Tales of the Sausage Factory

What Problem Does Cryptocurrency Solve? Ask Any Small Business — or the Collins Family.

NY Times Columnist and Nobel Prizewinning economist Paul Krugman is a cryptocurrency skeptic. I don’t follow it closely enough to have an informed opinion, but I see nothing wrong with being skeptical of cryptocurrency. But after explaining his reasoning for skepticism, Krugman concludes with the following question:

“So that’s why I’m a crypto skeptic. Could I be wrong? Of course. But if you want to argue that I’m wrong, please answer the question, what problem does cryptocurrency solve? Don’t just try to shout down the skeptics with a mixture of technobabble and libertarian derp.”

Challenge accepted! Because while I respect Dr. Krugman and generally have similar politics, he has fallen into the classic mistake of establishment economists in this area. The current set of electronic transaction mechanisms works very well for him and most people like him — so why would anyone want to change? Other than for nefarious purposes, of course.

 

Short answer: The highly concentrated nature of the payment processing industry and the banking industry generally creates lots of hidden transaction costs, permits extraction of rents and imposition of onerous terms on merchants, and can be exploited by government to impose extra-legal sanctions on disapproved businesses or individuals without due process.

 

Even shorter answer: Cryptocurrency solves the gatekeeper problem and creates competition in electronic payment processing.

 

I unpack below, but it will speed things along if you first read the recent Supreme Court decision in Ohio v. Amex and this Washington Post article on how the Collins family of Kansas found their Bank of America account frozen.

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Posted in Digital Platforms, Tales of the Sausage Factory | Also tagged , | 2 Comments (Comments closed)
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