Do cryptocurrencies foster innovation?, with Francisco Álvarez Molina

Francisco Álvarez Molina (Madrid, 1946) knows the ins and outs of the stock markets like few others: from 1971 to 1995 he worked at the Paris Stock Exchange, eventually becoming its vice-president, then moving to the Valencia Stock Exchange as the CFO.

He was also general manager at the Foundation for Stock Market and Financial Studies and president of the European Association of Regional Financial Centers.

But this mathematician and PhD Computer Engineering is also a free thinker and a great educator. In 2000, he joined the Economy for the Common Good (EBC), an economic model born in Austria in 2010 which makes the Common Good, a good life for everyone on a healthy planet, its primary goal and purpose.

What is a cryptocurrency and how does it work?

Crypto comes from the Greek “kryptos” (hidden or concealed). The term refers to the verb to encrypt, which means to hide data with a code.

Cryptocurrency is digital money, or money that is not physically represented by bills or coins but by computer mechanisms that use a specific code. 

Bitcoin is the best known cryptocurrency, the name of which perfectly exemplifies this concept: “bit” is the acronym for “binary unit” (the basic unit of digital information) and “coin” is the English word for currency.

How many cryptocurrencies exist in the market right now?

At the moment there are more than 7,000 cryptocurrencies, although just ten of them are really popular. Although most of them use the famous computer algorithm known as “blockchain”, some are based on other encryption systems.

The blockchain is similar to a certificate that issues from any transaction made with a blockchain based cryptocurrency. Like the algorithm, this certificate is hosted in multiple computers which prevents it from being altered. Thus, the cryptocurrency has a decentralized control. 

Decentralization is another feature of cryptocurrencies as opossed to bills and coins, which are issued and controled in a centralised way (banks).

Why do we attach value to cryptocurrencies such as dodgecoin, which emerged as a joke and was based on a meme?

Interesting question. I would also ask: Why do we attach value to a piece of paper called a bill?…It’s just paper. Why does my baker give me a loaf of bread in exchange for some metal pieces? 

While it is true that both bills and coins are physical, payments with credit card are not. The latter are digital transactions backed up by financial organisations that record a debit in the payer’s account and a credit in the recepient’s, without using bills nor coins.

Dodgecoin recent major price increase of 2,000% was partly due to the support of celebrities like Elon Musk and rapper Snoop Doggy Dog, as well as several groups in Reddit. How volatile can cryptocurrencies be given the immediate influence of events such as those?

Regarding the volatility of cryptocurrencies, do we know what happens with official currencies reg. volatility in the financial markets after all? The coefficient of variation is currently lower for traditional currencies than for cryptocurrencies, but the mechanism is the same and it’s called speculation. 

Why does speculation occur? Simply because money, whether physical or digital, has become an end in itself, an instrument to make more money, and has not retained its raison d’être, which is to serve as a tool for exchange.

In the liberal-capitalist system everything is regarded as an opportunity to make money. The Elon Musk and Snoop Doggy Dog episode simply shows that today, celebrity and social media, both beyond the government’s control, can turn something fictious into something credible and take credibility away from actual facts.

How can cryptocurrencies impact the global financial system and our economy?

In the same way as bills and coins, just with new means and mechanisms. Digitalization comes across as a revolution, but salt, cocoa or gold as a reference value was also perceived as a revolution centuries ago, and so did bills that represented gold reserves but have nothing to do with them anymore.

The distributed control of cryptocurrencies is nevertheless a big novelty – some find this decentralization concerning, especially the central banks which are used to controlling everything.

But the principle is the same: a cryptocurrency is a tool which facilitates trade and which, unfortunately, as I have already mentioned, the liberal-capitalist system has turned into a purpose.

According to a study by Sending Money Home Organization companies such as MoneyGram, RIA and Western Union typically charge around 20% commission on remittances. Likewise, access to funding is one of the main problems in developing countries. How much can developing countries benefit from a cryptocurrency-based economy?

The fact that, according to Sending Money Home, these companies charge 20% commission on remittances and that this is accepted by banking supervisors and central banks, when it is an obvious outrage, should lead us to the question of why they accept it and how is it possible that they do. It is an armed “robbery”. 

Both cryptocurrencies and social currencies undermine the powers of banking and lower costs simply because they somehow get out from under the centralized control of global banks.

Would a decentralized financing system benefit innovation, and do today's financial institutions hinder it somehow?

Any mechanism that reduces costs is positive for society in general and for the business sector in particular. The business sector cannot live without innovation, given that innovation is crucial to all productive sectors, and innovation is not just new inventions, it is, above all, improving what already exists. 

Financial institutions have been, and will continue to be, an obstacle to innovation if they keep discarding any innovation that is not financially profitable.

Do cryptocurrencies make it possible to get by without the financial institutions involved in today’s finances?

The existence of money and the “validity” of its representation, whether physical or digital, are two different things. 

The representation must always be endorsed, controlled and verified. This requires state regulated and controlled organisations or institutions, even if these need to adapt to the new representations of money and new means of payment.

We could easily dispense with those financial institutions whose sole objective is just money for the sake of it, but not with those intermediaries that charge reasonable prices for their services and have the welfare of society in mind and not just their managers and shareholders benefits.