Like many things digital, bitcoin has the potential either to transform the world or to be largely ignored by it. When Chicago Booth’s Randall S. Kroszner and Tyler Cowen of George Mason University met in February for a Chicago Council on Global Affairs discussion on “The Future of Money,” they considered the prospects for the digital currency, including the applications that could propel it into broader use and the legal incongruities that may hold it back.
Potential breakthrough uses
Cowen: The potential killer application for bitcoin, if there is one, is Africa, and I mean Africa in particular. Almost everyone in Africa is accustomed to using a phone to make payments, and furthermore, other payment systems are poorly developed, and the legal infrastructure in many places tends to be poorly developed. So if bitcoin is going to transform anywhere, I think it will be there.
Kroszner: One element that was crucial for the early success of PayPal was eBay. There were a lot of people who wanted to transact but were not organized merchants or vendors and who didn’t have merchant accounts with credit-card companies. You didn’t really have anything that was catering to people who on a one-off basis wanted to sell their Beanie Babies, etc. In some sense, PayPal allows individuals to participate in eBay’s online marketplace in a way that they couldn’t before. They could operate like merchants without having to be merchants. I think that there’s a potential for the block-chain technology to be able to do something like that going forward.
Cowen: In the world of bitcoin and the block chain, things are decided by people on the chain. The chain has the last word, and there’s something about the chain having the last word that stands at tension with our legal system. The way the American and most other legal systems work, institutions want to close out deals. They want to avoid certain kinds of ambiguity. They want to be able to shut the door and declare something finished and done.
Kroszner: It’s not even clear in some countries whether bitcoin should be counted as an asset, or as money. Most countries are currently treating it as an asset, so if there are capital gains, the tax authorities get to take some revenues out of that. But, we don’t have a consistent legal framework.
Expectations for the future
Cowen: Bitcoin is a mostly mature technology used for evading capital controls, which I’m fine with. That’s useful, but I don’t think it will replace the dollar or the euro. Most of all, it lacks a killer application.
Kroszner: The legal uncertainty is the key thing, and this is a classic issue of needing to have proper rule of law. The legal framework just isn’t there. It’s not clear what the legal obligations of the verifiers in the system will be. The system is certainly not there yet, and I think in some sense, the innovation’s going to have to come on the legal side. It’s not clear who, if anyone, has the right or ability to change the protocols. I think a very clear legal framework for being able to use these, to know who you would go to if something went wrong, is going to be more crucial to its acceptance than the next wave of technological development.