What was the most noteworthy global financial and economic event of 2017? Arguably, it was the stratospheric rise of bitcoin. During 2017, its price rose from $952 to $14,310, even after dropping from its peak of around $19,000 in mid-December 2017 (bitcoin prices vary by exchange). This 15-fold rise is truly phenomenal, after more than doubling in 2016, and from a high level of nearly $1,000. Keep in mind that the earliest year-end price recorded in Bloomberg is 30 cents in 2010, and its 2012 year-end price was about $13.

Along with this rise, there was a huge proliferation in the number of cryptocurrency issues, apart from the relatively established ones: Ethereum and Ripple. The proliferation is so widespread that even a college girl in Saharanpur, Uttar Pradesh, was mining bitcoin, and, according to news reports, she has written an app that updates users about the prices of about 1,000 “cryptos" in 32 countries.

If there is an apt word to characterize this phenomenon, or rather related phenomena, it is cryptomania. Nouriel Roubini, the reputed New York University Stern School professor and chief executive officer of Roubini Macro Associates, has lashed out at this cryptomania. Recently, he wrote, “Blockchain, which has existed for almost a decade, still has only one application: crypto currencies," and went on to say, “Until now Bitcoin’s only real use has been to facilitate illegal activities such as drug transactions, tax evasion, avoidance of capital controls, or money laundering...".

Contrary to his first statement, blockchain technology has many uses apart from creating cryptos. Microsoft and GlaxoSmithKline are working with Viant, an Ethereum-based supply chain firm. IBM has tied up with Walmart and Chinese retailer JD.com to track food supplies from China to the US using blockchain. American Express is using Ripple’s blockchain system for B2B cross-border payments. There are many more such cases.

Roubini’s second statement above is both misleading and unfair. It is misleading because such tax evasion, money laundering, and the financing of drugs and terrorism have been going on for ages. They are done globally mainly through hard cash—in particular, the almighty greenback, the US dollar. Why single out bitcoin?

The statement is unfair because bitcoin was not created to avoid taxes or to buy drugs, although those may well have become its major uses, since it provides anonymity. Its creation in 2009 was a warranted response of adversely affected individuals and entities to Lehman Brothers’ collapse on 14 September 2008. It is noteworthy that the website Bitcoin.org was registered in August 2008, shortly before that. The Lehman collapse and the ensuing global financial crisis were largely due to the failed policies of Alan Greenspan and Ben Bernanke, who as chairmen of the US Federal Reserve had the prerogative of central bank monopoly of money supply. Indeed, when the mysterious Satoshi Nakamoto mined the first genesis block on 3 January 2009, he added text from The Times that day: “Chancellor on brink of second bail out of banks".

Under American law, creating private currency, barring coins, is generally not illegal in itself, although counterfeiting the dollar can lead to imprisonment. Nevertheless, the creators of bitcoin have prudently chosen anonymity, since its creation, use or possession could have been, and even now can be, made illegal. After all, bitcoin exchanges have been probed or raided or shut down in China, India and elsewhere.

In his 2015 memoirs, The Courage To Act, former Fed chairman Ben Bernanke makes no mention of bitcoin. His silence on this truly remarkable innovation is rather revealing. Its pioneers were not merely calling for an end to the Fed, as Republican senators Ron Paul and Rand Paul were doing, but were trying to provide an alternative. The concept paper of legal scholar Nicholas Szabo on digital property rights and verification, similar to Hernando de Soto’s pioneering work on title to land, played a role in its development.

Roubini is correct in pointing to the deflation bias inherent in bitcoin, since its supply is fixed at 21 million units. Indeed, in evaluating its feasibility, I have stressed this point, “This deflationary bias, unless it can be rectified by reprogramming Bitcoin to ensure slow steady growth in Bitcoin supply…poses a big threat to its acceptability." (July 2017, Applied Macroeconomics: Employment, Growth And Inflation).

Nevertheless, Roubini’s specific sentence, “Unless the supply of currency tracks potential nominal GDP, prices will undergo deflation," is erroneous. In macroeconomics, there is no such concept as potential nominal GDP (gross domestic product). What macroeconomics, and, more specifically, the quantity theory postulates is that the supply of money determines nominal GDP. When money supply is fixed, nominal GDP growth cannot keep pace with the growth in actual real GDP, which, in the long run, is at potential real GDP. The excess of real over nominal GDP leads to deflation.

The real risk with bitcoin is not so much deflation bias, but the inflation that could result from its counterfeiting. I am in broad agreement with Roubini’s conclusion that many currencies viably operating together “contradicts the very concept of money". Nevertheless, one cannot help but ask, who’s to blame for cryptomania? The short answer is Greenspan and Bernanke.

Vivek Moorthy is professor, economics and social sciences, IIM, Bangalore.

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