5 things Paul Krugman gets wrong about crypto | Industry

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When I read ’s July column in the New York Times explaining why he’s a skeptic, I couldn’t help but think about his article from 1998.

“By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine,” the economist and Nobel laureate declared.

Now, Krugman, who told Business Insider in 2013 that he “doesn’t claim any special expertise in technology,” is taking on crypto —  and he’s once again on the side of history.

Blockchain is going to change the world. The impact of this breakthrough technology on society is going to be profound. That realization is what made me leave my job driving product strategy and global go-to-market at Facebook to start an investment firm focused on blockchain technology and crypto assets.

Here are the five main flaws in Krugman’s argument.

1. Bitcoin and crypto are two different things

Krugman conflates “crypto” and “Bitcoin.” Throughout his NYT column he uses them almost interchangeably, though these are different terms used to describe different things.

In reality, Bitcoin is a subset of crypto. It was the first cryptocurrency to market, and is by far the largest by market cap. Still, Bitcoin is one of roughly 1,500 cryptocurrencies that were made available since 2013.

Different cryptocurrencies have different business models, goals and underlying technology. In fact, the most widely used platform to build on top of is Ethereum, not Bitcoin, with crypto companies often opting to use the flexible ERC-20 technical standard.

2. Fiat doesn’t work as well as Krugman thinks

According to Krugman, “conventional money generally does its job quite well: Transaction costs are low. The purchasing power of a dollar a year from now is highly predictable  —  orders of magnitude more predictable than that of a Bitcoin. Using a bank account means trusting a bank, but by and large banks justify that trust, far more so than the firms that hold cryptocurrency tokens. So why change to a form of money that works far less well?”

Having lived on three continents so far, I have some experience with fiat currencies and international money wires.

It doesn’t work well.

First, fiat money transaction costs are generally high. Wiring money to a bank account abroad typically includes a conversion fee, taking a hit on the actual conversion rate and paying international transaction costs. Various intermediaries are involved in the process and you may need to wait several business days for clearance.

Not exactly what I would call a low-cost, frictionless process.

Second, the purchasing power of the dollar is fairly predictable, but that doesn’t apply to all foreign currencies. In particular, some people in emerging countries suffer from significant devaluation of their local currency, impacting their purchasing power and consequently quality of life.

Just ask people in Turkey, Argentina, and Iran about the stability of their local fiat currency. Having a stable dollar doesn’t really help them much.

As for Krugman’s “by and large banks justify that trust,” I could write an entire article just on that. It would involve a lot on the following: 2008 financial meltdown, banks that are too big to fail, and the subprime mortgage crisis.

3. Not all cryptocurrency protocols are as inefficient as Bitcoin’s

Krugman isn’t all wrong when it comes to his critique of Bitcoin’s protocol. He writes, “instead of money created by the click of a mouse, we have money that must be mined  —  created through resource-intensive computations.”

Bitcoin’s consensus mechanism is indeed wasteful and costly.

But, again, it’s important to distinguish between Bitcoin and cryptocurrencies in general. There are crypto companies that use better and more energy efficient consensus algorithms to verify transactions, most notably via proof of stake.

4. Crypto assets don’t need to be backed by governments  to be reliable

In the new era of web 3.0, for most use cases we don’t need to “bite gold coins,” as Krugman suggests to verify the value of crypto assets. Blockchain relies on a decentralized system of nodes spread all over the world for transaction validations and fraud prevention.

Krugman’s assertion that “for the most part governments and central banks exercise restraint, because they care about their reputations,” doesn’t adequately address fiat volatility, inflation, and economic costs experienced in various regions due to irresponsible governments.

In fact, it’s because crypto is not backed by governments that it could potentially prove most transformative to people who don’t live in Western societies or may be currently unbanked.

5. Crypto is driven by some of the smartest, most forward-thinking people in the world

Lastly, Krugman makes the case that “very few people are using Bitcoin to pay their bills, but some people are using it to buy drugs, subvert elections, and so on.”

Ah, the good, old crypto-is-used-by-criminals argument that crypto skeptics like to use. I have yet to see convincing proof that this market, currently worth over $200 billion, was created by and for organized crime. I’d be very interested to see data that backs up such claims.

Contrary to these claims, establishment financial institutions like Goldman Sachs, JP Morgan, and BlackRock are showing an increased interest in blockchain.

Illegal activity probably does happen via cryptocurrencies, but using Bitcoin to facilitate a crime is one of the stupidest things a criminal could do, since crypto transactions are transparent to all, can be traced, and are recorded forever in the blockchain. I can think of much better ways to hide transactions  —  cash, for example.

Why crypto will outlive Krugman

Thanks to blockchain, people can now easily, cheaply, and quickly send money across borders. No element of trust is needed to transact safely.

And blockchain’s potential reaches far beyond the facilitation of financial transactions. The speed, transparency, and security this technology enables is opening the door for a wave of disruptive new applications and use cases across various verticals.

Will some companies and tokens fail? Of course. But blockchain and crypto are here to stay.

With massive amounts of capital pouring into the space and new talent entering, I’m positive about the future of crypto. So, Prof. Krugman, I suggest you fasten your seatbelt. The blockchain revolution is upon us.

Tomer Federman is passionate about the promise of distributed ledger technology and is Founder and CEO of Federman Capital, an investment firm focused on blockchain technology and crypto assets. Previously, he drove product strategy and global growth of major ad products at Facebook, helping to build the company’s multi-billion dollar ad empire. Prior to Facebook, he was Founder and CEO of an ecommerce startup incubated by Stanford’s StartX Accelerator and worked at Fortune 500 tech companies, including SAP and TE Connectivity.

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