Central Banks Can’t Ignore the Cryptocurrency Boom
bloomberg.com
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It seems the tech bubble that is being predicted for the last decade would manifest itself in a slightly different form. I doubt that the end-result would be anything different than a crash.
With crypto currently, there is a similar pattern. I follow the Ethereum ecosystem closely, and there's an incredible amount of projects that just say they will do something with crypto and blockchain, and they get millions or tens of millions - and in the most ridiculous case, you have Golem with its 0.5 billion valuation. The projects that aren't outright scams still rarely have anything functional and worthwhile, just like the many dot-coms of the 90s. But the underlying technologies, the blockchain as a concept and the blockchain-as-VM the way it's being done with Ethereum and NEO, I think those are incredibly significant and not going away.
And there are probably a few crypto projects around now that are going to end up being significant (just like the dot-com bubble also gave us Amazon and Google, it wasn't all failures). One such project I like is Sia. It's not too hyped up but it solves an interesting problem, and it actually works.
If those were called «crypto-highly-speculative-assets», that would have been a totally different story. But "Currency"?! That is way to off.
I think this is too absolutist. I don't think BTC or cryptocurrencies in general, to be successful, don't have to have do all of that __today__, or at all. They just have to chip away along the margins, as they have so far in order to become more attractive to people to use for exchanging goods/services. In the US, I could only pay for my electricity usage in USD, in Indonesia, I can use BTC. People speculating on BTC face similar risk considerations as people speculating on any asset.
>That, in order for you to have a stable exchange rate when you need public services, like health services or to pay taxes…
In any system of resource allocation, you need people to buy into it and stay invested, and as I can see, the balance sheets of "real state economies" are having a hard time getting people to stay invested through typical means that states have established channels. Unless one thinks that continuously selling T-notes to CB's or private investors by collateralizing ones taxation ability through typical channels, or CB's buying up all corporate stocks/bonds will be enough to win the hearts and minds in the long run…
>Otherwise, just having always to exchange your BTC in the de-facto currency so you can do your daily stuff, that is just not money. You can call it whatever else you want.
As an expat living abroad, this isn't really issue since I need to do it anyways to convert from whatever currency you have to what you need to use, and ones habbits are reaptible enough that you should be able to get a good guess to withdraw enough to cover a period of time to minimize the inconvience. And there's increasingly more options in how to go about this than there was say 5 years ago. I think there is more freedom by being able to be exposed to numerous amounts of currencies to be able acquire/leverage goods and services than just being locked into just one.
While I do agree that there are a bunch of socks.com (1997) token equivalents, some of these technologies will change the internet for decades to come.
I just wish I knew which ones :).
You can't pivot a currency the way you can a corporation, and I think that will make a difference in how long cryptocurrencies last.
If you really wanted to make a ton of money on cryptocurrencies, you'd develop the Google to ETH's Ask Jeeves.
I don't have the time to actually make a client -- but there's definitely some low-hanging fruit in terms of improving the marketplace. Satoshi proposed a brilliant solution to a distributed trust problem -- and we'll likely use the kernel of that idea for a long while to come -- but that doesn't mean the first generation or two of implementations are going to be long-term survivors.
(This is a joke.)
And by their very definition, don't expect either party to fully recognize each other. Central banks operate on the premise of centralizing, cryptocurrencies operate on the premise of decentralizing.
[1] A rather old post, on ex-Fed (Central Banker) Alan Greenspan take : https://www.coindesk.com/bitcoin-intrinsic-value-alan-greens... [2] A recent post, on current central banker of Mexico take: https://www.coindesk.com/bank-of-mexico-governor-bitcoin-mor...
That's a weird way of wording that. The US Dollar (along with many other currencies) doesn't meet the definition of a "backed currency", because it doesn't have a direct correspondence with the value of a commodity. If the value of a currency isn't guaranteed, it isn't backed. Instead, the value of the US dollar is determined by imports/exports, interest rates, monetary velocity, confidence, etc.
There are many other differences that the US dollar has with bitcoin that are more concrete:
1) It's legal tender in the US
2) It's exclusively accepted for the purposes of taxes (follows from 1)
3) It has a dynamic (as opposed to bitcoin's fixed) monetary policy (which is either good or bad depending who you talk to)
4) It's the world's reserve currency
5) It's far more popular than bitcoin
6) It's not deflationary (which is either good or bad depending who you talk to)
https://en.wikipedia.org/wiki/Quantity_theory_of_money
If so, then a fixed money supply is necessarily deflationary in an expanding economy.
Of course, by that same argument, the US should be experiencing massive inflation right now due to the actions of the government during the financial crisis which led to a tripling of the monetary base, and yet it never materialized...
- Monetary inflation and price inflation are different things. Right now we have unprecedented monetary inflation in terms of base money, but almost no price inflation.
- Price inflation is always a very non-linear function of its drivers.
- Price inflation also doesn't have to be uniform. Some people would argue that the monetary measures taken after the financial crisis have already led to price inflation, namely price inflation of financial assets such as bonds and stocks. In this view, the money has been sloshing around the world as excess liquidity, being passed on like a hot potato that nobody wants to hold, propping up new bubbles but without leaving the financial system.
- A simple quantity theory of money may not apply because we live in a complex credit based system. Base money is just a liability of the central bank. We don't pay and save much in base money, we pay and save mostly using liabilities of private banks. As long as the increases in base money don't trigger increases in these broader forms of money and credit (this is what it means when they say "the transmission mechanism has broken down" or "the velocity of money is too low"), we shouldn't normally expect any direct impact of base money increases on price inflation.
About bitcoin: any healthy, advancing economy running mostly on actual bitcoins as a medium of exchange would probably see price deflation in terms of bitcoin. If we were to have technological progress like we had the last 50 years, the price deflation would probably be unprecedented. But if we could manage to piramid ever increasing amounts of credit on top of actual bitcoins and pay and save mostly in those credits, probably not so much :-)
It's not that it's explicitly shrinking itself. It's that it's shrinking relative to other factors because it has a fixed supply.
Caveat: this presupposes that Bitcoin will become a medium of exchange.
The US dollar is not deflationary because it is inflationary. I wasn't really trying to make a distinction between the two, I just worded it weirdly in the OP.
As for question 2:
There's two parts to this answer. First, you don't need a money supply to be shrinking to have deflation. In May the US dollar deflated 0.1%, and plenty were printed [1]. Many things can cause deflation, see this: https://en.wikipedia.org/wiki/Deflation#Causes_and_correspon...
Second, bitcoin does have more money mined every day, just like the US dollar. And the rate of bitcoin mining (4%/year) is actually higher than the rate of US dollar printing. However, bitcoin has a predetermined monetary policy: the mining rate will eventually drop to zero, which is why many people argue that bitcoin is deflationary.
[1] https://blogs.adobe.com/conversations/2017/06/may-dpi-report...
Australia seems to recognise Bitcoin as currency [1], as does Japan[2].
1. http://www.businessreviewaustralia.com/finance/2403/Australi... 2. https://www.cnbc.com/2017/04/12/bitcoin-price-rises-japan-ru...
Neither are shares, yet banks are trading them on regular basis. Thinking of bitcoin as a currency makes as much sense as using shares/stock exchange to pay for groceries.
EDIT: thx to everybody who replied! That being said, I would have really liked to discuss the actual technicality of blocking a cryptocurrency :-) E.g. what technical measures could a hostile government take against bitcoin and how would any circumvention techniques, if they exist, impact scalability and usage of bitcoin. A lot of answers here just give reasons why a govt would never do something like this; or that there are other ways of discouraging bitcoin users; or that it wouldn't affect users outside of that country (wouldn't it though?). I think the dependence of cryptocurrencies on IT infrastructure is an important issue, as it puts boundaries on the extent to which a cryptocurrency's can truly be considered decentralized. I think we should assume that, given enough time, any cryptocurrency that makes it to the big leagues of being used as transaction money will be put to this test. And if it fails this test, its use cases will be more limited than what some currently think.
I think crypto-anarchists will always find technology to "route around" any bad sectors in the network. Even if it comes down to sharing e-wallets via secure bluetooth mesh networks in ad-hoc fashion.
The more impactful story may be the way Big Banks are adopting blockchain tech. As with the R3 consortium and open-source Corda project:
Another data point to watch is LedgerX, the first LedgerX CFTC-regulated Swap Execution Facility (SEF) and Derivatives Clearing Organization (DCO) for crypto currencies.
If you view them as what they are, a commodity, you realize all you need is a buyer and a seller of that commodity. Whether or not you can trade that commodity for goods and services is entirely irrelevant.
The market for crypto-currency is very very small - much smaller than similar forex markets.
You're just trading one set of masters for another, in this case, it's the influential contributors and organizations that act as a defacto steering committee for bitcoin and the mining cartels that monopolize the hashing power. You might say "bitcoin is controlled by the masses", but this is only true in the sense that any ostensibly democratic government derives its power from the governed. At the end of the day, a small group of people will make decisions for everyone, especially if the stakes rise to a level where bitcoin is anything other than a technical novelty (which it still remains, despite what the relatively high prices would have some believe).
> it also happens to be a viable currency
No it's not. It could be one day, but in my personal opinion it will always remain as a "back channel" currency utilized only by enthusiasts and those with an explicit need to avoid the traditional banking system. There will never come a time when bitcoin is generally acceptable because there is close to zero incentive for the general public to use bitcoin.
> This is what everyone wanted, right? The end of central banks, the end of fiat currencies, the end of pointless middlemen, clearing houses and transaction fees
This is not happening and never will. Central banks and fiat currencies will always exist and bitcoin has its own competing system of pointless middlemen and transaction fees which will only increase if bitcoin becomes more popular and when mining rewards eventually fizzle out.
More accurately stated:
Money as we know it depends on the authority of the state for credibility, with central banks typically manipulating its price and/or quantity.
Which is why Cryptocurrency is attractive in the first place.
I expect if you did a survey, a very small, very libertarian group of cryptocurrency "investors" may be concerned about governments managing their respective currencies.
The vast majority just wanna make money on the hottest new thing. A subset of those people might even believe in the fundamentals. The rest are just glorified gamblers.
The more things change the more they stay the same. LOL
Here's a tweet that said it perfectly: "Cypherpunks are libertarians who stopped whining." https://twitter.com/oleganza/status/902942938820263937
Oh please. This is just like someone's mom telling their kid "they're bullying you because they're jealous".
The arguments against cryptocurrencies are legion. Some of those are arguments are very good. Some not so much.
But this argument of yours is nothing more than a baseless ad hominem attack leveled at people you disagree with.
https://cointelegraph.com/news/former-chairman-of-federal-re...
If he's jumping on board, then I imagine central banks are already looking at it.
It'd be easy to construct a network, either from-scratch or a fork of an extant blockchain, where they set up rules that allow them to manipulate with minimal effort while maintaining the appearance of independent mining and consensus algorithms. If they wanted to, they could pretty much already do this with bitcoin itself, which is still small potatoes to a state-level actor looking to disrupt it.
And of course, the permanent, irrevocable public ledger of every transaction ever is the ultimate tool for concocting false associations.
You mean you accidentally contributed 3% of the bitcoin that was used to fund a drug operation 2 transactions down the chain? Sure, tell it to the judge. It doesn't matter that we didn't unearth this until after you published an article critical of the Central Money Authority! That is purely coincidental.
People learned long ago that the best way to undermine a burgeoning movement is not to moralize or criticize its obviously-resonant principles or core properties. It's to build something that you can continue to control that appears to have those same attractive qualities. Meet the demand with a trojan. Big companies and governments do this constantly.
At this point, cryptocurrencies are just tradable speculative assets. They are not first-class-citizen currencies due to the major flaw exposed above.
No government in this world will ever give up the power to control its currency through this body called "the central bank".
The only one condition to make this a true currency that is out of the hands of the central banks is that EVERYBODY in this world will give up their currency and adopt ONE AND VERY SAME cryptocurrency. Since this is not a plan a government is willing to accept, they won't accept the cryptocurrencies either, since governments are the biggest money handlers.
If that is not possible, and very likely not to be, having a central bank to control a cryptocurrency cancels the very important and crucial attribute of the cryptocurrencies – the decentralization and the distributiveness – defeating its purpose.
Excuse me, I am. Expedia, Cheap Air, NewEgg, Microsoft, Dell and lots of other merchants accept it and I used them.
It is exactly like paying goods and services with, let's say, Apple stocks, only that the price will always fluctuate depending on the DOLLAR quotation of the Apple stock at the time of the payment.
There's some truth to that in terms of merchant acceptance of BTC not being widespread (even though from a merchant perspective BTC is very attractive compared to regular methods of payments).
That said - couple of comments. 1. All of the "enterprise" type BTC payment acceptance systems that I'm aware of end up with fiat currency transferred to merchant's bank. They typically don't keep BTC balance. So the "speculation" point isn't really valid.
2. This ^^^ is one of the biggest hurdles in the way of a more widespread BTC acceptance. Banks are very suspicious of BTC-originating TXs for various reasons (AML, regulatory compliance etc) so it's not an easy thing to set up an end-to-end payment acceptance flow with BTC from that perspective.
At the end of the day, those BTC are exchanged into dollars, or even right away, making the the dollar the de-facto currency you used for purchasing the goods or services.
If the merchant receives the funds in a fiat currency account in a bank, then the bank worries about AML and related issues so that the merchant wouldn't have to do that - receiving money to a regulated financial institution exempts your business from most of these regulations, but if merchants such as NewEgg, Expedia, CheapAir and others would accept BTC "directly", then the same rules as for cash transaction would apply, namely, they are responsible for ensuring that high value transactions or repeated low value transactions that add up to a lot of value cannot be anonymous, they become responsible from enforcing KYC (know your customer) requirements, they become responsible for any laundering done through their channel if someone finds a way to do this, etc.
The only way how a legitimate business can deal with cryptocurrency (or cash) in large volumes is if they can ensure that the expected benefits of cryptocurrency (unrestricted ability of anonymous/pseudonymous trade) don't get used. The only high-value goods that get sold/bought with BTC are illegal items. The regulations don't affect selling coffee for BTC (but high transaction fees do), but if you want to do serious transactions - transfer wealth, buy lots of electronics, cars or real estate, settle financial deals or stock purchases - then that won't work with anonymous cryptocurrency unless you have appropriate paperwork documenting how you got it, or are ready to pay extra tax (you know that if you bought BTC for $10/coin and sell it for $1000/coin, then the difference is taxable income, right?). It's the same manner as allowing your customers to pay for stuff with a briefcase of cash - you can do that, but you'd need to report the transaction, identify the customer, and that customer would either have a clear source for that briefcase of cash or would have a talk with IRS.
That's the thing - they don't want to keep BTC balance which means merchants or their payment processors have to deal with the banks who are very reluctant to deal with BTC-originating payments which is a pretty significant obstacle in the way of BTC payments becoming more mainstream.