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Nov 1, 2018

Will we all be using a blockchain currency some day?

Posted by in categories: bitcoin, cryptocurrencies, economics, government

At Quora.com, I respond to quetions on Bitcoin and Cryptocurrency. Today, a reader asked “Will we all be using a blockchain-based currency some day?”.

This is an easy question to answer, but not for usual Geeky reasons: A capped supply, redundant bookkeeping, privacy & liberty or blind passion. No, these are all tangential reasons. But first, let’s be clear about the answer:

Yes, Virginia. We are all destined to move,
eventually, to a blockchain based currency.

I am confident of this because of one enormous benefit that trumps all other considerations. Also, because of flawed arguments behind perceived negatives.

Let’s start by considering the list of reasons why many analysts and individuals expect cryptocurrencies to fail widespread adoption—especially as a currency:

  • It lacks ‘intrinsic value’, government backing or a promise of redemption
  • It facilitates crime
  • Privacy options interfere with legitimate tax enforcement
  • It is susceptible to hacks, scams, forgery, etc
  • It is inherently deflationary, and thus retards economic growth
  • It subverts a government’s right to control its own monetary policy

All statements are untrue, except the last two. My thoughts on each point are explained and justified in other articles—but let’s look at the two points that are partially true:

  1. Indeed, a capped blockchain-based cryptocurrency is deflationary, but this will not necessarily inhibit economic growth. In fact, it will greatly spur commerce, jobs and international trade.
  2. Yes, widespread adoption of a permissionless, open source, p2p cryptocurrency (not just as a payment instrument, but as the money itself), will decouple a government from its money supply, interest rates, and more. This independence combined with immutable trust is a very good thing for everyone, especially for government.

How so?

Legislators, treasuries and reserve boards will lose their ability to manipulate the supply and demand of money. That’s because the biggest spender of all no longer gets to define “What is money?” Each dollar spent must be collected from taxpayers or borrowed from creditors who honestly believe in a nation’s ability to repay. Ultimately, Money out = Money in. This is what balancing the books requires in every organization.

This last point leads to certainty that we will all be using a blockchain based cryptocurrency—and not one that is issued by a government, nor one that is backed by gold, the dollar, a redemption promise—or some other thing of value.

Just like the dollar today, the value arises from trust and a robust two sided network. So, which of these things would you rather trust?

a) The honesty, fiscal restraint and transparency of transient politicians beholden to their political base?

b) The honesty, fiscal restraint and transparency of an asset which is capped, immutable, auditable? —One that has a robust two sided network and is not gated by any authority or sanctioned banking infrastructure

Today, with the exception of the United States Congress, everyone must ultimately balance their books: Individuals, households, corporations, NGOs, churches, charities, clubs, cities, states and even other national governments. Put another way: Only the United States can create money without a requirement to honor, repay or demonstrate equivalency. This remarkable exclusion was made possible by the post World War II evolution of the dollar as a “reserve currency” and the fractional reserve method by which US banks create money out of thin air and then lend it with the illusion of government insurance as backing. (A risky pyramid scheme that is gradually unravelling).

But, imagine a nation that agrees upon a form of cash that arises from a “perfect” and fair natural resource. Imagine a future where no one—not even governments—can game the system. Imagine a future where creditors know that a debtor cannot print paper currency to settle debts. Imagine what can be accomplished if citizens truly respect their government because the government lives by the same accounting rules as everyone else.

A fair cryptocurrency (based on Satoshi’s open-source code and free for anyone to use, mine, or trade) is gold for the modern age. But unlike gold, the total quantity is clearly understood. It is portable, electronically transmittable (instant settlement without a clearing house), immutable—and it needn’t be assayed in the field with each transaction.

And the biggest benefit arises as a byproduct directly of these properties: Cryptocurrency (and Bitcoin in particular) is remarkably good for government. All it takes for eventual success is an understanding of the mechanism, incremental improvement to safety and security practices and widespread trust that others will continue to value/covet your coins in the future. These are all achievable waypoints along the way to universal adoption.


Philip Raymond co-chairs CRYPSA, hosts the Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He advises The Disruption Experience in Singapore, sits on the New Money Systems board of Lifeboat Foundation and is a top writer at Quora. Book a presentation or consulting engagement.

5

Comments so far

  • Caycee Neely on November 1, 2018 4:59 pm

    “It lacks ‘intrinsic value.’
    It seems that your argument is that this is irrelevant because regular currency has no intrinsic value. However, this is not an excuse, but it also not an excuse for regular currency. In fact, the lack of connection to some real universe asset is a problem with bitcoin and regular currency. This issue needs to be resolved which is why I like SolarCoin, which combines the best of cryptocurrency and the need for a connected real-world value.
    https://solarcoin.org/

  • Philip Raymond on November 1, 2018 5:27 pm

    I respectfully disagree, Caycee.

    Related:
    What exactly backs Bitcoin? http://awildduck.com/?p=4904

    Even gold has questionable “real world” value when used as a currency. Only a very small fraction of gold demand and consumption is used for electrical and dental. The rest is either used to adorn the body, add pretty touches to buildings and picture frames or hoarded due to the imagined demand of one’s neighbors.

    Aristotle never defined “intrinsic”, but it has long been assumed to mean a value unto itself, because of its importance to mankind. By this definition, we had best barter with food, clothes, housing or artificial knees and hips.

    I believe that value arises from supply and demand — and absolutely nothing else. And so I am keenly fascinated on what sustains demand, and is it likely to continue sustaining demand. IMO, trust in a currency is sustained by trust and a capped supply. Bitcoin has both. The dollar only has history and it is not a great history. Many of the creditors and countries that value the dollar are searching hard for a replacement.

    We need water, but if one is not crossing the desert, we don’t value it so much, because in our homes, the supply usually exceeds our needs. We value dollars because they are widely recognized; have a large, fluid market; and haven’t tended to inflate as much as the currencies of other nation.

    But with massive debt eroding looming under the surface and countries that see USA-keystone status as a handicap, the world is beginning to shun the dollar as a reserve currency. There is an alarming race to accurately guess the next trusted settlement chit, at least for large international contracts. For these reasons, I believe that bitcoin is also likely to become the next legal tender. It serves all of the desirable qualities of a reserve currency without the baggage or susceptibility to manipulation or conveying preferential benefits.

    ~Philip

  • Caycee Neely on November 5, 2018 7:42 am

    “I respectfully disagree, Caycee.”

    I’m sure you do. Plenty of cryptocurrency people do because they refuse to accept a couple of factors related to cryptocurrency.

    I think the problem is that we rely on two separate definitions of intrinsic. You’re relying on “value in, and of, itself” while I’m relying on “originating within a body, organ, or part,” which is to say, a real object. In other words, cryptocurrency isn’t based on any real value or, as Dodd said,

    “a pure token devoid of any connection to an underlying material substance, money created ex nihilo, and as simulacra without reference to the real. With bitcoin, “money can be created out of nothing, i.e., from within the network itself. [1]”

    A statement that your reference also agrees with.

    “Bitcoin is backed by math, a firm cap, a completely transparent set of books, and the critical mass of a two-sided network. [2]”

    “I believe that value arises from supply and demand — and absolutely nothing else.”

    Even if that value is completely imaginary based on self-created limiting definitions? Bitcoin and the majority of the rest of the cryptocurrencies have created an artificial cap and pretended that it has some value based completely on your desire for it to be. They’ve also separated the creation of the currency from any real-world connection. There is no connection to the energy required to run the processes and they’ve managed to completely separate it by externalizing any costs in its creation.

    Just to reiterate, this is also the problem I have with most currencies. They’re not connected to any real resource and they externalize the real costs of their production. It is critical that we find a better way. Especially if we’re moving into space because we can’t keep ignoring the real costs and inefficiencies of our technologies.

    [1] Dodd, N. (2014), The social life of money. Princeton University Press, Princeton, NJ
    [2] Davies, E. (2017), Spell it Out: What, exactly, backs Bitcoin? A Wild Duck,
    [3] C. Mora, R. L. Rollins, K. Taladay, M. B. Kantar, M. K. Chock, M. Shimada, and E. C. Franklin, “Bitcoin emissions alone could push global warming above 2°C,” Nature Climate Change, vol. 8, no. 11, pp. 931–933, 2018.

  • Philip Raymond on November 5, 2018 11:04 am

    Just to be clear and transparent, Cacee, that reference is me (writing under the pen name that I use in my blog). And so, I am not suggesting that another pundit agrees with me. I was only pointing to that past article to clarify my position on intrinsic value.

  • Philip Raymond on November 5, 2018 11:28 am

    Caycee, you quoted Dodd: “[With bitcoin], money can be created out of nothing, i.e., from within the network itself.”

    Yes, but I believe that *ALL* forms of money are created out of thin air. The real question is why should we believe that Bitcoin has durable value, and not a dollar, Picasso painting or a caycee-coin? This is where a believable formula and a robust, two sided network come into play…

    In modern times—and especially in the internet era—money is more likely to take the form of testable credentials rather than a truckload of grain, goats or even gold. To be a widely recognized credential, the document, note or electronic proof must be something that is portable, transmittable evidence of value, net worth or promises, and it must be accepted almost everywhere.

    This leads me to my original assertion that money derives its value from just one thing: supply-and-demand (O.K. two things! Users also need trust. That is, they must have confidence in something). And since supply and demand ultimately floats freely, a fixed or very believable supply rate takes high-risk uncertainty out of the equation.

    Goats cannot be easily transported or transmitted and grain goes bad if it is not carefully stored. (If carefully stored, then the owner still has a need for portable and transmittable evidence of his assets).

    Bitcoin is more real, tangible, and desirable than any other chit that comes to mind. The only reason that I compare the US dollar (i.e. for believability, supply confidence, likelihood of inflation), is because the dollar is widely recognized and it has been widely trusted for the past 150 years. For all this time, it enjoyed a reputation for slow inflation (at least during periods of economic growth). That is, its purchasing power has not rapidly eroded.

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