development. However, it will not be able to prevent it entirely.

Bitcoin’s technological consolidation will require scalability. The most sophisticated solution at the moment is the Lightning Network, a technology that remains highly experimental and in constant progress. The network capacity and the number of nodes are increasing; the developer community seems optimistic.

The Lightning Network should also facilitate micropayments. Currently, no one uses Bitcoin for their daily expenses. This is a normal process: for a monetary object to become a legitimate currency, it first has to prove itself as a store of value before it can become a generalized media of exchange. It therefore seems natural to me, at this stage, to apply the popular principle in the crypto community, “HODL.”