Central bank digital currencies
13 January 2021
Erasmus and Turing
11 January 2021
Brexit and Marxism
3 January 2021
What to do about the Covid financial system bailouts?
22 December 2020
The crypto-technical response to the Covid-19 bailouts
13 December 2020
The libertarian response to the Covid-19 financial turmoil
9 December 2020
The socialist response to the Covid-19 financial turmoil
4 December 2020
On the response of the financial authorities to Covid-19
2 December 2020
The Covid-19 bailouts and the future of the capitalist banking system
26 November 2020
Which programming language is best for economic research: Julia, Matlab, Python or R?
20 August 2020
ARM on AWS for R
15 June 2020
Low vol strategies
8 May 2020
Of Julia and R
8 May 2020
How to manipulate risk forecasts 101
30 April 2020
The five principles of correct riskometer use
27 April 2020
The problem with Backtesting
25 April 2020
The magic of riskometers
24 April 2020
Risk and scientific socialism
23 April 2020
Financial crises and epidemics
19 April 2020
Hayek and Corona
17 April 2020
Hayek et Corona
17 April 2020
Ignoring the Corona analysis
15 April 2020
The coronavirus crisis is no 2008
26 March 2020
Artificial intelligence as a central banker
6 March 2020
Systemic consequences of outsourcing to the cloud
2 December 2019
The dissonance of the short and long term
12 August 2019
Central banks and reputation risk
6 August 2019
The Brexit culture war
5 May 2019
All about BoB — The Bank of England Bot
29 April 2019
My tiny, tiny contribution to Apple's fall in profits
6 January 2019
The 2018 market in a 250 year context
1 January 2019
Short and long-term risk
3 December 2018
Perceived and actual risk
2 December 2018
Cryptocurrencies: Financial stability and fairness
9 November 2018
The October 2018 stock market in a historical context
1 November 2018
The hierarchy of financial policies
12 September 2018
Which numerical computing language is best: Julia, MATLAB, Python or R?
9 July 2018
26 June 2018
What are risk models good for?
3 June 2018
The McNamara fallacy in financial policymaking
1 June 2018
VIX, CISS and all the political uncertainty
20 May 2018
Here be dragons
30 March 2018
Low risk as a predictor of financial crises
26 March 2018
Cryptocurrencies don't make sense
13 February 2018
Yesterday's mini crash in a historical context
6 February 2018
Artificial intelligence and the stability of markets
15 November 2017
European bank-sovereign doom loop
30 September 2017
Do the new financial regulations favour the largest banks?
27 September 2017
The ECB Systemic Risk Indicator
24 September 2017
Finance is not engineering
22 September 2017
University of Iceland seminar
14 June 2017
Brexit and systemic risk
31 May 2017
Should macroprudential policy target real estate prices?
12 May 2017
Learning from history at LQG
13 April 2017
Is Julia ready for prime time?
12 March 2017
With capital controls gone, Iceland must prioritise investing abroad
12 March 2017
Competing Brexit visions
25 February 2017
Systemic consequences of Brexit
23 February 2017
Why macropru can end up being procyclical
15 December 2016
The fatal flaw in macropru: It ignores political risk
8 December 2016
Why it doesn't make sense to hold bonds
27 June 2016
On the financial market consequences of Brexit
24 June 2016
Cyber risk as systemic risk
10 June 2016
Big Banks' Risk Does Not Compute
24 May 2016
Interview on þjóðbraut on Hringbraut
21 May 2016
Farewell CoCos
26 April 2016
Will Brexit give us the 1950s or Hong Kong?
18 April 2016
Of Brexit and regulations
16 April 2016
IMF and Iceland
12 April 2016
Stability in Iceland
7 April 2016
Everybody right, everybody wrong: Plural rationalities in macroprudential regulation
18 March 2016
Of tail risk
12 March 2016
Models and regulations and the political leadership
26 February 2016
Why do we rely so much on models when we know they can't be trusted?
25 February 2016
Does a true model exist and does it matter?
25 February 2016
The point of central banks
25 January 2016
Volatility, financial crises and Minsky's hypothesis
2 October 2015
Impact of the recent market turmoil on risk measures
28 August 2015
Iceland, Greece and political hectoring
13 August 2015
A proposed research and policy agenda for systemic risk
7 August 2015
Are asset managers systemically important?
5 August 2015
Objective function of macro-prudential regulations
24 July 2015
Risky business: Finding the balance between financial stability and risk
24 July 2015
Regulators could be responsible for next financial crash
21 July 2015
How Iceland is falling behind. On Sprengisandur
12 July 2015
Greece on Sprengisandur
12 July 2015
Why Iceland can now remove capital controls
11 June 2015
Market moves that are supposed to happen every half-decade keep happening
14 May 2015
Capital controls
12 May 2015
What do ES and VaR say about the tails
25 April 2015
Why risk is hard to measure
25 April 2015
Post-Crisis banking regulation: Evolution of economic thinking as it happened on Vox
2 March 2015
The Danish FX event
24 February 2015
On the Swiss FX shock
24 February 2015
Europe's proposed capital markets union
23 February 2015
What the Swiss FX shock says about risk models
18 January 2015
Model risk: Risk measures when models may be wrong
8 June 2014
The new market-risk regulations
28 November 2013
Solvency II: Three principles to respect
21 October 2013
Political challenges of the macroprudential agenda
6 September 2013
Iceland's post-Crisis economy: A myth or a miracle?
21 May 2013
The capital controls in Cyprus and the Icelandic experience
28 March 2013
Towards a more procyclical financial system
6 March 2013
Europe's pre-Eurozone debt crisis: Faroe Islands in the 1990s
11 September 2012
Countercyclical regulation in Solvency II: Merits and flaws
23 June 2012
The Greek crisis: When political desire triumphs economic reality
2 March 2012
Iceland and the IMF: Why the capital controls are entirely wrong
14 November 2011
Iceland: Was the IMF programme successful?
27 October 2011
How not to resolve a banking crisis: Learning from Iceland's mistakes
26 October 2011
Capital, politics and bank weaknesses
27 June 2011
The appropriate use of risk models: Part II
17 June 2011
The appropriate use of risk models: Part I
16 June 2011
Lessons from the Icesave rejection
27 April 2011
A prudential regulatory issue at the heart of Solvency II
31 March 2011
Valuing insurers' liabilities during crises: What EU policymakers should not do
18 March 2011
Risk and crises: How the models failed and are failing
18 February 2011
The saga of Icesave: A new CEPR Policy Insight
26 January 2010
Iceland applies for EU membership, the outcome is uncertain
21 July 2009
Bonus incensed
25 May 2009
Not so fast! There's no reason to regulate everything
25 March 2009
Modelling financial turmoil through endogenous risk
11 March 2009
Financial regulation built on sand: The myth of the riskometer
1 March 2009
Government failures in Iceland: Entranced by banking
9 February 2009
How bad could the crisis get? Lessons from Iceland
12 November 2008
Regulation and financial models: Complexity kills
29 September 2008
Blame the models
8 May 2008

The crypto-technical response to the Covid-19 bailouts

13 December 2020

Are cryptocurrencies and blockchains the solution to the problem laid bare by the Covid-19 bailout of the financial system? No.

I have been discussing what the bailouts of the financial system in response to Covid-19 means for the future of the financial system. We have a clear idea of what the financial authorities are thinking, I have guessed what a libertarian or socialist might make of it.

There are more voices with strong opinions, like those cryptocurrency enthusiasts who see the bailouts as signalling the failure of the entire infrastructure of the financial system. Such opiners are not interested in preserving the system but changing how it is controlled.

No, they want a new operating system. Rip out state controlled fiat money and payment systems and even the banks and replace the whole shebang with new technology — blockchains, cryptocurrencies or central bank digital currencies.

Now, the vast majority of cryptocurrency investors don’t care about any of this, all they want is to ride the bubble and make money. Sensible enough in the short run, so long as they manage to get out in time. I am not talking about such people here. Cryptocurrencies are lousy long term investments.

There is a subspecies of cryptocurrency enthusiasts who see cryptocurrencies as a political mission. They are a broad church, and constantly fragmenting like all political ideologies and religions — hodlers, DeFi degens, yield farmers, etc. etc. As a catch-all term, I’ll just use crypto-technical for the lack of a better word. I am open so suggestions for better nomenclature. These are the people who see cryptocurrencies as a superior form of money and blockchains the way the system should operate.

So how do they fit in politically? They generally identify somewhere on the libertarian spectrum, usually the Austrian variety because of Hayek’s 1977 paper A Free-Market Monetary System on the failures of fiat money and the need for free-market alternatives. I think that is just wrong. The overlap between the libertarians and the crypto-technical crowd is coincidental and unlikely to last as I argue below.

So what does that have to do with the Covid-19 bailouts?

In the crypto-technical narrative, the problem with fiat is that corrupt states and central banks manipulate the money supply for the benefit of the insiders. The central banks pump in liquidity to bail out the insiders whenever they get into a spot of trouble. Like how a rich father bails out his teenage son out of jail when he crashes the Ferrari when high, and then buying him a new one to play with. Their bête noire is quantitative easing and bailouts and how fiat money doesn’t hold its value. And horror of horrors, the government even legally mandates a 2% depreciation in fiat’s value every year.

The Covid-19 bailout of the financial system is just yet another proof of how the fiat monetary system is just wrong.

Fortunately then, the solution is right in front of us: either replace fiat money with cryptocurrencies or central bank digital currencies (depending on the opiner) and certainly replace the payment systems with blockchains.


In the narrative, technology — cryptocurrencies and blockchains — are pure, unsullied by human corruption. It promises a stable store of value and efficient way of transferring money, away from the banks’ high fees and the authorities monitoring of undesirables.

So it’s a morality tale.

And just like religion and political ideologies, the crypto-technical narrative doesn’t survive reality — one has to believe. Two reasons why: one practical and other moral.

The practical reason is that for money to be useful, it really needs to have a relatively stable value. If I have 5 dollars in my pocket, I could buy a pint of beer last year, yesterday, today and tomorrow. There is a certainty. If I have the equivalent amount of bitcoin in my pocket today, it would’ve brought me 1 pint today, 1.03 pints last week, 0.69 pints last month and 0.39 pints last year. I have no idea how many pints my bitcoin will buy tomorrow or next year. It is that lack of predictability in purchasing power that makes bitcoin an inferior type of money, one reason I wrote a few years ago that Cryptocurrencies don’t make sense.

And then on to morality. The value proposition for bitcoin is that it displaces fiat money. I have calculated that there is about $31 trillion worth of M1 fiat money in circulation in the 20 largest economies today, and the total market value of bitcoin today is $320 billion. So, if bitcoin takes over from fiat money, the current holders will enjoy a 10,000% return. It will be the biggest transfer of a public good to a handful of private owners in the history of humankind. We’ll end up with a class of super-wealthy people who make Jeff Bezos look like a pauper by comparison. I discussed this couple years ago in a paper called Cryptocurrencies: Policy, Economics and Fairness.

How on earth can that be fair or acceptable?

The bitcoin enthusiasts will dismiss this argument, perhaps by saying that the technology cannot be stopped or the people will become so fed up with fiat that they will embrace bitcoin.

Doesn’t work.

We live in a democracy, and there is a reason why fiat money is called “legal tender”. It is within the power of the government to mandate the use of its fiat money in all legal contracts, like paying salaries, mortgages and buying beer.

Replacing fiat with cryptocurrencies requires the government to acquiesce and hence a popular mandate. Perhaps, if the central banks really screw up yes, but the ECB or the Fed are not exactly like El Banco Central de Venezuela, and the way the central banks manage money does not arouse public anger in most of the world.

To sell bitcoin to the general public as fiat replacement, the bitcoin investor has to say: “Give up your fiat money for bitcoin. You will be better off, and I will be a trillionaire.” Good luck with that.

That is the reason why I don’t think bitcoin+blockchain will ever replace the current fiat system.

The politics of the crypto-technicals

As I said above, I think the vast majority of bitcoin enthusiasts don’t care an iota about any of this. But those who opine tend to have interesting politics, worth getting into.

The rejection of fiat is what creates the coincidental overlap between libertarians and the crypto-technicals. Both think fiat money has failed — to Hayek in the 1970s it was stagflation and the crypto-technicals quantitative easing — and the marketplace should supply something superior. And that superior thing is bitcoin (or ethereum or …).

What unifies both groups is disdain for fiat.

I think their politics are fundamentally very different, and that in many ways the crypto-technicals are quite similar to communists — looking for a utopia governed by an algorithm. And, some of the most unequal societies of the world are or have been communist, like the Soviet Union, China and North Korea, so the bitcoin monetary system and communist states have that in common.

The main reason why the crypto-technicals are different from the libertarians is that the former are looking for technical efficiency, the latter freedom. And efficient technology does not guarantee freedom. It doesn’t care about freedom.

A technological solution is searching for an optimum, and an optimum can be reached by one technology that ends up being all dominating. The optimum can mean suppressing freedom. Perfectly acceptable to the crypto-technical crowd but not the libertarians.

Suppose we replace all the human decision-makers that now control the financial system — all with their inefficiencies, corruption and venality — with technology. Getting something like the Star Trek utopia, which even has the same morality tale.

That society is much akin to the communist utopias. Why the crypto-technicals are not libertarians.

Of course, crypto is not about to replace fiat, and it will not do so as long as the crypto-technical world is so marginal. Looking at the numbers, perhaps 0.1% of the population in a typical European country cares about fiat and pines for bitcoin. Contrast that with the other concerns like vaccines, inequality, environment, black lives matter, Covid 19, representation, etc. etc.

So something will have to change before those of us to live in Europe will embrace cryptocurrencies. And that exposes the inherent contradiction in cryptocurrencies. For crypto to become successful:

  1. The central banks have to become like their counterpart in Venezuela;
  2. The people who call fiat a failure and want crypto to take over, are the very people who will become trillionaires if crypto displaces fiat. Yes, they are conflicted, and their arguments are fundamentally self-serving;
  3. And that would mean a monetary system run by technology, communist style.

All three prospects are frightening.


I maintained in this series that the bailouts of the financial system in response to Covid-19 were quite unfortunate, creating moral hazard and long-term instability.

Then what is the solution? I think the financial authorities are on the wrong track, socialism is not the answer and neither is laissez-faire. The crypto-technical alternative is the worst of the lot.

So what to do? I discuss that in my next piece.



Several friends and colleagues have commented on this series. Robert Macrae and Nikola Tchouparov gave me excellent comments that significantly improved the pieces. We don’t always, or even usually, agree, and all opinions are mine alone.

© All rights reserved, Jon Danielsson, 2021