In a report on the opportunities and risks of crypto, Dutch Central Bank DNB shows it has studied crypto quite well. But the piece is steeped in the idea that crypto is a lesser version of "real" money, namely the money issued by central banks.

An interview in the NRC of 7 November 2022 with DNB board member Olaf Sleijpen reveals that DNB looks at crypto mainly through the lens of risk. We list the emotionally charged words from this article, both positive and negative: 

speculative
advantages
unstable
inconvenient
no success
advantages
teething
energy guzzling
ban
speculate
gamble
money laundering
terrorist financing
fine
fear
collapse
market manipulation
supervision
something goes wrong
not something real
speculative
fool 

Not exactly words from someone who sees the crypto glass as half full... Admittedly, perhaps that attitude is not crazy either, given that the DNB also has the role of financial regulator and has to protect consumers. 

In that role, the DNB therefore warns against influencers in Lamborghinis promising the world to unsuspecting consumers. It also names and explains the recent Celsius and 3AC fiascos. Certainly, it is right to point out and warn about this lesser side of the crypto industry. 

"An important innovation"

Apart from the excesses in the industry, how does DNB view crypto the technology? Fair is fair, much of what the report says about crypto as a technology is pretty accurate (we forget for a moment the missing insight in Bitcoins proof-of-work: DNB sees the high energy consumption as a flaw). The DNB acknowledges that crypto (Distributed Ledger Technology (DLT) in DNB's words) is not hot air but is indeed an innovation: 

'DLT is an important innovation because this technology enables the storage and transfer of tokenized assets without the need for a central intermediary.'

And further: 

"Crypto-ecosystems have mimicked these functions [traditional financial functions such as investing, paying, providing credit] in a different way, in just over a decade. 

The word 'mimicked' is revealing and a motif of the whole piece. Embedded in the word is much about how DNB thinks about crypto. Namely that it is not 'real' and therefore only a tool for speculation. 

"Crypto is for gambling"

Agreed, DNB, in a 2021 survey of crypto investors, about 40% said they wanted to "take a gamble". This aspect of investing in crypto is singled out by the DNB: crypto is a means to speculate - and nothing else. That a similar percentage of those surveyed say they want to protect their savings from monetary depreciation: the DNB does not address this. Perhaps wisely, since it is the DNB - or rather related foreign institutions - that create money and thus devalue people's savings.

"Crypto unsuitable as a means of payment"

The institute's arguments as to why crypto cannot function as money are that the price is volatile and crypto is not backed by anything. What is true of these arguments?

First, we only need to look at real-world examples to see that crypto is used as money. In an Ethereum-based NFT marketplace like OpenSea, buyers and sellers exchange ETH for NFTs. If an economy is circular, the exchange rate against an external currency does not matter that much. If I get paid in ETH and pay for groceries in ETH, I am less interested in the dollar exchange rate of ETH.

Granted, we're not there yet...  but it shows that the flaw in the DNB's thinking is that there is one absolute yardstick: fiat money like dollars and euros. That is the true money. Perhaps not surprising that the DNB thinks so, as they have a position to defend as the issuer of this money. 

Free market for money
Is crypto 'unbacked' because there is no pot of gold or dollars to cover Bitcoin's value? In a sense, yes. But it is a mistake to think that such coverage is necessary. A payment system that guarantees security of transfers creates a demand for that system that gives value to that system's coins (by the way, it's Bitcoin's energy usage that creates the security of the network). 

What backs the value of our fiat money? There has long since been not enough gold in the vaults of the DNB to cover our money. What covers the value of our euros is the social consensus that we pay each other in this currency. That consensus is ultimately enforced by a country's government, which can throw people in jail if they don't pay taxes in the local currency. That creates demand for fiat money. If you leave out that consensus, our money is notes of paper or - like crypto - its digital incarnation: entries in a database.

At a time when countries are no longer the only entities that define communities, and when technology exists - crypto - to spend money themselves, a free market for money is emerging. Communities can ultimately decide for themselves what they use as money - whether a central bank gives their stamp of approval or not.

Stablecoins are allowed

So, is crypto completely unsuitable as money? The DNB makes an exception for stablecoins: 

"Possibly stablecoins can function as money in specific applications, but only if the risks are sufficiently mitigated." 

Why stablecoins? Because they are usually backed by the money the DNB does recognize as money: euros and dollars (and other fiat money). 

Conclusion

The document's technical explanation of crypto is broadly fine. But although DNB does mention the decentralized aspect of crypto, the new reality has not sunken in: namely, that money issuance is no longer a state monopoly. Now that we have crypto, money has entered the free market. We are no longer totally dependent on a central bank.