Former Federal Reserve Regulator is Afraid Bitcoin Could Destroy Central Banking

By Kyle Torpey Nov 12, 2014 4:18 PM EST

Central Banks Bitcoin

NEW YORK (InsideBitcoins) — Previously, we covered [See: “Professor Bitcorn Strikes Again”] the first nine points made by former Federal Reserve Bank Examiner Mark T. Williams in his recent presentation at the World Bank Conference, Virtual Currencies – Bitcoin Risk. Point ten was much longer and discussed the idea of bitcoin removing power from central banks, so it rightly deserved its own full article.

The final point made by Williams in his presentation discussed bitcoin’s sovereign attack risk. In his first bullet point, Williams noted:

“If adopted in its current raw form, bitcoin has the potential to undermine the longstanding bond between sovereign and its currency.”

This could be the most ironic statement found in the entire presentation because the other points were all used to explain why the risks involved with bitcoin will eventually lead to its downfall. In this final point, it seems that Williams is open to the idea of bitcoin becoming so prevalent throughout society that central banks will lose the power to control monetary policy.

Central banks and economic stability

The second bullet point in this section talks about how governments and central banks are needed to provide economic stability for their citizens. Venezuelans and Argentines will have to hold back a mixture of laughter and anger as they read the following statement from Williams:

“Governments exercise a monopoly power on currency creation with the understanding that doing so will provide its citizens with a greater level of economic stability.”

Williams seems to be ignoring the fact that a government’s ability to stabilize the economy depends on a level of perfect execution from the central bank that is simply unattainable. Whether you’re talking about the United States or Zimbabwe, the idea that central bank regulators are economic monks that are immune from corruption and error is laughable. We’re only five years into the bitcoin experiment, and this new digital currency paradigm is already competing favorably with certain central banks around the world.

Who controls the bitcoin monetary base?

Mark Williams

Professor Mark Williams, Boston University. (Wikipedia)

Williams also seems to be concerned with how bitcoin manages its own monetary base in a decentralized manner. He notes that controlling the monetary base is “an immense power and responsibility” that is put into the hands of “those who create the algorithm, protocol, manage the transactional ledger and mine virtual currencies.”

First off, it should be noted that the above system may be preferred over what’s currently going on in places like Argentina and Venezuela. Secondly, Williams is correct in stating that the miners have a large amount of authority when it comes to whether or not bitcoin’s monetary policy could be changed in the future. One could even imagine a scenario where the mining community agrees to create more bitcoins due to the fact that transaction fees have not risen to compensate for the drop in block rewards; however, the miners also need to keep the economic majority in mind.

It’s important to remember that, in a world of competing cryptocurrencies, the controllers of a currency’s monetary policy are competing with other currencies available on the market. A country experiencing hyperinflation may turn to bitcoin, gold, or US dollars, and a cryptocurrency that makes a highly-inflationary change to its monetary policy may find itself losing out to other cryptocurrencies with monetary policies that are more advantageous for its users.

Deflation is scary

In another bullet point, Williams points out that bitcoin’s current monetary policy is inherently deflationary over the long term. This is a common point made by bitcoin critics, although they never seem to get into the details of why deflation is bad. There are many arguments to the contrary, including the deflationary period in the late 19th century. This was one of the largest periods of real growth in human history that also happened to coincide with a mostly deflationary monetary policy. As A.E. Musson noted in his “The Great Depression in Britain, 1873-1896: a Reappraisal”:

“Prices certainly fell, but almost every other index of economic activity – output of coal and pig iron, tonnage of ships built, consumption of raw wool and cotton, import and export figures, shipping entries and clearances, railway freight clearances, joint-stock company formations, trading profits, consumption per head of wheat, meat, tea, beer, and tobacco – all of these showed an upward trend.”

Although the conventional wisdom is that deflation is bad, it makes sense to also take a look at the counter arguments coming from alternative points of view. After all, there seems to be a general correlation between people who believe deflation is bad and people who were oblivious to the impending economic collapse in late 2008.

That’s not how Gresham’s law works

The last point made by Williams in this particular section is a complete misunderstanding of Gresham’s Law. He argues:

“If bitcoin were allowed to co-exist as ‘legal tender’ it could also create a situation where under Gresham’s Law ‘Bad money drives out good.’ In such a scenario, bad currency (bitcoin) would be used and good currency (US dollar) would be hoarded, creating greater economic instability.”

Anyone who is involved in the bitcoin community understands that this is the exact opposite of how things work right now. If you’re someone who has adopted bitcoin, you’re mostly using it as a store of value (part of your savings). Remarkably, Williams seems to be aware of this fact, as he states, “Over 90 percent of bitcoin are also hoarded setting a temporary price floor.”

This point is actually also at odds with the previous argument made by Williams in regards to deflation. He seems to be claiming that bitcoin will be “dangerously deflationary” (increase in value over time), while at the same time claiming that people will choose to store the inflationary US dollar for long term savings.

This kind of logical inconsistency is a perfect example of why Williams should not be taken seriously as a bitcoin critic.

You can follow @kyletorpey on Twitter.

Facebook Comments


  • John Mark

    If some major sovereigns decided to adopt the RScoin cryptocurrency in order to run their national finances, how would selling their debt work?

    Currently, bondholders buy government debt using that nation’s currency.

    How would a government buy, say, RScoins in order to use their value on the welfare state?

    As it borrows RScoins, it finds it needs more value than it can obtain from lenders of RScoins, so it creates more RScoins.

    Up to a point, this is what bitcoin does, but beyond that point at which all bitcoins are mined, inflation is prevented.

    Surely an indebted sovereign is going to be willing to create RScoins ad infinitum since politicians must spend on their citizens or die as politicians.

    Therefore, inflation is inevitable in any fiat cryptocurrency and we are no further forward economically despite ruling out the middlemen.

    This inevitable desire of democracies to spend ad nauseam makes inflated sovereign cryptocurrencies inevitable as well.

    Since we can agree that deflation is better than inflation, despite Prof Williams, then, therefore, bitcoin will survive any sovereign cryptocurrencies, and can continue to exist to function even all the bitcoins are mined by serving the interests of those who own bitcoins or come to own bitcoins thereafter.

    What I’m trying to persuade myself about is that, whatever governments throw at bitcoin, it cannot but survive.

  • Macc Mosley

    I say good the banking system has done nothing good. They exist only for profit and control America. We need to completly dismantle the American banking system. Profits only cause corruption,Banks shouldn’t be allows to make profits as they’ll only take it to far and hurt the America people. Look at what happened in late 2007 when they declared bankruptcy and stole billions only to be bailed out while the still owned billions in property that they sold to increase their profits. They gab loans to people that couldn’t afford them repossessed those properties,and claimed bankruptcy. They were property rich just not cash rich scumbags.

  • sometimes the act of seeming to know more, is just that, an act. designed to fool and confuse, and hope doubt settles in.

  • Sarge

    No, everything but physics and math are bullshit. God is no more real than the Easter Bunny, Santa Claus or Tinker Bell.

    I’ll show myself out.

  • Milly Bitcoin

    The point of Bitcoin is to solve a computer science problem of having a decentralized consensus. One possible use of that is Silk Road but that is not the “point” of Bitcoin.

  • Milly Bitcoin

    At least we agree that you write propaganda rather than news

  • No, John is right. I’m no longer an Anarcho-whatever guy. I write propaganda for the Fed now. Please keep up.

  • Milly Bitcoin

    The author of the article is one of those Anarcho-whatever guys and I always complain about him inserting his biases into the stories he writes. In any my point is that people who think somehow Bitcoin will change human nature or change all the problems with governments and finances are setting themselves up for disappointment. First of all, most of the claims assumes the whole world switches over to Bitcoin which is highly unlikely. Bitcoin is a tool that opens up more options to people and will influence things but it won’t change the fundamental problems humans face.

  • John Kuhn

    I appologize for twisting your words regarding my fed reserve spokesman comment. The point I was trying to make is that the author of this article does not appear to be an independent journalist. The author appears to be drafting propaganda for the establishment. Like wise, you also misconstrued my comment regarding the innocent college kids…. Of course I recognize that criminals and predators will exist in any financial based enviornment. My point is not that bitcoin is perfect, it’s certainly not. However, the federal reserve based system is criminal at it’s very core. The constitution of our republic clearly states that congress alone must control the currency. On 1913 the federal reserve (deception) corporation was given the unconstitutional power to create and control our currency. As a result, the IRS was created that same year to tax Americans (redistribute wealth to the elite class) as the planned scheme now required the federal government to pay interest to these bankers any time that the governement needed money to be added into the economy. The creation of debt is the only way money enters our economy, and the only people who now have the power to make it out of thin air are the private bankers. The were granted unconstitutional powers by a corrupted and bribed congress. So 90 million American families now have homes that are pledged to the bankers as assets l, for money that they created out of nothing to lend… If they decide to shrink the money supply enough, these 90 million families will default on the mortgage, and the bankers will own all the land. Furthermore, our tax dollars are nearly exclusively going to pay the bankers “interest” on currency that our constitution prohibits anyone but congress having the power to control. If the congress were to issue currency to the government when needed on a prudent basis, instead of taxpayers being 20+ trillion dollars in debt, and having to slave for over 1/3 of every year to pay bankers interest on our federal governements spending, we would be zero dollars in debt, and we wouldn’t be redistributing 1/3 of the peoples money to the banking elite on an annual basis, in addition to pledging nearly all of our real assets to them….
    Bitcoin atleast is a system that prevents a corrupted 3rd party from doing such evil, furthermore, it prevents inflation via the limitations on the currency. Allowing private banks to dilute the value of your savings and earning anytime they create more money from nothing is an atrocity! If you broke your back for a dollar of work, that dollar should be worth the same amount of sweat equity in 10 years as it was today. With bitcoin, that’s assured by way of the system not allowing for some third power to dilute down what you have earned. For example, if you and a partner started a corporation, and you both put in 2 years of hard work for no wages, and you each received 50% of the companies shares for that contribution, how would you feel if your partner had the power to start giving himself more shares whenever he wanted… He wouldn’t take your shares, he would just create more and give them to himself. Soon enough, your 50% is now 1% even though you still have the same 500 shares…. If the company was worth 1 million dollars, you would have started with 500,000 in “value” for your work. After the theft occured, your now only in posession of $10,000 of value for your work. That’s dilution, and that’s what the banks are doing to our money supply every day.
    Can criminals back into bitcoin and steal…. Yes. Will criminals be anywhere value can be gained… Yes! Criminals by and large steal federal reserve dollars much more than they do bitcoin! You just don’t hear it on the news everytime someone gets a wallet with cash stolen! Ironically, bitcoin is far more secure than cash, and far safer, provided the owner takes the time to store their bitcoin private keys offline in a secure safe place. If you secure them online, your havjng to trust a 3rd party that may or may not be scamming, or simply they may not have safeguards in acs to prevent hacks! Trust me the fed banks are hacked all the time! What do you think happens each time millions of credit cards are compromised by a hack? If you don’t think your paying for those thefts, your not familiar with the fee based system!
    I subscribe the the Benjamin Franklin philosophy… “Any society that will give up a little liberty for a little temporary safety deserve neither and will lose both” – Ben Franklin
    I believe he had the nations best interests in mind when he ratified the constitution of this great nation and I believe our nation has been complacent to the fact that we have been giving up liberty for “temporary safety” for some time now, and were becoming deserving of neither, and were on the verge of losing both! We need a system like bitcoin, yes it may mean we have to learn new things, however nobody said freedom comes without sacrifice. That sacrifice is not accepting a loss of freedoms, it’s fighting hard to hold onto those freedoms.
    Again, I do apologize for misconstruing your comments, I wasn’t trying to create a flame, I simply wanted to engage in a discussion and debate that needs to be had by intelligent and open minded people. Your free to disagree with me and I’ll respect your opinion , provided that you atleast pay an open mind to mine. I have considered your opinion, however as a business owner that’s employed over 10,000 people and had several 8 figure lines of credit, I can tell you with significant experience that anyone who thinks the federal reserve is an honest and fair system for the people, is sorely mistaken.

  • Milly Bitcoin

    the notion that somehow the federal reserve is all bad people and that Bitcoiners are all good people is ridiculous. The same kind of evil scammers are in both systems as we have seen in the many scams and losses in Bitcoin.

    You also misrepresent things that I said as I never said to listen to the federal reserve spokesman. Are those the only 2 choices, agreeing with the federal reserve spokesman or listening to a bunch of know-nothing cultists? Most people won’t listen to either.

  • John Kuhn

    One thing they know better than most, is how to spin and dupe the public. I’ll give you that! These “college kids” want the American dream that they have been sold on… You know, the one where we live in a Republic, have have constitutional rights, and where life, liberty and the pursuit of happiness are all assured opportunities.
    The federal Reserve Corporation is deceitful, dishonest and destructive to our republic. This system, which provides private bankers with protection from prosecution for creating money out of thin air via a ledger entry, to loan out at interest, is a system that makes a Ponzi scheme look tame. Atleast a Ponzi scheme uses real money to pay back early investors.. The banking system simply dilutes the shareholders of federal reserve notes on a daily basis by creating money that didn’t exist and lending it to individuals and business’s at interest, and secured with real property. Therefore, when they decide to reduce the currency in the system, economies will collapse, and they will own all the real property… How can that be anything other than pure evil?
    Don’t give me the crap about listen to this corrupt fed reserve spokesman…. I’ll take the honest college kids any day of the week!

  • Mass adoption of bitcoin doesn’t make very much sense right now. It’s not a very efficient payment system. Silk Road is the point of bitcoin. For all the talk of mainstream adoption from VC’s, censorship resistance is still the main use case.

  • hswdisqus

    Even if points 1 to 9 in your response is valid (which for the most part I agree with), your answer # 10 shows you are disconnected with reality. Bitcoin (or any crypto currency) cannot be legitimized if it simply tries to find a “route around governments”. If it does that, it will remain a currency for SilkRoad ver 25, and nothing else. The future of Bitcoin lies in working with governments and broadening its mass use. Taking this approach will automatically put Bitcoin in a very good position when Fiat money does blow up at some point. Until then, the smart move is to legitimize its existence and its worldwide use.

  • Dominik Z

    Bitcoin currently and for many decades is actually inflationary….

    “It’s value is not guarenteed”? Seriously? The only things that can guarantee anything are God and physics. Everything else is bullshit.

  • Dominik Z

    they are the future generation. out with the old, in with the new.

  • Milly Bitcoin

    No, he made a rational discussion of issues surrounding Bitcoin. What you have is some teenagers/college kids sitting on the sidelines trying to make fun of him so they misrepresent his statements because they think they know everything. Jerry Brito and Coin Center do a good job of analyzing these things and the author of this article does not because the author is promoting an agenda and not covering news about Bitcoin.

  • inpips

    Milly you can take him seriously or ignore him, thats up to you or anyone else reading his arguments but the point he lacks logic and contradicts himself does show a serious flaw in his argument.

    In logic truth contains no contradictions, a contradiction is the result of a lie or an error, its that simple.

  • D,

    Its tragic that this guy actually teaches students.

  • paleh0rse

    1. …yet.
    2. That’s a pro, not a con. The boundaries and bias are algorithmically controlled and available for the whole world to see and adjust to accordingly.
    3. For those 90%, it’s no different than storing wealth in gold. Unlike fiat currencies, Bitcoin can act as a currency, a commodity, the basis for a smart contract, and so much more… all simultaneously and without third-party control (read: interference).
    4. Patience, young grasshopper, the market is young… very young.
    5. They can try. They can also be replaced, as can any laws they previously passed.
    6. No value can ever be guaranteed, including any/all fiat currencies in existence. You apparently don’t understand the concept of “value.”
    7. Says you and others sucking from the central bank teat. I respectfully disagree, and there are plenty of examples wherein deflationary periods led to economic booms/prosperity.
    8. “All of you” is a number that is growing every day. Also, please put on your seatbelt once Bitcoin gains real traction in b2b transactions.
    9. Says who? You? Please provide technical specifics for the alleged insecurities, or stop talking about them if you really have no idea and no specifics. Also, please name another payment system that is more secure, and explain how it is more secure.
    10. You sound like you hope that happens. Are you always this fascist? That said, Bitcoin, like any decentralized p2p system, will always find a way to route around governments and laws. The world governments would literally have to turn off the internet to completely destroy Bitcoin. Good luck with that.

    Freedom, and those who love freedom, are coming. If you’re a fascist who hates to see governments lose total control of everyone and everything, you should be afraid. Be very afraid.

  • Richard Dixon

    BitCoin has inherent weaknesses it can not overcome.
    1. It is not backed by law
    2. There is no central bank to counteract it’s deflationary bias
    3 Nobody seems to realize that a 90% hoard of BitCoins is an extremely severe depression in economic terms.
    4. BitCoin ‘insurance’ is shotty at best and untrustworthy
    5. Lawmakers can make it illegal to use at any point in time, rendering it useless.
    6. It’s value is not guaranteed.
    7. Deflation, as great as bitcoiners think it is, has tremendous negative economic impact, despite the economic boom during a deflationary period. That was
    8. Businesses see all of you as a niche market with diehard beliefs that they can take advantage of by allowing you to pay with BitCoin. You can bet that they’re almost immediately taking their coins and turning them in for USD to avoid losses due to value fluctuations.
    9. It’s not as secure as you’d like to believe it is.
    10. The fact that you have the attention of governments should scare the shit out of you, because they can squash you like a bug in the blink of an eye.

  • Milly Bitcoin

    people who are aligned with A) can also use Bitcoin and I think they will.

  • Milly Bitcoin

    “Williams should not be taken seriously as a bitcoin critic…” I assume we should instead listen to a bunch of college kids who have little or no experience in the world and who go around telling everyone how to structure society under their so-called “anarchist” agenda?”

    I suggest you try to listen to and try to understand what these people are saying instead of trying to make fun of them … because they know more than you do even if they are not experts on Bitcoin.

  • Dave

    This will all come down to a choice that humans make: who do you trust more A) bankers and politicians, or B) fellow human beings not aligned with the groups in option A? It will take time but until I see a better option Bitcoin is literally the ONLY way to set humanity free from enslavement to the bankers.

  • Dave

    Nice article. I find any analysis with BTC and its impact on the Federal Reserve to be quite comical. It’s always some Fed person whining about how the Fed could lose control. Kindly point out for me where in the U.S. Constitution it talks about the Fed. Do people even realize who owns the Fed? Yes, it is a brilliant idea to have mathematics and algorithms control the money supply. Didn’t Jefferson warn us about letting people like the Rothschilds and Rockefellers control our currency a couple hundred years ago? Bitcoin is the ONLY way to eliminate greedy, scumbag bankers and politicians. Period. End of story.

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