Why Blockchain has no economic future

When Bitcoin went public in 2009 it introduced to the world of finance and economics the technology of blockchain. Even the many who thought Bitcoin would never make it as a major currency were intrigued by the BlockChain technology and a large set of new companies have tried to figure out how to offer new services based on blockchain technology. It is still fair to say that very few economists and social scientists understand blockchain, and governments are even further behind.

I will argue that blockchain has no economic future in the regular economy. I will give you the bottom-line, then describe blockchain, discuss its key supposed advantages, and then take it apart as a viable technology by giving you a much more efficient alternative to the same market demand opportunities.

The bottom line for those not interested in the intricacies of blockchains and public trust

The essence of my argument is that a large country can organise a much more trustworthy information system than a distributed network using blockchain can, and at lower costs, meaning that any large economic role for blockchain is easily displaced by a cheaper and even larger national institution.

So in the 19th century, large private companies circulated their own money, in competition with towns and princedoms. In that competition, national governments won, as they will again now.

The reason that the tech community is investing in blockchain companies is partially because some are in love with the technicalities of blockchain, some hope to attract the same criminal and gullible element that Bitcoin has, some lack awareness of the evolution and reality of political systems, and some see a second-best opportunity not yet taken by others. But even in this brief period of missing-in-action governments, large companies will easily outperform blockchain communities on any mayor market. Except the criminal markets, which is hence the only real future of blockchain communities. Continue reading “Why Blockchain has no economic future”

Why would banks eliminate ATM fees?

Over the past two days, the four major Australian banks have eliminated ATM fees charged to users who are not their customers who use their ATMs. This is great news for people who do not use ATMs of their own banks. They no longer have to pay the fees — that have been transparent since 2009 — that were charged by ATMs — at least those owned by the four major banks. Not surprisingly, the media is fawning over it as are politicians.

But nothing tickles an economist’s spidy sense like this. Wait a second? Banks have decided to charge nothing for a service, that people who are otherwise not their customers for any other products, use? I have to ask: doesn’t this use impose direct costs on the banks? Aren’t those costs likely to be non-trivial? Aren’t those costs likely to rise substantially as consumers do not suffer the pain at the ATM of paying for those costs? The stench no economist nose is picking up is quite pugnant.

The news articles all say that this was the result of government pressure. To be sure, it is just that. There are no laws preventing such things nor has any government wanted to pass them.

And there is a good reason for that. This will have consequences.

For starters, there are going to be fewer ATMs; at least from the big four banks. They no longer have to roll them out to please their own customers, so they won’t. If you all decide a service will be free, it will be supplied by a free service. In addition, independent ATM operators — who charge the highest fees — will also see returns slashed by the new competitive pressure and so they will pull back to. As for smaller banks and credit unions, they get a gift. People will use their ATMs less but since they likely didn’t earn anything other than covering their costs, they might even expand a little. However, in the aggregate, there will be fewer ATMs.

(Actually, the smaller banks really do benefit from all of this. I am not saying that is a bad thing per se but once again, why are the majors giving them this gift?)

I have not been following recent regulatory developments but it strikes me that this may be the first act in trying to get a better deal under the hood. Banks are doing this to get lighter regulation elsewhere. Perhaps to avoid a Royal Commission? This is something that Australians will need to watch out for.

Personally, I have not really bought the notion that Australian banks are colluding on things like interest rates. (I looked). But this time, one bank (the CBA) seemingly unilaterally eliminated fees (for people who weren’t their own customers) and then the other banks followed. The only way the CBA’s customers benefited from this was if the other banks followed. Otherwise, there is no benefit coming back to the CBA. So there is no private benefit, only a group benefits. Usually, those things do not happen without explicit coordination.