It’s Oct. 31, 2021 and the G20 climate summit just concluded. Based on initial assessments of the summit, little of substance has been accomplished. In contrast to the lack of political progress, atmospheric CO2 continues to rise and is now at 413 ppm, a new record despite the global economic slowdown due to COVID. It’s tempting to cast climate change as a purely scientific or technical challenge, to be ultimately resolved by more efficient solar cells or better batteries. However, even if energy technologies kept getting better, their global-scale adoption will require large investments in energy infrastructure, significant changes in consumer behavior, and, overall, a century-long effort (at least 2021 to 2121) to stabilize our climate.
The puzzling thing about all of this is that billions of parents, when asked what they wish for their children, have remarkably similar answers across the world – some combination of sufficient nutrition, health, and educational and economic opportunity. If this is the case, then why has progress on climate change been so slow? In my view, it’s because our financial systems are still constructed around 19th century notions that currencies and economic policies are there to benefit certain geographic regions (e.g. the US, Europe, or China) at the expense of other regions, rather than being purpose-built to tackle larger problems that affect us all.
National currencies such as the US dollar or the Chinese Yuan are typically viewed through the lens of convenience – it certainly is easier to buy something from the grocery store with paper money as opposed to having to barter with, for example, chickens or potatoes that you have raised or grown. More importantly, national fiat currencies are also important strategic/political instruments that can be used to influence interest rates, employment, the outcome of elections, the ebb and flow of entire industries (like the US steel industry), and trade patterns with other countries (sometimes strangely-named ‘trade imbalances’).
At least for right now, we have multiple big global problems that affect us all, on the one hand, and on the other, numerous local fiat currencies focused on domestic agendas. Can we do better? A spark was lit on Oct. 31, 2008, precisely 13 years ago. Despite being initially labeled a computer science experiment by fringe anarchists, Bitcoin is now a global, distributed digital currency with a value of more than $1 Trillion; the overall value of cryptocurrencies now exceeds $2.4 Trillion. To put that into perspective, the most significant national climate investment proposal is the Biden administrations’ $36 billion for 2022. Certainly, Bitcoin is not perfect – most notably, its consensus mechanism is based on endless cycles of a trivial and deliberately wasteful and expensive calculation – but Bitcoin (and other digital currencies such as Ethereum) have three critical attributes of special relevance to global challenges. They are transparent, so everyone can monitor how they flow; they are immutable, so the entire history of each transaction is an unalterable part of our history; and the systems are global, distributed, and trustless, operating according to pre-set and unchanging laws written in computer code.
Objections to global initiatives frequently invoke questions about equality, transparency, fairness, and trust – you might be quite comfortable giving food to a neighbor you know needs it, but many of us probably think twice about supporting efforts run somewhere else, far away, by people whom we have never met, with murky financial structures, imperfect transparency, and ever-shifting goals and priorities. This is especially true when significant resources will need to flow from places/industries that disproportionally emit CO2 to places/industries that sequester CO2 or are most heavily impacted by climate change.
Would you prefer to give 1% of your income to a traditional charity seeking to address climate change, or would you prefer to give the same amount to a global, transparent, distributed climate change effort run according to preconfigured laws written in computer code, with a 100 year time-horizon? Such an effort would require fundamental improvements to cryptocurrency infrastructure (the nuts and bolts) to address scaling, cost, and energy use of the current generation of distributed currencies. As Bitcoin and Ethereum show, global financial systems no longer need to be trust-rooted in geographically-defined entities but can instead emerge and run stably (13 years and counting) all without a clear geographic center, faithfully and transparently executing – in the case of Bitcoin – a preprogrammed logic and specific financial strategy. CO2 does not know or care where it is; perhaps national efforts to address climate change will welcome help from distributed financial systems that operate according to preprogrammed computer logic to address major global challenges.
2 replies on “Global problems like climate need global digital currencies”
hey Jan, I seem to remember your name from some flying lessons out of Concord many, many years ago. Anyways you are dead wrong about crypto. The biggest and most fatal flaw of crypto (which lots of people think is a feature) is its cap which makes it deflationary. You need your money supply to expand as the economy expands. If your money supply stays fixed then we get deflation. So why is deflation bad? Because now your salary goes down but your debt obligations remain the same. So your risk of default goes up. Which means lending money to somebody becomes very risky. So Bitcoin is incompatible with credit. Imagine you loaned somebody 20 Bitcoin to buy a house and are expecting them to return 22 bitcoin back. Across the economy the number of Bitcoin is fixed so it is a zero sum game. Even if the person you lent your 20 Bitcoin was somehow able to return 22 back, it means there is somebody else out there who now has a greater chance of default.
There is a reason why the Great Depression of the 1930s is also called the Great Deflation when prices fell catastrophically and caused widespread misery.
You can read what Nobel prize winners like Krugman or Stiglitz have to say about crypto. It is very disturbing to see well educated people like you talking about subjects that are outside your field of competence and making all these rookie errors. At least reason from first principles. It is no different from Trump supporters talking about how covid is a hoax and so on.
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Hello @Girish, thanks for your thoughtful and interesting comment and it’s wonderful to hear from you. This might surprise you, but we are in fact in complete agreement. Your comment focuses on using Bitcoin to replace a fiat currency and its implications for the economy. I agree 100% that this would make no sense whatsoever and would bring with it many risks. The problems are even worse than merely the deflation you emphasize. The Bitcoin protocol is a beautiful piece of computer science and game theory – among other things it’s the first known solution to trust-less time-ordering of events. However, Bitcoin has almost zero real-world utility, due to many flaws: deflationary, low TPS, 15 minute block times, horrible carbon footprint due to deliberately wasteful repetition of trivial calculations, high transaction costs – and those are only a few major problems. So it is very beautiful but at the same time utterly inappropriate as a replacement for a typical fiat currency. The only use case where perhaps Bitcoin might be useful is e.g. in Venezuela as a way to hedge against hyperinflation, but even in that case I would have many doubts (and keep in mind that I’m not an economist).
With the above in mind, I encourage you to reread my blog post and focus on what I actually said, from the perspective of building global systems for tackling things like climate change, where transparency and accountability are vital to build trust with all stakeholders (regulators, donors, farmers, etc). I’ll write a longer blog post to expand on this, but note also that Stiglitz’s position on crypto is considerably deeper and more nuanced than you imply. His thinking on cryptocurrencies and other digital payment systems goes far beyond what can be encapsulated by a simple CNN soundbite such as “Stiglitz says: Ban Bitcoin”.