Is Bitcoin a new revolution? : Interview with David Andolfatto Federal Reserve Bank of St. Louis ①

David Andolfatto serves as a Senior Vice President in the Research Division at the Federal Reserve Bank of St. Louis. He is Canadian-born to Italian immigrants and worked in the construction sector before going to school to become an economist. He worked in the Canadian university system for 20 years before joining the Federal Reserve. He joined the Fed in 2009 and advises St. Louis Fed President James Bullard on monetary policy. Mr. Andolfatto also coordinates FOMC briefings and participates in Research Division matters with colleagues.

Interview Date : 2nd February 2021

When did you learn about Bitcoin?

I first started looking into Bitcoin around 2013. My initial reaction, like many economists, was one of skepticism. But once I looked under the hood, I recognized something very familiar and interesting. The basic problem that Bitcoin was trying to solve was in managing a virtual database of transaction histories without the aid of a delegated intermediary. The basic idea is centered on the notion of a decentralized consensus-based record-keeping system.

Monetary theorists

Monetary theorists have for a long time talked about social credit systems, where people organize an activity with the aid of a “virtual shared ledger” that records each member’s contribution to society. This virtual ledger, I noted, was maintained by the community, and not by any delegated third party. This is the similarity I noted with the consensus-based recordkeeping system in Bitcoin. Bitcoin is very much like a social credit system. What has happened is that innovations in data storage, communication, and cryptography have permitted this form of consensus-based record-keeping system to scale. This idea intrigued me early on.

What is the best use-case for that model?

Early on, I thought one of the nice use-cases was international remittances. The plumbing of the banking system is still pretty archaic, but there has been a lot of progress made over the years. It is surprising how the banks within the country still don’t really communicate with each other as well as they should. It’s even worse for cross-border communications. For example, if you want to send money from a St. Louis bank to Russia, it could take days. It shouldn’t take that long. It should be more like the way Paypal works.

What kind of a threat are Cryptocurrencies and Bitcoin?

Bitcoin and cryptocurrencies pose the threat of competition for fiat currency systems, intermediaries, and central banks. We should keep in mind, however, that currency competition has always been part of the landscape, and we’ve always had local currencies, like the Ithaca hour. The threat is more pronounced in mismanaged economies. Traditionally, people would seek alternatives to the local currency, like the U.S. dollar. But acquiring and keeping dollar bills safe is costly. People wouldn’t normally have access to a U.S. bank account. But now with the Internet, people with phones can just download an app, and they will have access to this alternative competing monetary system. I think this is potentially good in the sense that it could provide a competitive threat and so serve as a disciplining device for governments, banks, and money processors. This competitive threat can be healthy, and this could be one of the main benefits of Bitcoin and cryptocurrencies.

Does the Bank need to get in touch with the crypto space?

Banks don’t need to enter the crypto space narrowly defined. Bitcoin, for example, is inherently inefficient to transfer value. It may seem more efficient than the existing banking infrastructure, but this is because the banking system design is not optimized. We could fix that design and use very conventional database management systems to affect value transfers using a central ledger operated by a trusted third party. Banks and other intermediaries will innovate along this dimension and potentially offer systems that are inspired by “blockchain,” even if they are not really blockchain-based protocols.

Can the cryptosystem beat the banking system?

If you can trust a third party, then there is nothing that beats it. The question is whether or not you trust your accountant. For the accountant to credit and debit accounts, it’s very simple. Banks are models of trusted third parties and are going to leverage their reputation stating they don’t need to rely on things like proof-of-work. Why should they? You are basically asking a community of people you don’t know to play a non-cooperative game against each other to help you manage your books. This is the price one has to pay for bypassing conventional intermediaries. It may be a price worth paying for some. But it won’t be for most people, I don’t think.

Do you think the banking infrastructure has to be reconstructed?

I think it is something to be fixed. The system in Europe is probably one of the most advanced ones in the sense that they have zero fees at the user end and a good internet banking system. The United States was an international payment settlement leader in the 1970s. They produced ACH, the Automated Clearing House payment, which for a long time took 2 to 3 business days to clear payments, albeit in a very cheap way. That 1970s infrastructure is still in place in the United States. Many countries, including some countries in Africa, have been able to leap from this system, and the United States is slowly catching up. Also, people like myself and others have been advocating for a central bank digital currency that will have a zero user-fee, free access, and fully insured accounts with real-time gross settlements.

Is Bitcoin a new revolution?

A lot of young people think this FinTech is very revolutionary, but this revolution is just a part of an ongoing evolution in database management systems. When I first went to Italy with my mother in 1971, I was 10 years old. I remember before we went on this trip from Vancouver to Italy, we had to get a telephone book and look for Thomas Cook or American Express (offices). We needed to obtain a traveler’s cheque to be able to exchange Canadian dollars for Italian Lira. We were told that we would need a traveler’s cheque to take with us to a corresponding bank in Italy for currency exchange. Traveler’s cheques alone took 2-3 weeks to be issued and were quite costly. When we flew to Italy, my uncle took us 50 km to the nearest bank that would process the cheque to conduct the currency exchange. Fast forward, right before the COVID-19 pandemic hit, I would fly anywhere with my credit card and didn’t have to think about anything in terms of arranging for methods of payment. The lesson of this story is that there has been a tremendous amount of innovation in payment settlements before cryptocurrencies.

Interviewer , Editor : Lina Kamada


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