Bitcoin is bad news for stability, professor warns

How disruptive an impact could digital currency have on national governments and institutions? Gideon Samid begins his analysis by recounting another disruptive moment in history: Archduke Franz Ferdinand’s 1914 assassination in Sarajevo.

How does Samid – an assistant professor in electrical engineering and computer science at Case Western Reserve University – make the argument for equating bitcoins with the violent event that set off World War I?

“Bitcoin is bad news on many levels,” Samid writes in an article in American Banker. Its greatest threat, he argues, is its threat to economic stability:

“What if people start lending and borrowing bitcoins? If your debt is denominated in the digital currency, and then its price soars, your burden in dollars will be off the chart. How would the debtors ever pay back their debt if overnight it multiplies by a factor of three?”

Samid continues, “And let’s remind ourselves that credit extension and repayment is the mechanism for societal growth. Bitcoin is rogue. It offers no recourse to those whose accounts are hacked or who lose their shirts investing in the currency or simply misplace their passwords. There is no central authority to lay blame to, and its cryptography is too deep for most traders to follow.”

Samid offers two choices for backers of official fiat currencies: find a way to put the digital money genie back in the bottle (“Good luck on that route,” he writes) or co-opt the Bitcoin model and use it as their own.

Central banks and other authorities, he advises, should respond with “a robust, trustworthy, durable and stable solution to digitize the national currency.”

Samid concludes, “Let commercial interests compete against one another, following the guidance set by central banks, and offer the public the advantage of digitized fiat currency to stave off the rogue alternatives.”