In a recent webinar, 2007 Nobel Laureate for economics, Harvard Professor Eric Maskin outlined why he sees central bank digital currencies (CBDC) as likely to displace cryptocurrencies. In a high quality webinar with Luohan Academy (initiated by Alibaba), the economist also expressed optimism about the positive impact of blockchain on economic growth because it will broaden market access.
The role of central banks
Maskin believes central banks’ role in managing monetary policy is critical and that their actions in 2008 prevented a repeat of the 1930s depression. And the primary function of commercial banks is to make loans.
He outlined potential alternatives to banks providing loans. One is crowdfunding, but the problem is too many bad ideas get funded and banks probably do a better job. Instead, it’s conceivable that new institutions might develop to play that role.
Maskin stated that if new unregulated lending organizations replace banks, leverage without regulation is dangerous. Because too much gearing is possible, it can get out of hand and cause a chain reaction. A failure of one institution or area is likely to spread. In other words, there are systemic risks. He pointed to the U.S. Dodd-Frank Act and the Basel rules, which are designed to prevent a serious financial crisis.
The problem with cryptocurrencies
Maskin’s first reservation about cryptocurrencies is the price volatility. “Except for the fact that Bitcoin fluctuates wildly and therefore is attractive to a certain kind of speculator, it’s hard for me to see why anyone would want a private cryptocurrency when they can do the same thing with government backed digital currency,” said Maskin. Although we’d observe the latest stock market rally, supposedly driven by Robinhood users, points to a reasonable number of people attracted to speculation.
The Nobel Laureate made the point that blockchain can enable money transfers easily, cheaply, securely and quickly. But that can be true for central bank digital currencies. To him, private currencies move us back to the world of primitive barter of apples for oranges. Government backed currencies have far greater liquidity making the exchange of goods easier. In contrast, most won’t accept cryptocurrency as payment. Moreover, as legal tender, government money has to be taken as payment.
“The original lure of bitcoin was that you could transfer it easily. But you can transfer the public digital currency just as easily,” said Maskin. “I hope that CBDC will drive out private cryptocurrencies”.
How blockchain will trigger economic growth, tackle inequality
Maskin’s Nobel prize was for mechanism design, so he’s interested in how blockchain addresses trust issues.
“Markets developed in the first place because they allowed more people to transact with each other than was possible at a time when you had to know someone well in order to be able to trade with them,” said Maskin.
He continued: “And blockchain takes this to another level because you don’t need to trust the person you’re transacting with. Because the technology will protect you, it becomes possible to trade with many more people or firms than was previously possible. ”
“So it has the potential for greatly expanding the level of transactions and therefore greatly expanding the output of the world. And when output goes up, we all benefit. That is the secret of the great economic success that the world has enjoyed ever since the 19th century.”
Chen Long, the Executive Director of the Luohan Academy, argued that people had to provide collateral for loans in the past because of a lack of trust. “Information is the new collateral,” he said.
Maskin concurred. “Asymmetric information is a huge problem. It’s one of the fundamental barriers to a successful transaction. Asymmetric information is a major reason for inequality,” he said. He outlined the challenge for poorer people to take out loans, whereas wealthier people don’t have that problem, which exacerbates the divide.
On a final note, Maskin believes that digital currency will replace cash completely. “Twenty years from now, all money will be electronic,” he said. “It’s very hard for me to see how old fashioned cash is going to persist for that much longer. “