And that’s why it’s time to act and ban cryptocurrencies

And that’s why it’s time to act and ban cryptocurrencies

A Dutch government analyst is drumming up support for a ban on Bitcoin and other cryptocurrencies. We summarize his argument. A leading Dutch government analyst is making the case for a full ban on Bitcoin – from trading, from ownership, from debit cards [1],  from mining [2]. Pieter Hasekamp, director of the Central Bureau for Economic Policy Analysis under the Ministry of Economic Affairs, lays out why in a guest article in the fd. newspaper.

We summarize Hasekamp’s arguments here without comment. It goes without saying that we do not agree with them, but it goes without saying that you, as readers, should take note of them without bias. Hasekamp thus begins his commentary somewhat awkwardly by quoting Gresham’s famous law: bad money displaces good money.

At first glance, he says, the rise of Bitcoin fits into this scheme: cryptocurrencies are bad money – their origins are unknown, their value volatile, trading in them shady. However, Bitcoins are not used in regular payments, Hasekamp knows, and therefore do not displace other money. Does that mean, as Bitcoiners like to say, that Bitcoins are really the good money? That cash, fiat money, fiat money are old-fashioned and bad?

No, it does not mean that. Because how good a money is, says Hasekampf, depends on how well it fulfills the usual functions of money: as a unit of account, as a means of payment, as a store of value. Fiat money retains its value well – inflation is low – and is ideally suited as a means of payment and a unit of account. Although security leaves something to be desired in some cases, especially in the digital space, all in all the money we have functions so excellently that it can only be called a good one.

“Cybercurrencies,” on the other hand, are a bad money, a grotty money, in every way: there is no preservation of value, usability is weak, and security is undermined by fraud. If anything makes cryptocurrencies attractive, it’s the privacy of anonymous transactions.

  • For these reasons, Bitcoin and other cryptocurrencies are “unsuitable as a unit of account and means of payment outside of criminal circles,” Hasekamp knows. If they did well as a store of value, it was because people hoped they would one day replace real money.
  • But this will not happen. That’s because cryptocurrencies are neither a real financial product nor real money. Rather, he says, cryptocurrencies are just “an example of what Nobel Prize winner Robert Shiller calls a contagious narrative”: a story that people believe in because others believe in it.
  • And that’s why, Hasekamp picks up from the beginning of his commentary, Gresham’s Law is being replaced by Newton’s when it comes to cryptocurrencies: “What goes up must come down. The ultimate collapse of the crypto bubble is inevitable.”

The analyst welcomes the fact that various countries are now taking action against the “crypto hype” because of its harmful consequences – fraud and criminal use, gambling addiction, financial instability and the massive waste of energy. China particularly excels at this, he said. The People’s Republic has not only banned mining, but has also recently been resolutely fighting crypto-influencers on social media. The Netherlands, on the other hand, is lagging well behind.

An attempt to tighten oversight of trading platforms has been unsuccessful, he said. As recently as 2018, Hasekamp’s own institution, the Central Bureau for Economic Policy Analysis, said stricter regulation was unnecessary. Now, however, he cautions that “prudent regulation” legitimizes cryptocurrencies as a “real financial product” and could do great harm.

Therefore, he said, the time to act is now. After all, “the longer we wait, the greater the negative consequences of a potential crash.” In the final instance, he said, a “total ban on the production, trading and even possession of cryptocurrency” is the right option. Opponents of such a ban claim that prohibition has already been ineffective in the case of drugs, and that it must therefore be even more ineffective in the case of something like Bitcoin, which consists only of numbers and mathematics. But Hasekamp recognizes a crucial difference: a ban on cryptocurrencies would lead to falling prices and thus reduce their attractiveness.

Bitcoin miners initiate taproot activation

Bitcoin minersA super majority of miners have accepted Taproot, the first major bitcoin upgrade since SegWit. This means there is nothing standing in the way of activation.

The Taproot upgrade can also be seen as a lesson in what kind of pace bitcoin upgrades need to have. In early 2018, Gregory Maxwell proposed Taproot. Since then, the update has been developed, polished, and tested, and, most importantly: a way to activate it as undisruptively as possible has been sought.

After long discussions and votes by the miners, the developers decided to use the “Speedy Trial” variant of BIP8, the classic mechanism by which softforks were previously activated. Speedy Trial allows miners to signal for three months whether they are ready for a softfork or not. Once 90 percent of the blocks contain a “yes” over a period of about two weeks, the upgrade is locked in.

This happened this past weekend. This clears the way for Taproot. However, it will take some time before activation. Only about six months after the “lock in”, around 24,000 blocks, Taproot will go live on the Bitcoin network. This is expected to happen in late November to mid-December.

With the new method of activating softforks, the developers want to implement experience it has gained with previous softforks. The six-month delay in activation is intended to give the ecosystem an opportunity to update the software to be ready when the time comes. This is to avoid potential risks of loss, such as from mix-ups or incorrect addresses.

Taproot itself is as comprehensive as it is complex. The upgrade introduces three new features:

  • MAST (Merkelized Abstract Syntax Tree) will use hash trees (Merkle trees) to hide the conditions under which a smart contract is satisfied in a tree of hashes.
  • Previously, transactions that issued coins in a smart contract revealed all the conditions by which this was possible.
  • With MAST, the transaction now reveals only the conditions that were met. Alternative conditions remain in the dark. This could make it more difficult to detect Lightning transactions, for example.

Taproot introduces Schnorr signatures

These are a long-held desire of core developers that the Bitcoin Cash community has successfully fulfilled for some time. Schnorr signatures are natively multisig-enabled, dissolving the differences between normal and multisig addresses. For example, it will no longer be easy to distinguish whether an address is part of a Lightning channel or not. This should also strengthen the fungibility of Bitcoins and thus privacy. In addition, Schnorr reduces the size of transactions slightly, by about 20 percent depending on the type. This will improve Bitcoin’s scalability, increase throughput, and potentially reduce fees.

Finally, Taproot is introducing Tapscript, a modification of its previous programming language to write scripts for smart contracts. This is intended to both adapt the scripting language to MAST and Schnorr, and improve the development of smart contracts.

In general, the community is very hopeful that Taproot will inspire smart contracts on Bitcoin. The power that smart contracts can unleash is shown by Ethereum, where they have long since enabled an unmanageable number of decentralized applications (dapps). Whether Bitcoin can really gain ground here through Taproot is very questionable, since the fundamental differences between the scripts in Bitcoin and Ethereum remain.

At its core, Taproot will rather marginally improve the privacy of certain rather niche applications: for example, it will no longer be possible to see whether a smart contract that someone redeems through multiple signatures would have been fulfilled if a certain number of blocks had elapsed. This sounds like a detail, but it can potentially obscure Lightning transactions.

First, however, Taproot will decrease the fungibility of Bitcoin transactions by providing another format by which addresses and coins can be distinguished. However, as Bitcoin users move broadly to Taproot, this will shift to an improvement in fungibility, as the distinction between simple P2PKH addresses (“1…”) and P2SH addresses (“3…”) will then dissolve.

The increase in scalability will also only have a noticeable effect when Schnorr is used on a large scale. However, Schnorr signatures will already give users and exchanges the chance to reduce fees at least a little bit if needed.