On the tryanny of merit

This video promoting the book “the tyranny of merit” by Michael Sandel was brought to my attention a few days ago. I found the video so objectionable and misleading that I could not resist filing my disagreement (even though through the medium of my personal blog).

Overall, Sandel throws a few straw-man arguments (and arguments premised on wrong assumptions) and tries to make wrong conclusions from them. 

A few very brief points about the video (please watch the video before going through the points below): 

1. Many billionaires with whom I am familiar (not personally of course, but through biographies, etc.,) are very humble, and are very recognizant of their situation, limitations, and the role of luck in their lives. That is why they often contribute to charities and some other causes. There are exceptions as matter of course. 

2. This is the first time I am hearing someone claiming that “the money people make is the measure of their contribution to the common good”!!! He claims that ‘we’ often assume it to be so. I do not know which ‘we’ he refers to. Has anyone ever heard of this strange argument? I assume this is another straw-man argument or wrong assumption he needs to just come to his conclusions. (I guess in the end, things will be hammered down to the definition of the common good.)

3. I absolutely agree that every job should be seen as a dignified job. For me, the garbage picking job is as dignified as any other job that contributes to social welfare. But does that mean that the salaries in every job should be equal or even nearly equal? Of course, a garbage picking job is absolutely essential to society, but should a garbage picker earn (nearly) as much as a physician do? We know that potable water is also absolutely vital to us, but we pay more for a piece of (seemingly useless) diamond than we do for potable water, and there is a good reason for that. 

There is more wrong stuff there, but for the want of time, let’s skip them. I deliberately refrain from entering into some political/ideological stuff in the video. I have not read the book, I sincerely hope that the book is more subtle and nuanced than this video. 

On humility and open-mindedness in social sciences

Having been an observer and sometimes participant in quite a lot of debates over various issues, a single thing that catches any observer’s eye is the extremely polarized nature of each and every single debate. What I have realized throughout my life is that when there is such a polarized debate, the truth is often the main victim, which is why I always avoid engaging in such debates.  

One of the main areas of contention that has caught my attention is the rapid pace of change that is a catalyst for heating up the debate for both sides. In other words, the pace of change often disturbs our perception of phenomena, causing divergent viewpoints, because one side of the debate often clings on the old perceptions and the other tries to analyze the new phenomena wearing a new lens. The strange thing about the former group is that they often stick to the established theories as if they are timeless truths. 

However, it is always important to keep in mind that social sciences (including law, economics, and finance) are not rocket science/natural sciences. In all social sciences, given the sheer abundance of the variables influencing outcomes, it is virtually impossible to derive any conclusions from given facts. Even worse, more often than not, the facts are elusive and in a state of flux, which scapes the eyes of the most perceptive of scholars, making it very difficult to agree upon a specific set of facts, let alone deriving any lesson or conclusion from them.  

In the debates about the value of various assets, it is hard not to notice that they are those who adhere to the existing methods of valuations, and those who try to come up with new methods; the latter arguing that new assets (if they can even be categorized as ‘assets’) require new methods of valuation and the old methods are not up to such a task. While the existing methods, are the fruits of years of toiling of great minds, and have so far provided a valuable contribution to the finance and economics literature, they are not infallible and faultless, and they may indeed fall short of correctly valuing certain objects/assets to which people are willing to assign some value. 

We may know a bit about corporate finance, methods of valuations etc., but we should not take them as given and create a sacred totem out of them. A little bit of the review of the history of such valuation methods is enough to give us some idea of why they are not meant to be bullet-proof and unfailing methods that could always work. 

The whole point is that the social sciences are not exact sciences. After a lifelong deep dive in the study of history, the great historians Will & Ariel Durant conclude that “[h]istory is mostly guessing; the rest is prejudice.” I am afraid their insight is equally applicable to all social sciences. So, it would not be an exaggeration if we say: social sciences are mostly guessing, the rest is prejudice. 

So, what to do with such levels of uncertainty in social sciences? I always prefer the methods that start building on the legacy systems/methods, rather than starting by discarding them. Edmund Burke once said, “[a] disposition to preserve, and an ability to improve, taken together, would be my standard of a statesman.” This quote, which I think has very deep insight, always resonates with me. Although preserving what we already have is in itself a strenuous task, the ability to improve what we have is excruciatingly more arduous, as it always requires a much deeper understanding of what we already have. 

So, I am always more appreciative of the efforts of those who try to improve, rather than those who try to preserve, even when the former turn out to be wrong or fail with disastrous consequences. 

But the ones that I dislike most are the ones who already have some understanding of the existing legacy systems, without a real understanding of their limitations, and have a condescending and belittling approach toward the ones who try to improve things. 

Let’s be humble and respect those who are builders and essayists, who in good faith try to find new ways of analyzing the world and discovering solutions to its most pressing problems.

 

In praise of the entrepreneurial spirit

I recall those desperate days of Tesla, the not-so-distant days when its share price was around $180, and the big investment-bank analysts were forecasting a $10-tesla shares. As far as I can remember, it was in one of those days that Elon Musk appeared in a podcast and burst into tears while describing what he was going through in keeping the company afloat. 

It was so impressed by his dedication and commitment to the success of his company that I decided to do my part by buying a few Tesla shares just to support such an amazing soul and his ambitions. I have never been so careless with my hard-earned money, but once I saw how steadfast on his conviction he was, and how hard he worked to achieve what he aimed for, I just decided to disregard all the analysts’ forecasts and buy a few shares. I was totally convinced that even if the investment turned sour, I would always be proud of losing the money on a noble, ambitious, and worthwhile cause. [Of course, as you might know, Musk, as always, did not disappoint and I got paid back manyfold.]

I am a lawyer, and the supermajority of lawyers are conservative or become so through time. This should come as no surprise as spending so much time within the conservative legal institutions naturally breeds conservatism. Having this in mind, I – similar to many other legal professionals and scholars - should have naturally held a very pessimistic view of the cowboy-like methods of the likes of Elon Musk and their enterprise. 

Perhaps for a lawyer, being conservative is a virtue, but our deeply ingrained conservatism should not blind us to the fact that we live in a multi-dimensional world that needs all sorts of people with various attitudes, aptitudes, and risk calibers to make the world go round.

This is why, despite my usual legal conservatism, the people whom I admire most (in private) are those who – defying all the odds - take a risk with their own skin in the game to better their lives and those of others by trying to stubbornly solve difficult problems of our age, or those who are just after financial gains and in the meantime make the world a better place to live. 

In the case of Mr. Musk, I was happy to see that the US justice system - despite the fines imposed on him on certain occasions - has been flexible and gave him some leeway and room for maneuver. I believe if the likes of Elon Musk were in a different jurisdiction and made the same mistakes, the outcome of the legal proceedings would have been different. 

Anyway, I just wanted to say that I am honored and feel privileged to be living in the same era, breathing the same air, and walking on the same planet as those of the great gentlemen like Mr. Musk. I raise my chapeau to their success and wish them all the best for the coming year and decade, which I hope would be remembered in the history books as the roaring 20s of the 21^st century. 

Many of us, as well as our posterity, will be grateful for all the pioneering and entrepreneurial spirits of such great gentlemen. 

Buoyant markets and the eternal feeling of FOMO

As the markets are in a buoyant mode, I am receiving an increasing number of messages asking for advice on whether to invest in this or that market.

 

I am a researcher and lecturer with some outdated training in forex trading and with a small investment portfolio as my pastime just to lighten the boredom of life. But if you will, here is my more-than-a-decade-long long-term investment ethos:

• It is very unlikely that you can beat the market. If you think you can, think twice. I was very lucky to get to know people like John Bogle very early. If you want some advice from him, have a look at his book.
• Having the above point in mind, dollar-cost-average when there is blood in the streets (in bear markets), take profit when everyone FOMOes. Otherwise, stay put, relax, and enjoy your life/work!
• While dollar-cost-averaging, have some exposure to assets/investments with asymmetric payoffs. 
• In case you are FOMOed, keep in mind that life is long enough, be patient, and wait for your turn. Believe me, your turn will come.
• It is a waste of the good gift of life to be spent on trading. I am sure there are very many great productive things you can do with your life. Unless you really love trading, don’t make trading your full-time profession, except if you are a fund manager or adviser or you work for an investment services business. In that case, it becomes a heads-I-win, tails-you-lose situation, the best of the two worlds. 
• In case you are lucky and make some good money on your investment, be humble and generous. Believe me (or for that matter, the Bible or the classic Persian literature), cast some of your profits upon the waters and it will return to you manyfold.
• Don't listen to anybody (including me). Do your own research.

I am also receiving some questions on investment in Bitcoin, I have always been optimistic about Bitcoin’s future. But I always refrain from price forecasting, and for good reasons. I have written a few papers on Bitcoin and crypto-assets. In this paper, my coauthor and I have highlighted one very specific feature of Bitcoin and in this one, I have explored certain governance issues in Bitcoin, which answers some questions raised by Bitcoin skeptics. If you have time, you may have a look and decide for yourself whether Bitcoin is worth investing in. 

Again, I am not an investment adviser, and this is not investment advice.

Enjoy your holidays and have a great 2021. 

In praise of free markets or: How I learned to stop worrying and love the free market

The more my age advances, the more I realize that the only fair market is the free market and that the only value that should prevail when it is in conflict with other values is Freedom, one manifestation of which in the business world is the equality of opportunities (market freedom). Any measure we take to correct the perceived failures of free markets tends to distort it in ways that not only make it un-free and unfair but also attract rent-seekers who often do the rent-seeking at the expense of the least advantaged groups in a society. 

I know that many of you who sit in positions of privilege do not share this view with me. But this might be exactly because you are already sitting in a position of privilege and have probably never genuinely experienced how someone starts from zero. Let me start with my own lived experience.  

I was born into a poor family in one of the worst neighborhoods of our city in Iran, with official and nick-names of the neighborhood literally meaning “[neighborhood] without wire/electricity” and “established by force”. My parents – of whom I am immensely proud - are completely illiterate. Not knowing how to read and write - and even worse, belonging to the Azeri minority, how to speak the official language of the country – they have always struggled raising me and my other five brothers and sisters. My father, as a factory worker, had to go to work from 4 a.m. to 8 p.m., and my mother busied herself with raising the kids at home. 

I am not going to go into the details but just wanted to say that being born into such conditions, the first 20-years of my life was replete with all sorts of hardships and difficulties. I had to start working at the age of 6 or 7 in a carpet-weaning workshop – a kind of job that I still consider one of the examples of crimes against humanity - from 7 a.m. to 7 p.m., with the exception of school seasons, during which I was privileged to work part-time and attend the school the rest of the day. But the great thing about working in a manual job, which does not require a lot of thinking, is that it gives you ample time to (day)dream. This, I did for more than 10 years before being admitted to the Law School of my dream in Tehran.

But how did I get into such a prestigious university? The answer is by taking advantage of ever-disappearing outposts of equality of opportunity, which gave me the opportunity to enter free competitive battles in which almost all of the participants were treated equally. The nation-wide entrance exam for state/public universities in Iran is the fiercest competition one can face and it has an unparalleled reputation for incorruptibility (though there are some backdoors to the Universities for certain people). After studying hard for 9 months from 5 in the morning to 12 at night and obtaining the rank of 38 out of more than 500,000 competitors, I enrolled in the University in Tehran, where I had the privilege of coming to know an entirely new class of people and styles of lives that gave me a huge culture shock with scales far greater than the one I experienced when I migrated from Iran to the Western hemisphere. 

It was this environment that made me more ambitious and encouraged me to pursue my studies somewhere else. If it was not for the anonymized and impersonal artificial markets (exams) for University entrance, which kept the human biases, bigotry, and prejudices at bay in the selection process, I and a lot of other people like me were still sitting in carpet-weaving factories weaving stupid Persian carpets.

But I have always struggled once external factors interfered to make free-market processes fair by adding extra – and often arbitrary- measures to markets. In my home country, these ultra-market measures were often the test for religious piety, and devotion to the government and its ideology, and in western countries they are the formal considerations of citizenship, residency, race, gender, and informal considerations of cronyism, cultism, tribalism, favoritism, etc. Whether ideological, religious, progressive, or regressive, they have always worked against me and the people like me with an immensely discouraging impact. In my eyes, they seem to pursue a single objective: protectionism under the guise of fairness with the aim of keeping out the least advantaged people and protecting those who often have a greater influence on the decision-making processes. Let me give you another example of my lived experience. 

During the last couple of years that I have been in the academic job market, I have applied for several positions that I thought I would be a great fit, but eventually, I was not selected. The academic world is a small world and you often come to know who has been selected for a specific position. I am always very happy with the result when I realize that I have lost the game against brilliant minds, but in the majority of the cases, I came to know that I have lost the race to someone not even having one-fifth of my skills, expertise, and experience. These all happened in a job market where the selection committees did not have much skin in the game. I believe the outcome would have been totally different if I were competing in an anonymized or impersonal free market with the committees unaware of my name (which reveals my country/region of origin). I would have attained even better results if the selection committee had 100% skin in the game instead of a committee that only distributes/spends taxpayer money. 

I have to mention that I was once offered a position that I considered accepting. But once I got wind of the fact that some of the extra competitive elements had influenced the decision of the selection committee, I decided to decline the offer without hesitation, as I believed that me accepting the offer would have meant depriving someone else, who was more competent than me, from the opportunity. Please do not see this as virtue signaling. I had to mention it because I did not tell you why I am so immensely proud of my parents: among others, their uncompromising insistence in my upbringing on not infringing other peoples’ rights, irrespective of the consequences.

These two examples of my lived experience, from which I have left tons of details out, are why I would never trade free markets with fair, just, or whatever nice adjective you put before the word ‘market’. It was the free market/competition and equality of opportunity that helped me and thousands/millions like me out of the abject conditions, and it is the human considerations of fairness – extremely prone to rent-seeking behavior that welcomes all sorts of bigotry and prejudice – that have held and are holding the disadvantaged and the underprivileged back. 

This is of course not to say that free markets are always perfect. We are not discussing perfection here; the point is that the alternatives are often worse. In other words, just like most of our social phenomena, perhaps the free market is the worst form of organizing human societies, except for all the others.

Monetary Exclusion and Decentralized Financial Technologies

In November 2018, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) - a financial market infrastructure (FMI) institution that provides secure messaging for international payments - suspended certain Iranian banks’ access (including that of the Central Bank of Iran) to its messaging system. This step was seemingly taken to protect the stability and integrity of the global financial systems. However, the reluctant tone of the announcement could hardly disguise the reality that SWIFT took such an action conceding to the US government push to expand the secondary sanctions on financial messaging services to the Central Bank of Iran. Although the US did not have jurisdiction over SWIFT, which is a cooperative company incorporated under the Belgian law and is owned and controlled by its shareholders (financial institutions), after months of intense negotiations about the US demands and irrespective of the dismay expressed by European officials, SWIFT had to acquiesce. In making SWIFT to yield to US demands, the US government apparently went to such an extent as to threaten the SWIFT’s twenty five board members (which include two US bankers from Citi Bank and JPMorgan) with visa bans and asset freezes, and its member banks with charges and fines.

The intrusion of considerations beyond the scope of financial regulation in the operation and risks management of Financial Market Infrastructures (FMIs), was of such proportions that triggered radical proposals for reforming and restructuring the international FMI institutions. The recent calls for establishing international payment rails independent of the US have shown the frustration with the hegemony of a single dominant player having formal (i.e., through extraterritorial application of its laws or through secondary sanctions) and informal dominance over international payment infrastructures. For example, German foreign minister Heiko Maas proposed that Europe could create its own SWIFT rival based on the euro rather than the US dollar (USD). More recently, speculations about Synthetic Hegemonic Currency (SHC), which would be provided by the public sector through a network of central bank digital currencies (CBDCs), could also be viewed as a mechanism that could - in the long run - lead to decentralization in a multipolar international monetary and financial system. However, it is unlikely that a system, which is based on fiat money, issued and controlled by states, could stand tall against the pressures exerted by one or more groups of hegemonic governments. 

These developments have also highlighted the need for a truly decentralized uncensorable FMI on which one or a group of coordinated actors could not exert arbitrary influence. Such a value proposition requires a settlement asset that is denationalized, decentralized (peer-to-peer), divisible, digital, and globally transferable, and that provides certain levels of anonymity to its users. Bitcoin, which is built upon an open-source protocol, a distributed tamper-resistant timestamped globally synchronized ledger, and embeds a native digital asset is an obvious candidate to play such a role, despite its shortcomings in terms of price volatility. In this regard, it is important to mention that in spite of its currently predominant use as a speculative asset, Bitcoin and its underlying technology can be viewed as a new model for a parallel decentralized FMI (dFMI) for clearing and settling obligations in its unanchored native settlement asset (i.e., bitcoin). In addition to clearing and settling its native asset, Bitcoin can be used to transfer the title to tangible or intangible assets on top of the Bitcoin blockchain. This is made possible because Bitcoin’s scripting language allows embedding metadata in bitcoin transactions. For example, colored coins allow for recording the creation, ownership, transfer, and tracking of extrinsic digital and physical assets other than bitcoin.

Add censorship-resistant property of Bitcoin to the above specificities. Censorship resistance as the unique value proposition of Bitcoin is very much reflected in the Bitcoin whitepaper as well as Satoshi Nakamoto’s communications with early bitcoin adopters. Given the fate of Bitcoin’s predecessors such as Digicash and American Liberty Dollar (ALD), whose centralization was their undoing, the creator or creators of Bitcoin had the understanding that permissionless innovative payment systems have to be decentralized, otherwise those innovations will face the same fate as Bitcoin’s ancestors. This is also clear from the chronology of the technological breakthroughs that led to the birth of Bitcoin. 

More importantly, censorship-resistant property of Bitcoin is reflected in the design of the Bitcoin network. The clearest manifestation of this property is in the trade-off between efficiency and censorship resistance. Rather than opt for fast and efficient payments, Bitcoin goes a long way to create extreme inefficiencies by introducing a distributed ledger that should be maintained, updated and validated by all fully validating nodes, only to make sure that no single or a small group of participants violate the rules of the Bitcoin protocol, modify the ledger arbitrarily or censor other stakeholders from participating in the Bitcoin network. Such a tradeoff has been made because the unique value proposition of Bitcoin and blockchain technology is not to replicate the functions of centralized technologies in a faster or cheaper fashion.

It is indeed hard not to notice that the censorship-resistant property of Bitcoin drives the entire mechanism design in the Bitcoin network. Since Bitcoin is designed to operate outside the legal framework (i.e., alegality), it assumes an adversarial environment and prepares to defend itself against various attack vectors using a variety of ex-ante built-in mechanisms within the Bitcoin network rather than rely on the external legal system for ex-post remedies. To this end, the PoW security and consensus mechanism and various other incentive mechanisms are embedded to align the often varied and divergent interests of network participants and discourage uncooperative behavior that could result in attacks on the network. 

Whether a parallel dFMI relying on a settlement asset other than fiat currencies can alleviate the issues of financial exclusion and censorship remains to be seen. In particular, because the reason that the US possesses disproportionate influence over payment infrastructures is not entirely due to the reserve currency status of the USD, which is predominantly used in international FMIs, but also it is because the US has a large and attractive economy the benefits of which are hard to forgo for market participants in the face of a threat of being cut out of the US markets. But it seems that decentralized financial technologies, in particular, their structural architecture, which is built upon decentralized or distributed, consensus-based and censorship-resistant mechanisms without relying on centralized third parties can help shield such infrastructures from undue political influence. Despite its current shortcomings in terms of price volatility and fungibility issues, Bitcoin remains to be a giant leap for mankind that offers a universal, permissionless, trust-minimized and censorship-resistant store of value and value transfer network.

The new landscapes vs. the new eyes

Recently, I read two books one after the other by coincident: one entitled “The Birth of Plenty: How the Prosperity of the Modern World was Created” by William Bernstein, and the other “Talking to My Daughter about the Economy: A Brief History of Capitalism” by Yanis Varoufakis. 

What I found interesting is that despite both going through the same fact pattern in economic history, they seem to take very different viewpoints and come to diametrically opposing conclusions. Having read the books, combined with my own personal life experiences, I have come to the realization that the facts and realities do not matter as much as the lenses through which we allow ourselves to observe the world. 

Indeed, “[t]he real voyage of discovery consists not in seeking new landscapes but in having new eyes”, selon Monsieur Proust.

Apparently, what counts is not what we see, but how we see it. So, let’s be careful in choosing our lenses.

On the Tenth Anniversary of the Bitcoin Whitepaper

Today (depending on where on earth you are) is the 10th anniversary of the release of the Bitcoin whitepaper.

I invite my tech-oriented friends, lawyers, and economists to carefully read it at least once and to contribute to bettering the Bitcoin network. As far as I am concerned, bitcoin is one of the most promising experiments in money in our lifetime, however, it is a work-in-progress and needs more and more dedicated contributors with diverse backgrounds to overcome its imperfections.

For our part, I and my coauthor have tried to shed some light on some of its idiosyncratic features and raise awareness among regulators to help them view Bitcoin as an evolving, work-in-progress, open-source protocol that warrants a nuanced light-touch regulatory approach which is data dependent, defers to the virtues of experimentation, spontaneous discovery process and evolutionary dynamics in the financial system.

For now, I raise my hat for bitcoin’s spectacular success in its first decade and salute Satoshi for his/her/their ingenious work.

PS: Stay tuned! Within a few days, our new paper on central banks and the regulation of cryptocurrencies may see the light of day. More is forthcoming within the next few months.

Ignorance, Debt and Cryptocurrencies

Decentralized, permissionless and blockchain-based cryptocurrencies and their underlying technology are said to have as transformative an impact on value as the invention of the internet had on information. For decades, the double-spending problem was the main roadblock to the emergence of cryptocurrencies. The Bitcoin Blockchain eventually solved this problem in a highly secure, decentralized, consensus-based, and censorship-resistant manner without relying on third parties. This has harbingered the advent of a whole variety of different cryptocurrencies, with varying degrees of societal risk-reward payoffs. Although regulators on both sides of the Atlantic have taken a passive approach to regulating cryptocurrencies, with the increasing popularity and potential success of cryptocurrency experiments, it is likely that governments will take interest and involve in regulating them in the foreseeable future.

In our recent paper titled “ignorance, debt and cryptocurrencies”, building on the seminal work of Holmstrom (2015), we analyze how information economics of Bitcoin, which is built on symmetric (common) knowledge, trumps that of central bank money, commercial bank money and shadow bank money, which is built on symmetric ignorance as to the underlying collateral. We argue that this informational distinction can potentially make Bitcoin a new ‘safe’ asset, holding the promise of maturing into a viable store of value, a potential medium of exchange, and a unit of account. By comparing the information economics of central, commercial and shadow bank money with that of Bitcoin, we highlight important aspects of information economics of Bitcoin that can inform any pending regulatory intervention in the cryptocurrency ecosystem.

In fiat currency context, A is willing to accept a piece of paper as a method of payment in anticipation of B willing to accept it from A, and C willing to accept it from A and B, ad infinitum. For this to happen, the settlement asset should not give rise to any adverse selection problem arising from the information asymmetry as to the value of the settlement asset. In transactional terms, the more adverse-selection proof an asset, the better it is for transactional purposes (medium of exchange). To be adverse-selection proof, the asset should be information-insensitive and its information insensitivity should be common knowledge.

Fiat money, including commercial and shadow bank money, is legally constructed as a debt contract. Finance literature suggests that debt instruments have traditionally been superior to equity instruments in addressing informational problems between the borrowers (issuers) and lenders (shareholders). Debt-on-debt (debt used as collateral for another debt contract) minimizes financial market participants’ incentives to produce private information about the ultimate payoffs (Dang, Gorton, Holmstrom, 2012). This makes debt the least information-sensitive instrument in financial markets. This near-information insensitivity removes adverse selection problems, contributes to the liquidity of debt instruments, helps public adoption and thereby makes them a viable instrument for both market and funding liquidity.

However, no debt instrument, including central bank money, is entirely free from adverse selection problems. There are different methods to mitigate adverse selection. Signaling and screening have traditionally been the two well-known mechanisms to mitigate information asymmetry; the root cause of adverse selection. Another way to address the adverse selection problem is to basically do away with information asymmetry by either shedding sunlight on the settlement asset so that its value would be symmetrically evaluated by both parties to a transaction (common knowledge), or by obscuring and hiding all information so that neither party to a transaction would be able to or would have an incentive to acquire information about the underlying collateral of the debt instrument (symmetric ignorance).

Since an ultimate means of payment and settlement needs to be the most information insensitive asset and be completely free from the adverse selection problem, we argue that for such an asset (money) neither signaling nor screening mechanisms provide complete information insensitivity. Instead, for such an asset to best perform its function as an ultimate means of settlement, its value and underlying mechanisms should be either common knowledge or should not be known to any financial market participant at all (symmetric ignorance). It is no surprise that governments have chosen the latter path. The residual information insensitivity of central bank money (arguably the safest asset in a given market) has been eliminated by making all financial market participants ‘symmetrically ignorant’ of the value of the underlying collateral (a vague promise based on the full faith and credit of the government). This symmetric ignorance of all market participants as to the value and nature of that collateral removes all incentives for participants to acquire any information about the underlying collateral (hence a state of blissful symmetric ignorance).

Commercial bank and shadow bank money use different techniques to create money, but ultimately, all those techniques explicitly or implicitly fall back on the government safety net (government credit and liquidity puts). The main techniques used to create information insensitive assets in the banking and shadow banking system are insurance, (over)collateralization, imposing prudential requirements on issuing entities, and granting preferential regulatory treatment to quasi-money instruments (bankruptcy safe harbors for repos). In all these cases, the value of a safety-enhancing external element (eg, collateral in repos, government credit and liquidity puts in deposits) removes the depositors’ or investors’ incentives to acquire information about the underlying debt contract, making it information insensitive.

The information economics and potential information insensitivity of Bitcoin, however, stands at stark contrast to that of fiat money, as Bitcoin relies on the common (symmetric) knowledge as to the underlying inner workings of the Bitcoin Blockchain. The proposition that ignorance can be turned into knowledge, but knowledge cannot be reversed back into ignorance, is central to the information insensitivity of Bitcoin. Full transparency in the Bitcoin Blockchain eliminates incentives to acquire new information, thereby eliminating the adverse selection problem as to the value of Bitcoin as a medium of exchange. This superior informational feature of Bitcoin can potentially transform it into a potential safe asset, a good store of value, a medium of exchange, and a unit of account.

Given the superior quality of Bitcoin as compared to fiat money and the absence of market failures in Bitcoin in terms of information economics, regulatory intervention would not be warranted. More importantly, since the cryptocurrency industry in general is in its infancy, a hard-touch regulatory approach can hinder the potential welfare-enhancing innovations coming from this ecosystem. However, this suggestion should not be mistaken for an advocacy of regulatory faineance, as the ecosystem suffers from legal uncertainty. To the contrary, this approach is a defense of regulatory sobriety, data dependency, and a deference to the virtues of experimentation, permissionless innovation, the spontaneous discovery process and evolutionary dynamics in the financial system. This being said, the fast and ever-changing cryptocurrency ecosystem should put regulators on alert as market failures and potential for abuse will likely develop swiftly.

This post has been originally published in the Oxford Business Law Blog. 

Some early observations on New York City

• The city never sleeps, and it does not let you sleep. There is so much noise in the air. Perhaps it is part of the vibe and vigor of the city.

• Pedestrians often do not respect traffic lights, and this makes some drivers to blow the horn contributing to a noisier environment. Not surprisingly, sirens are the integral part of the background noise.

• The subway is not very impressive, but very efficient. It’s amazing how many taxi cabs are on the streets in spite of such an efficient subway system.

• The city is great for the young, but not fit and friendly at all for the elderly and people with disability. Only a handful of subway stations are equipped with lifts. Perhaps, that may explain the abundance of taxi cabs. By the way, early-morning subway commuters look pretty tired and depressed.

• If you are coming from Europe, you will be disappointed in how people dress.

• People are straightforward, they do not care who you are and what you think of them, a feature of big-city dwellers. They are by and large themselves.

• The use of smart phones is pervasive and almost everybody is looking at screens all the time, no matter what they are doing. Unlike Europe, commuters do not read much.

• NYC is deeply diverse. So many languages are spoken in public places. Compared to Europe, there are fewer Muslims on the streets. Perhaps they are already integrated in the bigger community/culture.

• NYC is naturally colorful especially at night.

• People are helpful and do not hesitate to offer extra help and information at their own initiative.

• People are humorous, they try to joke around even with strangers.

• Woody-Allen-like characters abound. I used to think Woody was making comedies, but it seems like he was simply filming the realities of the every-day life in New York.

• Compared to Europe, cafes and public spaces are a bit less tidy and neat and more chaotic.  

• People tend to talk a lot to strangers. Everywhere, you have to have a small talk. Overall, this is a good thing.

• Condos and big apartment buildings have doormen! It came as a surprise to me to see doormen opening the door for the residents and greeting them each time they want to enter the building. An 18^th-century-England phenomenon, not fitting my image of NYC at all.

• So far, the internet speed has not impressed me.  

• The universities are superb. Lots of events, amazing lectures, great infrastructure and facilities to bring students together and to allow for teamwork. Of course, it comes with a high price tag.

• Food in Europe is healthier than it is in the U.S., especially in university cafeterias.

• NYC is more expensive than most cities in Europe. If you are shopping or eating out, pay attention to taxes and tips.

• My limited experience suggests that one should be patient with American cities, they always fail to make a good first impression. It takes time for NYC and some other U.S. cities to reveal their beauties.