Sunday, February 12, 2017
The Tyranny of Currency
My January 25th Currency Manipulation 101 blog spoke of governments’ reconfiguring their paper money for various policy purposes – cleaning out bribe money (India), stopping currency hording (Venezuela), curtailing those trying to avoid government watchdogs, etc. – or simply to allow new forms of banking to evolve in very sophisticated countries (Sweden) where paper and coins are just vestiges of past and unnecessary practices or developing nations (Kenya) where traditional banking just cannot reach into the majority of the grassroots population. But there are international political realities, some of them criminal, that are pushing the entire world away from currencies controlled by governments.
The new world order is led by a trend towards virtual currencies, increasingly accepted by mainstream business institutions around the world: Bitcoins and their ilk. This seems to be a natural progression in the history of money and commercial exchanges over time.
The movement into online financial transactions represents an evolution away from ancient in-kind trading societies, sea shells and jewelry, heavy gold, silver and copper coins and paper currency that pretty much is backed by faith (smoke and mirrors?). Even our basic “M-1” money supply (our “near money” or national currency liquidity) today is based on transactional values, money authorized by our Federal Reserve, and about half is reflected in actually issued currency notes. The rest is reflected in deposit accounts, which can be readily transferred into currency… but seldom are. From 1879 until 1933, our currency was backed by gold. The Great Depression and gold hording forced the change. Today, our dollar is simply backed by the full faith and credit of the United States.
But in a world of global turmoil, where mass migrations rip people from their homes and create millions and millions of stateless refugees, where internal factions are pushing parts of countries to reconsider their dependence on central state-controlled banking or where people wish to avoid the watchful eyes of government, we are witnessing the rise of intricately and elegantly interlinked, Web-based financial transactions (the “blockchain” phenomenon) that are not directly under the control of any governmental entity or denominated in any national currency. These are objective and tradeable “values” that can be converted into traditional currency equivalents but are equally capable of existing entirely on their own. The may rise and fall like any currency and carry with them the inherent risks of deal in values without the seeming reliability of governmental guarantees and controls.
Money values can flow across or within international boundaries in this convenient blockchain – Bitcoin – path, beyond the pale of government currency/trading bans and restrictions, outside of the formality of maintaining traditional bank accounts and not dependent on the political decisions of those trying to control the flow of money. Criminals may smile. Corrupt officials may wink and breathe a sigh of relief. But there are whole lot of mainstream participants in modern economies who have some pretty justifiable reasons for this alternative to traditional currency structures. From a simple and logical view of the evolution of money, the acceptance of virtual international currency just feels like it has to be the next, giant, step in the history of money.
The February 5th International Business Times examines this transitional phase, pitting sovereign governments trying to increase the control over their money supply and their subjects against those seeking political change, independence or simply a more global way to interact on the commercial stage. Today, most of us determine our economic identity in accordance with our citizenship or residence. But times are changing fast.
“The election of a new and unmeasured type of regime in the US, and the UK voting to stop the flow of people from the EU, have caused hundreds of thousands of people to take to the streets in recent weeks, and also in protest at foul and corrupt governments in Romania [where bribes under $48,000 were decriminalized], South Korea and Brazil.
“Meanwhile, people in India flocked to Bitcoin late last year after its government shocked and dismayed citizens when they announced the demonetisation of the of the 500 and 1000 rupee notes.
“The foundation for a potentially better new world will be the next internet generation, and the cornerstone of this will be digital identity. Identity on the internet is currently both centralised and balkanised: identities are piecemeal, differing from one internet domain to another. Systems like blockchain could bring a kind of ontological parsimony to digital identity, because in a digital context, where things can be copied and distributed easily at no cost at all, the Bitcoin blockchain solved the problem of ensuring that one thing (a coin) could be only one place at any time.
“In the world of identity, similar systems could be used to allow any person, organisation or thing to have an identity claim or relationship with any other. Using these identities and resulting relationships, without some intervening authority, is known as self-sovereign identity.” International Business Times. But if your financial reality – your down and dirty buying power – is determined by that digital identity that applies no matter where you are, then the dependency on a national currency – and the political strings that go with it – must fade.
The security and reliability of that digital identity will then move into the full faith and credit accorded within the interlinkage and verification stability within the relevant complex blockchain. Yup, lots of room for abuse. Yup, no one government (or predictable legal system) is standing behind the blockchain structure. But if you disagree with the government you are in or find it distasteful or even just inconvenient, perhaps then it’s not so bad. And if legal reliability can be built into that blockchain, it may actually be preferable to the currency of your domicile.
Here are some basics to understand how one of the most accepted underlying software systems is evolving: “Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.
”These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man or counterparty risk.” Ethereum.org. Bitcoin was built on the Ethereum platform.
Simply put: we can create new financial jurisdictions that can circumvent existing political cacophony and bridge gaps in banking and cross-border transactions. Think this is something for the distant future? Bitcoin is just one such effort. Even in the United States, companies like Overstock.com, Reddit, Virgin Galatic, Zynga, eBay, PayPal, Tesla, Tigerdirect, etc. currently accept Bitcoins. But there is a necessity for this direction of virtual currencies.
“Extreme circumstances call for extreme measures. During the refugee crisis which is still happening in Europe, a blockchain startup called Bitnation announced that it would issue digital IDs on a blockchain ledger to refugees. This would at least allow them to receive funds in Bitcoin from the family and friends they had left behind.
“Bitnation has partnered with the government of Estonia to work on blockchain identity, and it also offers marriage on the blockchain anywhere for any combination of creed, gender or religion. Bitnation's ultimate goal is grand indeed: the establishment of entire jurisdictions on a blockchain with new governance models and their own decentralised currencies – in other words new ‘nations’…
“Susanne Templehof, founder of Bitnation, said: ‘We have seen a lot more people joining Bitnation and creating their own local versions of it during the protests in Brazil and South Korea. It's an interesting development. People are not satisfied with the status quo. Why should we have to choose in each jurisdiction just one government service provider that lasts for four years?’
“Bitnation's 'governance 2.0' system works alongside the powerful Ethereum public blockchain community. Templehof provides practical advice on starting a nation. ‘Start by looking at governance service agreements. People normally start a nation with a flag and a national anthem. I would say do that last.’” International Business Times. Still, there are criminals and risks… always have been.
Throughout history, criminals have tried to pass false gold, forgers have created realistic paper currency, and most recently, hackers have stolen and ransomed their way to wealth, a threat that is not going away. Blockchains can be very complex verification systems, but… As the next generation of hyper-fast computing comes online over the next decade or so – quantum computing is just over the horizon – we are going to have to rethink most of the currently effective encryption systems that global economics currently rely upon. But then, you expected a permanent security solution? It is simply the next phase of how money will flow through society. It is clearly the “big next.” The IRS is also trying to figure out how to get its share!
It is a new world with new options for those who want very different possibilities and choices in their economic and political reality. Virtual currencies can unlock large groups of people from the tyranny of nationalistic economic systems with harsh political agendas. And it just might be how you will have to buy a cup of coffee… beyond Apple Pay and Android Pay smart phone solutions that are so common already. Get used to it!
I’m Peter Dekom, and in nations with growing dissent, you can expect a growing reliance on virtual currencies.