Tag: fiat

Central Banks Think Crypto will Fail – This is Why They’re Wrong

We typically think of crypto as a threat to the traditional financial system, and therefore to the current industry incumbents and institutional players - from JP Morgan and HSBC to Central Banks and the Federal Reserve. However, this over-simplified perspective ignores the fact that the current industry incumbents are actually among the blockchain technology's biggest investors, and that some Central Banks have been inspired by crypto to explore the possibility of Central Bank-issued  digital currencies. So, is crypto a threat or an opportunity for these giant companies and institutions? The answer is both. Blockchain technology is an opportunity for traditional players because it has the potential to eliminate bottlenecks that exist within the current financial paradigm. Visa is exploring blockchain as a way to facilitate faster cross-border transfers, while Deutsche Bank believes they can aid faster clearance of securities trades. With few exceptions, the opportunities that traditional players see in adopting blockchain technology are those which would improve back-end processes, creating monetary savings. The position of traditional incumbents who see blockchain technology as an opportunity rather than a force of disruption feels a little similar to the position of Blockbuster CEO Jim Keyes in 2008, who famously said: "Neither RedBox nor Netflix are even on the radar screen in terms of competition." Ten short years later, Netflix is worth $118 billion and Blockbuster is largely out of business. Incumbents limit their perspective to what they can imagine within the current paradigm, in a way that tends to leave them flat-footed in the face of disruption. They can imagine new technologies as complimenting their existing services, but not disrupting them. But blockchain and crypto-native startups, like Netflix and the Internet, are a genuinely disruptive force and they're not going away. However, the fact that crypto is a threat does not mean that traditional institutions necessarily view it as such. In fact, many of them remain very sceptical. Earlier this year, the research bureau of the People's Bank of China published a paper written by one of its employees on "What Blockchain Can Do and What it Can Not". The paper's central conclusion was that cryptocurrencies will not replace the fiat monetary system, but that blockchain technology itself holds promise. In other words: Blockchain, not Bitcoin. Sound familiar? More recently, Nic Carter - Cofounder of coinmetrics.io - took to Twitter to publish his account of the sentiment of talks held at DC Fintech week at the International Monetary Fund (IMF). One panel was made up of central bankers - Nic summed up their sentiment like this: "- they are laser focused on central bank digital currency - they have 0 concern about BTC/crypto threatening dominant monetary regimes - general view that everything can be regulated  - do not hate crypto, just indifferent" This echoes the sentiment of the paper from The People's Bank of China - central banks are confident in the superiority of fiat and aren't worried about the potential of cryptocurrencies to topple it. If this position sounds overconfident, that's because it is. The fiat monetary system is failing, and it's not clear if things can be made better within the system. John Hopkins University economist Steve Hanke believes that prices in Venezuela are doubling every 52 days, having risen by 12,875% during 2017.  Inflation and quantitative easing - flooding the economy with more cash to stimulate growth, as was done throughout the West in the early 2010s - cause asset price bubbles, an upwards transferral of wealth from the many to the few and steal wealth from savers and wage workers. The national debt of the US is $21.6 trillion, and it's ordinary workers who will have to pay this off as the the value of their salary is inflated away. Fiat is failing, and crypto is offering a genuine alternative. The positive thing for crypto believers is that what central banks think probably doesn't matter too much. Disruptors don't need permission from incumbents. Disruptors innovate to better meet people's needs, and incumbents simply see their relevance decline as the new world is created around them.

Articles/December 11, 2018

Fiat to Crypto: A Once in a Lifetime Paradigm Shift (Part 2)

Back in part one we spoke about the importance of money in allowing human societies to scale (if you missed part one of this post, and would like to start at the beginning, click here).  A monetary system that can facilitate trade between parties who don't necessarily trust each other is one which can support a society as it grows. The more barriers it removes, the larger such a society can scale, and the more complex its economy can become. We also spoke about how, in order to function properly, money needs to be hard. It must be hard to devalue either through increasing the supply or through it becoming worn down over time through use. Part two of this post seeks to explore how all of this applies to the present day and, more specifically, to crypto.  We cannot understand crypto without taking a look around ourselves at the context out of which crypto has burst forth into the world. The macro-economic context of the present day is important, because it's this that helps us to understand crypto as an answer to a number of current problems as opposed to something that's just cool, new and different. First of All, Hard Money Matters... Hard money is not just important in a theoretical or macro-economic sense - it actually changes the average person's day to day behaviour in a way they likely don't realize. Hard money incentivizes people to become more future-focused, to save and to create real value in order to accumulate wealth. When money is easy it incentivizes people to spend and consume, and even to try to 'game' the system by becoming wealthy without contributing. “Whether in Rome, Constantinople, Florence, or Venice, history shows that a sound monetary standard is a necessary prerequisite for human flourishing, without which society stands on the precipice of barbarism and destruction” - Saifedean Ammous, author of The Bitcoin Standard. Unfortunately, you're reading this at a time when money is not hard, but easy. Arguably very easy. Easy Money and Fiat Currencies You're likely already familiar with what fiat is, as the crypto community is rather scathing of it. Fiat currencies are those created and backed by nation-states, unpegged from any 'hard' asset and therefore free to fluctuate in value against one another. In a nutshell, fiat is problematic because it's easy money. Governments like fiat because it’s flexible and allows them to be reactive, adapting to the needs of the day by either raising interest rates or issuing more money. The latter - quantitative easing - is what many governments did after the financial crisis in 2008 in order to stimulate the growth they desperately needed. But the crypto community isn't angry about fiat for no good reason. Fiat currencies are very problematic too. As opposed to an economy based on the gold standard, in which creating new money is necessarily hard, 'forcing' people to create value in the world in order to be compensated, a fiat economy can create new money from thin air through 'government magic'.  The past 45 years since fiat currencies took over have been characterized by continued inflation, rising inequality and increasing national debt burdens. The devaluation of currency forces people to put their money into more stable assets, which creates a monetary premium, inflating the value of an asset beyond its utility and often creating unsustainable bubbles.  Take real estate, for example. House prices are still rising because people will keep paying more and more for a house. Why? Because real estate is one of the only assets they have access to that has for the last few generations has proven to be a stable store of wealth. Kyle Samani of Multicoin Capital explains further: "Since President Nixon took the USD off the gold standard, investors have increasingly stored their wealth in all kinds of non-money assets to escape fiat inflation...The assets that have absorbed these flows away from inflationary fiat are real estate, debt, and equities...As such, a massive amount of the world’s wealth is being stored in debt, equities, and real estates specifically as a way to avoid fiat inflation." The assets that have absorbed these flows away from inflationary fiat are real estate, debt, and equities. As central banks have printed exorbitant amounts of money over the last decade since the financial crisis, they’ve primarily purchased debt. This artificially raises the price of debt and lowers yields, which then causes investors to allocate even more capital to other asset classes, primarily real estate and equities. As such, a massive amount of the world’s wealth is being stored in debt, equities, and real estates specifically as a way to avoid fiat inflation. This would not be the case if our currencies were hard. To put the problem with easy money simply: Easy money changes people's conception of value and their financial behaviour, encouraging short-term thinking, spending and consumption. A system which people know the money they earn now will be worth less next year - because it's a feature of the system - is one which incentivizes spending and consumption over saving. For those that nevertheless do save, a system which disincentives putting one's capital to work productively by creating value in the world instead of just trying to beat inflation, is a dysfunctional system. The problem for you and I is that in a world of fiat currencies, we're forced to play a speculative game of investment in order to protect the value of our money and allow our wealth to accumulate. It's not an option to simply keep cash because its value will deteriorate over time.  However, beating the markets is a rich man's game. The barriers to entry on things like accredited investor laws, up front and setup fees on mutual or index funds, the costs of financial advisors etc. means that our current fiat financial system basically amounts to an organized upward transferal of wealth from the many to the few. Enter Bitcoin It's in this context that, on January 3rd 2009, the Bitcoin genesis block was mined. You'll likely already know that Satoshi encoded the words of a headline from a U.K. newspaper into that first block: "Chancellor on brink of second bailout for banks" and, in doing so, cemented Bitcoin's mission as an alternative to the worst over-exuberances of the fiat system. Bitcoin represents perhaps the hardest money that has ever existed.  As we said in part one, money is hard if it cannot be devalued through either increasing its supply or wearing it down through use. From a supply perspective, Bitcoin's supply schedule is fixed and transparent - we know exactly how many new bitcoins will be minted, hour by hour, from now until the end of its life. From a durability perspective, Bitcoin is a digital asset that cannot be destroyed by any central entity - its main vulnerability is a 51% attack, which is arguably very unlikely. That Bitcoin is hard is profound because the barrier to entry is so low. Bitcoin represents an opportunity for hundreds of millions of people to move their money into a hard asset for the first time - something that many simply can not do because the barriers to entry (e.g. the size of a house deposit) are too high. Let's return to Kyle Samani, in his blog post titled '$100 Trillion', to explain the potential impact of this: "Although it’s come to be accepted that many assets can act as a store of value to hedge fiat inflation, I assert that on a long enough time scale, we’ll look back and think it was crazy that non-money assets ever gained a monetary premia that’s measured in the tens of trillions of dollars. Now that we have objectively better state-free money, capital will slowly flow out of these non-money assets into money-assets, of which cryptocurrencies are by far the best option." The effect of such democratization of access could be a mass-scale societal shift in mindset - from spending, consumption and debt to saving money and creating wealth. From a short-term to a long-term focus. Easy Exchange = Greater Societal Scale... It's not just that Bitcoin is hard either. Bitcoin represents the potential for a money that lives natively on the internet, being transported as easily as information is now. Consider the changes that the internet has had on the world over the last 20 years through removing the barriers to free and permissionless exchange of information. That communication and information now lives on the internet has made for open source, open access conditions have changed the world. Blockchains can do this for money. Crypto can facilitate trade and exchange between people across national borders in a way that the traditional financial system cannot. By doing so we're likely to see a reorganization of human society that sees nation-states become less relevant. Conclusion To sum up, greater Bitcoin adoption could represent a move towards hard money. This could lead to a difference in society's conception of value that sees a greater emphasis on saving and creating value than on spending and consumption. This is a profound shift because we're arguably living within a monetary paradigm that is almost exactly the opposite of this. Bitcoin and crypto are also pioneering a kind of money that lives natively on the internet, which will remove many barriers to exchange and facilitate easier trade. Whenever this has happened through history, it has resulted in humans organizing in larger groups - nation-states could become less relevant as a truly global economy emerges. It's important at times, particularly during bear markets, to take a step back and remember just why we became so interested in this space in the first place. Crypto is a rabbit-hole that many never want to emerge from, and that's a fantastic thing. Keep up with the Cryptonomos blog to stay up to date with the latest developments, as well as exploring some of the more timeless themes within crypto. See you again soon! Resources for Further Exploration: Shelling Out - Nick Szabo (essay) $100 Trillion - Multicoin Capital (blog post) Invest like the Best - Saifedean Ammous (podcast) The Quiet Master of Cryptocurrency - Nick Szabo - The Tim Ferriss Show (podcast) Saifedean Ammous - The Bitcoin Standard (book) The History of Money - Jack Weatherford (book) Debt: The First 5000 Years - David Graeber (book) Yuval Noah Harari - Sapiens (book)

Articles/November 8, 2018