Money is just a measure. Like an inch or centimeter. Instead of measuring length, it measures ‘value’ in ‘standard’ units (eg dollar bills).
What ‘backs’ the units is the total natural, human, built, technological, organizational and legal resources of the society that accepts it.
The seller alone provides value in the form of real goods and services.
The buyer simply provides the seller with an agreed ‘record’ (in the form of paper or digital ‘notes’) of the value that the seller provided to them.
The seller can then use the notes (money) to recover the same amount of value from the rest of the community — when they come to spend it.
That is, in the ideal world, you get to take out equivalent value to what you put in… not more or less.
For this to work, the purchasing power of the notes must be relatively stable over time. This means that the amount on issue must remain roughly in balance with the (growing) size of the economy.
Business also requires a (relatively) stable currency to determine ‘profit and loss’ which is essential for economic efficiency.
Inflation is bad, because it advantages the holder of assets over the holder of money. Deflation is bad, because it does the reverse.
So, let’s consider cryptocurrencies in this context.
Bitcoin has deflation built in. On ‘Pizza Day’ in May 22, 2010, Laszlo Hanyecz paid 10,000 Bitcoins to have two Papa John pizzas delivered. The Bitcoin price reached a high of US$68,789 in 2021, making the two pizzas worth almost US$690 million. It’s now worth about 40% of that.
Imagine the outcry if we applied the same metric to fiat… but in reverse.
Imagine if inflation had turned US$690 million in 2010 into about US$40 in 2021!
Bitcoin makes terrible money. Not only is it inherently deflationary, it is highly volatile.
Volatility is likely made worse by the fact that it closely held, putting it at risk of pump and dump by the ‘whales’ that hold it. With no ability to trace beneficial ownership, prices can be pushed up by trading between your own accounts. Then selling out to third parties at the peak and buying back in at the bottom, making a profit in fiat, without losing your stash.
Nor can it handle anywhere near the volume required to facilitate normal trade.
Due to its volatility, no business accepts it — other than as a pure gamble, or as a marketing ploy where the Bitcoin that is accepted is immediately on-sold for fiat.
Bitcoin is a closed system. It does nothing but record the transfer of ownership of a bit of code on the blockchain from one person to another. In the process, it consumes huge amounts of talent, energy and computing power. Looked at this way, the total cost of each transaction is currently over US$70! The code that is transferred does nothing. It has no cash flow. It cannot be used in any other process like a commodity. It has no underlying value like a share in a company that produces real goods and services.
As it cannot be used for money, it is now used solely to ‘make money’ (measured in fiat… because even crypto enthusiasts still need a stable measure to know if they are ahead or not).
As for making money, both miners and traders only make money if they can find someone who will buy their ‘bit of code’ for more than they paid for it. While the buyer buys only with the same expectation, and so on along the chain of buyers. I know you’ve heard it before, but the requirement for a constant inflow of new buyers to pay out a profit for existing ‘investors’ is the definition of a Ponzi.
Bitcoin is most like counterfeit money.
A counterfeiter uses energy, ink, paper, plates, premise and people to make fake notes that give the counterfeiter and distributors an ‘unearned’ claim on society’s resources. Counterfeiters may claim that they are ‘doing work’, but the work benefits only themselves and those in the distribution network. As far as society is concerned, it is a net cost in terms of the resources used to create the fake money, plus the claims made on society for goods and services that the fake money provides.
Bitcoin miners do the same. They use energy, people, premises, and chips to create tokens that give them an ‘unearned’ claim on society’s resources. Again, miners claim they are doing work, but like the counterfeiter and its distributors, the work only benefits the miners and those in the distribution network; particularly those who bought in early and who still hold the majority of the tokens.
As for providing ‘services to the unbanked’, Phillip Rosedale, founder of Second Life, has undertaken a series of simulations across a wide range of crypto (including Bitcoin) to show that most of the benefit accrues to the original promoters who retain most of the initial coins. He claims crypto-wealth is more concentrated than wealth in the real world, and that this has not changed significantly despite years of new issues and trading, indicating the likelihood of ‘churn’ via cycles of ‘pump and dump’, and ‘buying back in at the bottom’.
Cryptocurrencies are also used to evade taxes, or for money laundering, or to pay for illicit goods and services, or for ransom.
Yes, fiat is used for those things too. But why add to the problem of enforcement by allowing crypto to proliferate, when it provides no added benefits and many costs for society?
Granted it is also claimed that crypto allows holders to escape a ‘failed state’. However, most people are stuck where they live. Having crypto will not get them out. The answer to a failed State is not crypto, but working on the governance and economic structures that stop the State failing in the first place.
No doubt there are some valuable uses for blockchain… Bitcoin (and similar) is not one of them.
As for ‘stablecoins’. By definition, they are ‘pegged’ to fiat (usually the USD). But then, if the USD falls, or worse fails, by definition, the stablecoin must follow suite. While fiat has its own risks, the stablecoin carries the additional risk that the peg fails. As is evidenced in this list: https://chainsec.io/failed-stablecoins/
The only reason for taking on the additional risk of the peg is that stablecoins are currently the best means of accounting profit and loss, and protecting your gains, while trading in the crypto sphere.
However, once the main currencies include Central Banks Digital Currencies (CBDC) as legal tender, with the capacity to transact instantly anywhere in the world for very little cost, there will be little need for law abiding citizens to use stablecoins.
There are obvious problems with fiat. But crypto is not the answer.
What if it is possible to reduce regulation, and allow banks to fail — without any impact on depositors, or any bank borrowers who are not in default, or the banking system as a whole?
It can be done. This paper, published by the Levy Economics Institute explains how:
It involves the use of Central Bank Digital Currencies (CBDC) for bank lending, and for all deposits and payments, without dis-intermediating the banks.
It can be implemented without changing the bank’s basic business model. And it can be done ‘over night’ without any impact on depositors or bank borrowers via a round robin of entries in the books of the banks and Central Bank.
All money would become legal tender like cash. Unlike cash, it would be immune from accidental loss or destruction or counterfeiting. It would also reduce the likelihood of theft. No deposit would ever again be at risk from a bank failure — without the need for guarantees or insurance.
The paper even explains how the same level of privacy can be maintained as now exists for bank accounts; as well as for ‘cash’ payments using CBDC downloaded to a device that would allow peer to peer payments.
It also offers a novel solution to make deposits more attractive than holding money on a ‘peer to peer’ device; that also aids economic efficiency.
And, it shows how the system could provide additional more targeted tools to help the Central Bank better manage the money supply to keep inflation and unemployment in check.
Society has long understood the need for a set of standards for all our ‘weights and measures’. Each nation only needs one standard for its currency. Though ‘Local Exchange Trading Schemes or Complementary Currencies’ can have local value, they still need to be pegged to the national standard.
Upon implementation of CBDC (if not immediately), all cryptocurrencies that do nothing but record the transfer of the token from one account to another account should be banned for use as currency, or as an investment (as they are nothing but a Ponzi set up using counterfeit money). All financial institutions should be banned from dealing with them directly, and from facilitating their use by clients.
This will also massively reduce the otherwise ever-increasing regulatory and enforcement burden arising from the continual increase of new tokens that can be produced by anyone at anytime, from anywhere around the world.
Banning will not eliminate crypto, but it will push it to the margins and make it very difficult to convert it into and out of fiat. It will also isolate any adverse impacts in the crypto sphere, so they don’t contaminate the real economy. Anyone dealing in crypto would do so at their own risk, and if engaging in illegal activities would be subject to prosecution.
Blockchain applications that deliver benefits in the real economy should be considered on their merits.
Let the comments roll :)