Yanis Varoufakis: 'Bitcoin is the perfect bubble, but blockchain is a remarkable solution'

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LOUISA GOULIAMAKI/AFP/Getty Images
When I first met Yanis Varoufakis in the summer of 2014, he was a highly respected but relatively obscure economist. Back then, the price of one bitcoin fluctuated around $440. Fast-forward three years and his career has followed a similar trajectory to bitcoin’s valuation. Both have experienced a meteoric rise in popularity, characterised by high-drama and volatility. Varoufakis would be thrust into the limelight as Greece’s finance minister; battling the austerity programme put forward by the Troika and today pursues the lofty ambition of trying to reform Europe. Reaching similar heights, just two weeks ago the price of one bitcoin broke $20,000 for the first time.
Varoufakis may have been one of the very first senior political leaders to explore the use of blockchain-based payments for a national economy. At the height of Greece’s financial crisis, he developed a plan for creating a peer-to-peer parallel payments system, based on the blockchain. Yet he wants to make one point very clear: “I was never impressed by bitcoin itself; but from the beginning I was saying that blockchain is a remarkable solution to problems that we have not even imagined yet.”
As bitcoin’s price continues to fluctuate, it has come under a steady barrage of criticism. Varoufakis is no less damning of the cryptocurrency but on very different grounds.

Bitcoin is “the perfect bubble”

Citing the 17th Century Dutch financial bubble in tulip bulbs, Varoufakis sees bitcoin’s current valuation as, “the perfect tulip bubble.” His explanation is simple. “Just take a look at two graphs. Graph one is a time-series of the dollar price of bitcoin, which has been growing exponentially. Graph two is the number of transactions and the quantity of goods and services that are sold and purchased by bitcoins.” The juxtaposition between these two graphs, suggests that the price of bitcoin is grossly inflated relative to its actual use. This leaves Varoufakis to conclude that, “without a shadow of a doubt, this valuation is the perfect bubble.”
What is driving the belief behind bitcoin? Some suggest that bitcoin is becoming a “safe haven” from national fiat currencies, particularly those that have been inflated through Quantitative Easing (QE). But Varoufakis is quick to reject this narrative. The fact that similar safe-haven assets such as gold and the dollar are not matching bitcoin’s wild price swings is a clear indication to Varoufakis that investors are not fleeing fiat currencies for fixed assets. As he argued, “If there was a correlation in the price of gold and bitcoin, then of course you could make the case that investors are fleeing fiat currencies towards fixed supply assets. But that is not what is happening.”
In Varoufakis’ view, what is really happening is the formation of a classic self-perpetuating bubble. It can be explained by one of Varoufakis’ primary intellectual influences, the British economist, John Maynard Keynes. Keynes famously studied the irrational and emotionally charged decisions that investors make when overcome by speculative fever, greed and hubris. Varoufakis believes bitcoin’s valuation is underpinned by the same irrational exuberance; “as Keynes argued, this is the kind of bubble that forms when average opinion is trying to guess what average opinion will be.” This self-referential game is what continues to erratically drive the price of bitcoin. But in terms of guessing when this bubble might burst, Varoufakis is adamant; “In non-linear dynamic systems, to predict when the bubble will burst, is actually impossible.”
Whilst it may be impossible to anticipate its bursting, Varoufakis remains less concerned that the bitcoin bubble will trigger a wider financial crisis. Despite the intense media attention and a rapid rate of growth, the size of the bitcoin market remains miniscule, compared to the overall financial sector. The crypto-currency’s market capitalisation is roughly 0.25 per cent of the $73 trillion global stocks market, 0.083 per cent of the $217 trillion global real estate market and 0.033 per cent of the $544 trillion global derivatives market.
Bitcoin is also unlikely to cause the “chain reaction effect” that Collateral Debt Obligations (CDOs) and Credit Default Swaps (CDSs) caused in the run-up to the financial crisis of 2008. Varoufakis maintains that it was the interconnection of CDOs and CDSs, with almost every other aspect of the financial sector, that caused such a widespread financial crisis in 2008. However he raises one note of caution; “I’m worried and I hear lots of noises about the creation of new financial instruments based on bitcoin, including CDOs based on bitcoin and so on. If that grows with the vengeance that we saw in 2007, then we will probably be having such worries, but I don’t think we will.”

The fantasy of apolitical money

Critics of bitcoin have tended to focus upon the technical limitations of the technology; its energy expenditure, its anarchic structure, its slower transaction speeds and its user anonymity. Yaroufakis agrees that there are numerous design flaws with the currency. Not least, he adds, “the fact that there are no controls, no democratic checks and balances of a bit issue and no way of back-stopping financial transactions by means of some kind of insurance policy for those that get defrauded.” Yet his central criticism focuses upon what he refers to as “the fantasy of apolitical money.”
To Varoufakis, money is inherently political. The decisions regarding whether money is produced or not, how it is distributed and who receives it, all have significant political consequences, benefiting certain social groups over others. Bitcoin’s central design feature, that it is not governed by a central bank or decision-making authority, means that responsibility for its distribution is forfeited. This can have profound social and political implications in times of crisis.
To understand what Varoufakis means by the political nature of money, consider how governments respond to financial crises. When a major financial crisis occurs, it is usually caused by the failure of widespread and interconnected debts. Once these debts fail, what happens is that a large part of the money supply effectively disappears. With this money gone, governments have a choice whether to replace it or not. Choosing not to replace it through the creation of new money (inflation) becomes a political decision with political repercussions. As Varoufakis suggests, “effectively you are choosing to shift the burden of a crisis onto the debtors and usually the weakest and poorest of debtors. So effectively you are redistributing power and wealth against the weaker members of society.”
If the decision is made to replenish the money supply, like it was in 2008 through Quantitative Easing (QE), then how this money is channeled through the economy will also influence the political economy. In Varoufakis’ opinion, QE was engineered in a way to benefit large corporations. Alternative options, such as creating a new public investment bank which invests in infrastructure, education or healthcare, would have had very different political repercussions. To Varoufakis, “these decisions are fundamentally political that change the political economy and the distribution of income across a society. Whether you want to make these decisions or not, you end up with political decisions, even if the decision is not to do anything - which is also a political decision.”
To Varoufakis, the moment you adopt bitcoin’s fundamental philosophy, which sets the quantity of money separately from the business cycle, the economy and the political process, in effect you, “make it exogenous from anything that has to do with our collective decision-making systems. You’re making a political decision, that during times of crisis, our society is opting for a shift of power and wealth to the creators and the richer members of society.” Thus by removing the creation of money away from human decision making systems, bitcoin’s algorithm risks cementing and even accentuating current inequalities in wealth.
As an economist inspired by the theories of Karl Marx and John Maynard Keynes, Varoufakis is chiefly concerned with the distribution of wealth and the impact this has on relationships between creditors and debtors. So, what if someone designed an algorithm that not only controls the production of money (like bitcoin) but also the distribution of money? If an algorithm could be designed to redistribute wealth more equitably, would this allay Varoufakis’ concerns with technical systems that operate outside of human decision-making processes?
Even if such an algorithm could be designed, Varoufakis insists that “democracy and the democratic process, in my mind, is irreplaceable.” This is because humans can never settle upon a precise and defined notion of justice, fairness or equality. Even in the case of the redistribution of wealth there are various competing theories of how wealth should best be redistributed. Consequently, human societies will never perfectly agree upon an apolitical, algorithmic and technical process by which to redistribute wealth. As Varoufakis warned, “we can not subcontract the discussions about what is proper, what is just, what is fair, what is right, to some algorithm, to any algorithm - even to the most fascinatingly brilliant algorithm. These are always going to be the result of debate, of dialogue, of ‘agora’ in the ancient Greek tradition. Of sitting around and discussing until the cows come home - there is no escape from that.”
Despite Varoufakis’ criticisms of bitcoin, the crypto-currency is gaining traction. Crisis-ridden countries, like Venezuela, are beginning to turn to it, as a surrogate to their ailing national currencies. So does Varoufakis believe that bitcoin could supersede national fiat currencies in the near future? “It’s perfectly feasible that a small nation can adopt a currency whose money supply can not be manipulated or controlled. But the real question is whether it’s desirable. On this question, I’m categorically negative.”
In the case of Venezuela, Varoufakis advises, “Venezuela must solve its interminable political affairs before it starts thinking about bitcoin.” Rapprochement between the government and opposition must come first, for without it the polarisation in Venezuelan society makes any currency system impossible. Again, Varoufakis emphasises the primacy of politics and the limitations of technical solutions to political problems; ‘Let’s not forget that our market economies require a degree of political consensus and legitimacy in order to function. And without that there’s no technical solution that you can bring to bear upon a crisis like that in Venezuela’s.”
Some bitcoin enthusiasts have suggested that bitcoin may one day challenge the dollar reserve global system upon which America’s economic might is based. But again, Varoufakis sees this vision as pure fantasy. “Bitcoin would never undermine the exorbitant privilege of the US dollar or indeed any currency backed up by strength,” he says. In Varoufakis’ view currencies are supported, not only by the “soft power” of institutions, but also by the “hard power” of military might and geopolitical power. As he explained, “if you’re a Saudi oil king or an industrialist from China or Korea, you want to put your money in the bonds and assets that are denominated in the currency of the superpower that has the military might and the geo-political strength, to back-up its own currency.”

Blockchain and the future of Europe

While acknowledging the limitations of bitcoin and other technical solutions to political problems, Varoufakis does see potential in blockchain technologies. For him, “the algorithm that operates behind bitcoin, caught my attention right from the beginning. I consider this to be a remarkable technology.”
As early as 2012, Varoufakis was toying with ideas for using blockchain to help solve Europe’s financial woes. By the time he was appointed Finance Minister of Greece in 2014, within days his anti-austerity programme was met with the direct threat from the Troika to close Greece’s banks. With no banking system, the country would grind to a halt. To counter this threat, Varoufakis devised an audacious plan to keep Greece’s financial system operating.
Effectively Varoufakis proposed creating an alternative, peer-to-peer payments system based on the blockchain. This would disintermediate the financing they were receiving from the Troika and from the money markets. But with no money coming from the Troika, Varoufakis would need to create a parallel payments system, that would leverage the tax that all citizens and companies of Greece need to pay, as a new form of money. This is what he would eventually brand, “fiscal money.”
To understand how fiscal money works, imagine that a pharmaceutical company in Greece is owed money by the state. Due to the constraints of the crisis, it may take years to pay the company in normal central bank euros. However what if there was an alternative option? What if the Greek State created a reserve account for the company under its tax file number, in which it placed tax credits of one million euros? This IOU could then also be used by the company to pay other organisations and individuals within the country.
One of the most disruptive aspects of this unrealised plan, was to enable the state to borrow directly from citizens and vice versa. In effect, Varoufakis was attempting to use new digital technologies, such as blockchain, to cut out the European lending authorities and build new lending relationships between citizens, companies and the state.
The risk this system faced was the threat of corruption and the subsequent decline in public trust of authorities, something that Varoufakis admits is “in very limited supply” in a country like Greece. For example, what if Greek authorities abused these tax credits and began to distribute this new fiscal money to close allies and friends? This is where Varoufakis saw blockchain’s potential. “If the payments system was based on the blockchain, this would allow the combination of anonymity but perfect transparency, regarding the total aggregate size of the transactions of the currency….blockchain would overcome the trust problem as we know it.”
For Varoufakis, herein lies the great potential with blockchain. Not only has it the ability to disintermediate incumbent middlemen, but it can also improve the overall transparency of systems. Make no mistake, Varoufakis does not believe that blockchain will completely solve the problem of corruption. In his opinion, “every financial system is abused and used for purposes of propagating corruption. The 500 Euro note is jokingly referred to as the ‘al-Qaeda’ - it is a remarkable tool for the mafia and for terrorism.” However what Varoufakis believes we must do is to try and embrace technologies that allow us to limit corruption. In his opinion, “the blockchain has many qualities and capacities that could help us limit this abuse.”
In designing future digital systems, like blockchain, Varoufakis calls for “coordination” and “openness” amongst technologists, designers and citizens. He also advises that organisations, “do the opposite of what Silicon Valley is trying to do, which is secure the profit stream, by trying to create property rights over everything they do.” Yet when it comes to the contentious debate of whether blockchains should remain public (such as bitcoin and Ethereum) or private, he anticipates a mixture of systems based on public, consortium and private blockchains. According to Varoufakis, “any useful tool should have a use at all levels: private and public”. And he predicts blockchain will be used by central banks to create national currencies, by private banks and companies to expedite settlements and by cooperatives for internal payments and transactions.
Looking to the future, Varoufakis is now leading the charge for a newly reformed Europe. His organisation, DIEM25, aims to create a more homogenised European system. In his view, “federal structures are essential - they are like the foundations of an edifice of a building.” But currently they only pertain to trade, industry standards, environmental standards and, of course, the currency. For Varoufakis, Europe needs full political, fiscal and constitutional union. Otherwise, “If we don’t have the whole thing, it will constantly threaten to collapse on top of our heads.”
Blockchain does feature in Varoufakis’ vision of a newly homogenised Europe. Ideally it would be used to create a two-tier monetary system. Individual member states would move towards a blockchain based version of Varoufakis’ concept of ‘fiscal money’. Atop of this, the European Central Bank (ECB) would create an over-arching, European-wide digital currency. As he surmised, “my dream for the monetary reconfiguration of the European Union, in particular for the eurozone, is blockchain based nation-state, euro-denominated fiscal money, hanging under a broader blockchain based euro.”
Technologies such as blockchain, may also help fulfill Varoufakis’ vision of a Europe that is at once homogenized to tackle the big problems (like the banking system, fiscal redistribution and poverty) whilst decentralized for the smaller, day-to-day decisions. Indeed DIEM25 is calling on Europeans to “imagine the European Union, not as a union of governments but as a union of cities, a union of regions, where power is simultaneously decentralised while problem solving of basic common problems is done at the broader level at the level of Europe.”
Blockchain can play a role in delivering this vision but as Varoufakis confesses, “I have to say that I’m not very optimistic about the capacity of technological innovation, on its own, to change the course of history.” For Varoufakis, politics and people come first.

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