Today Pakistan joined the list of countries that is actively working to slow down the growth of cryptocurrency usage within its borders. We are hearing a lot of hue and cry about it but not many are asking the fundamental question of “WHY”. As businesses that will be impacted by this it is our job to ensure that we help the state institution in mitigating the issues they are potentially foreseeing. I will try to explain some of the issues that the governments around the world feel the need to be addressed before they remove these measures that supress the growth of cryptocurrencies and the decentralization movement as a whole.

Proof of State

Yes, Proof of State is a consensus or shall I say, “delegated proof of state authority” as the citizens have empowered the state machinery to ensure their survival and to take the negative impact out of any technology, movement and pandemic that comes our way. The public servants are liable in case a disruptive phenomenon leaves a vast majority of its citizens worse off and the state’s own capabilities based on the consensus are compromised.

State role in Economic planning (Hayek vs Keynes)

To understand the two conflicting approaches prevalent in the society on the state’s authority regarding economic planning we need to understand the teachings of the two prominent economists of the 20th century, Fredrich Hayek and John Maynard Keynes.

Friedrich Hayek was of the opinion that the state functions should be limited and should not involve economic planning. He believed that the failures in the short term will allow for a longer-term stability. Hence, he despised government intervention in bailing out institutions that are failing. He noticed that when economies were in recession central banks artificially injected more money into the economy by printing cash and holding interest rates low to encourage investment rather than saving. Hayek argued that this was a mistake, when money was too readily available entrepreneurs invested in products which were not necessarily desired by consumers. When these products went unsold companies would go bankrupt leaving industrial capacity invested where it need not be. In addition, cheap credit incentivized long term capital investment and for Hayek this too was a problem as it would stop the entrepreneurs to realize short term gains which would actually kick start the economy.

Keynes believed that the role of the government was to maintain stability based on parameters such as employment, interest and money. He propagated the idea that the government should invest in public works, the building of roads for example which would create employment and therefore give people money to spend stimulating economic growth. Unlike Hayek, Keynes did not believe in natural equilibrium in the market as he saw people as more chaotic “animal sprit” therefore, he was strongly in favour of the role of the state to protect the people from market manipulation and falling into the trap of market hype, price fixing and failure. Keynes believed in bailing our organisations when in trouble and hence protecting jobs but this at times could result in economic bubbles having a huge impact on the economy in the long run.

To Decentralize or Not to Decentralize

It is no secret that the current decentralization movement is largely backed by those that are influenced by Hayek’s economic theories and wish to reduce the state’s influence on businesses and economy. The state bodies being the established order will do whatever in their power to stay in control so they try to supress and subvert the new paradigm shift, at the same time some within the state institutions will voice their concerns as there are possibilities that the people can benefit from the new disruptive technologies and the nation can leap ahead of other nations as happened in earlier disruptions e.g. ancient Mesopotamia after agrarian revolution or Europe after the various stages of the continuing industrial revolution. There are many within the state bodies that are not philosophical and only wish to protect the general population from fraud that can result from their “fear of missing out” on the profits that some in their community or friends circle would make from ICOs or due to the rise in the price of cryptocurrencies.

Widespread use of cryptocurrencies can result in weakening the ability of the central banks on applying their economic controls. i.e. if a significant size of the population switches over to cryptocurrencies as their primary medium of exchange then how will the central banks manage the availability of money and interest rates effectively?

From the Hayekian principles the issues associated with the use of decentralization and cryptocurrencies will even out after a while and any bubble will be short term. The demise of central banks is just a natural consequence and a part of the natural evolution cycle.

The Keynesians will argue that the cost of transformation will be too high. The cost being financial losses via fraud, stock market bubbles due to pump and dump activities especially by AI based bots where ordinary unsuspecting people cannot easily compete. The job losses, poverty and income disparity because of these financial losses. Already there are a number of very successful MLM (Multi-level marketing) outfits operating globally making millions out of the less savvy investors thanks to the huge market hype.

Next Steps

There is no doubt that the decentralization revolution is fast becoming a self-fulfilling prophecy and it seems that it will not stop. The responsibility is on the organisations and people like us, that wish to see the spread of decentralization and transparency, that we liaise with the governments and our elected representatives to alleviate their fears and make the transformation more acceptable so that we can benefit from this movement too. We need to help create systems and mechanisms that are built into the decentralized platforms that protect the population against fraud and market manipulation. Economists and scholars need to get together to ensure that the issues pertaining to economy and taxation are somehow addressed. Be it creating innovative ways of fair taxation or coming up with new models of economy altogether.

Change is imminent, change is inevitable but does it mean that we leave our bottom 50% population to mere chance, then what does it mean to be sentient, human and what does it mean to have empathy and compassion. We need to find ways of getting this right and we need to do this now.

The universe has a simple clean-up mechanism. Either you embrace evolution, ride the wave of revolution or be a victim of stagnation. The system will reclaim your resources and redistribute to a newer stronger, better more well adapted business, nation or species.

So, rise up and disrupt, before you are disrupted.