12 Feb

Jamie Burke

cat : Bitcoin, Crypto

5 Comments

IF NOT BITCOIN THEN WHAT? (PART 2): Underwritten Crypto-Currencies

The below post is a continuation of IF NOT BITCOIN THEN WHAT? Where we discuss the challenges Bitcoin faces and the impact that has on it’s future as a means of exchange for businesses.

The problem with Bitcoin is like Gold not just because of the mining process but because the large majority is controlled by a few entities. You can track the wealthiest wallets here and will see that just 500 people own 35% of all Bitcoins. In effect they are the market makers. If they gauge more benefit in volatility than stability they will game the system. This creates a self-reinforcing circle where the rest of the system as soon as they receive Bitcoin, offload it back into the system, something I believe adds to its volatility.

Companies like BitReserve are creating digital currencies pegged to fiat currencies like USD and GBP to mitigate some of the volatility. This only works if enough people accept their coinage otherwise you still need to exchange it. Similarly, on the consensus networks of Ripple, Stellar and Hyperledger gateways are providing digital tokens pegged to fiat currencies. In all these cases, the value of the digitized fiat is guaranteed by one or a few organizations which the holders of the “digital fiat” have to trust.

Government-backed digital money

So similar to gold either a sovereign entity corners the market and buys all the Bitcoins up or they decide to ‘mint’ their own. The latter would benefit from being able to entirely rewrite the rules.

Addition: The Greek Finance Minister considers as much back in Feb ’14.

When talking about EU periphery countries and alternatives to ECB Debt; The answer is yes: They can create their own payment system backed by future taxes and denominated in euros. Moreover, they could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free. Let’s call this system FT-coin; with FT standing for… Future Taxes.

 

But in order for that sovereign entity to avoid the current fate of Bitcoin and stabilize its coin they would need to effectively underwrite it by pegging it to some something real world be it metals or fiat. The Ecuadorian Government has already made the bold move of creating a government backed digital currency. However just as they previously used the US Dollar there are only a few financial institutions that could back a truly global coin; the IMF, Bank of China or the Federal Reserve.

 

I believe this game will be played out over the next few years for first movers to offer a truly global digital currency of exchange. Politically this could offer a powerful tool for a financial hegemony to extend its reach and attack or subvert the economies of others. Imagine if the US got the Russian people to start using a USD backed digital currency, because it offered greater stability, whilst in parallel they attack the integrity of the Ruble.

A commercially backed worldwide currency?

There is however a more left-field argument to be had whilst the use of something like Bitcoin is still small compared to other world currencies. I believe there is an opportunity for commercial entities with a direct interest in the payments space or that individually / collectively handles a huge volume of global online transactions to take the lead. Apple alone have a cash pile of $178bn so I think its a really big missed opportunity to have not gone it alone with Apple Pay especially now Google / Android are exploring the opportunity. In 2013 Bitcoin was just 2.5% of Google’s Market Cap so more than doable. But similar to how The Fed was formed by a group of private bankers why not a tie-up between; Amazon, Alibaba and eBay? Assuming they could form consensus and act quickly enough it would solve many of the Governance issue faced by the Bitcoin Foundation that inhibits wider commercial adoption.


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  • I believe for any real alternative to the dollar – with universality baked in – the issuer of the coin needs to have the kind of legitimacy that no government can deliver.

    For a start it needs to sneak past the central bankers and vested interests of business (which control government).

    The only way for that to happen (i believe) is for community to take ownership of the distribution of such currency and leave the general regs and standards (and lite-government) to a centralised processing platform that accounts for movements of the currency and ensures it’s issuance is standardised and regularised so that it becomes inter-operable.

    I have to declare an interest in this topic since i am helping with the design of Mancoin and Hullcoin. Financial inclusion and anti-austerity measures are baked into the design and we have the first release of our digital wallet in beta right now.

    Yes Apple and Google will have their own currencies eventually and yes they will be interchangeable with Google’s and Apple’s. But what underpins their value? That’s where it gets interesting for branded currencies which really are the future of money.

    • Thanks for the comment Mike. Very interested to hear more about your projects.

      You hit your nail on the head with ‘But what underpins their value?’ Yes we need all the things you talk about like inter-operability for a number of coins but the problem is you need a ‘master coin’. And that like any currency, to not fall prey to speculators, needs to be backed / underwritten by something of ‘understood value’. Coin by coin. There are only a few entities that could perform such a function and sadly they are the usual suspects. I suspect for true success we are going to need their involvement. The question is when and on what terms.

      I would say don’t underestimate populism to get behind something when it brings clearly understood value to something especially something as important as peoples money. The problem is people need to be informed. Then this is potentially a big vote winner for politicians which will unseat typical policy influences or at least lead to compromised solutions.

      The USD is a primary / secondary currency in many other countries outside of the States because it is so hard to have a stable currency even when you are a country of many thousands of people that far outnumber the Bitcoin marketplace at the moment. As an aside you could argue about the power play between The Fed and the Bank of China, because they are such a large holder of dollars, but at the moment it IS the global currency of trade.

      Could Bitcoin 1.0 be the answer? I really wish I could say yes be but I doubt the Bitcoin Foundation can balance the different and conflicting agendas of the expanding Bitcoin Community as it grows beyond developers and libertarians (an almost impossible task).

      • It’s nice to get into a convo with someone who’s clearly very informed!

        We come at the design of the currency from a financial inclusion/anti-austerity perspective. Whatever currency evolves out of Bitcoin / money / crypto…it HAS to make the world a better place. That means any such currency needs a purpose that serves the public interest and thus gives it some value as long as the issuance of the coin is regulated and standardised so that a common translation of value exists no matter if you’re in Amsterdam or Antartica.

        For us, any such currency has to value the stuff that money and Bitcoin don’t. That basically means contribution to the common good. If you’d like to know more then please get in touch.

        But the gig is when the markets begin to see value in possessing the coin. If the coin represents contribution to the common good (back to the value creation) then big business will use it as a proxy for social purpose and as a means to benchmark themselves against their competitors. Transparency = the future of business.

        Any marketplace would need to be attached to a digital wallet that could trade in hard currency and in coin. The coin would disguise the level of any discount offered up by the brand, so that only the balance is paid in cash.

        That enables them to shift their excess stock that much faster (assuming they make goods using raw materials) but it’s more exciting a prospect for businesses that trade in capacity – cinemas, buses, soccer grounds all have spare capacity the value of which perishes completely the minute the ticket isn’t sold and the film begins.

        What a waste?

        Why not recycle that waste stream in real time in a market place that’s ethical and dynamic.

        Pricing itself i believe is in for a wake up call. It’s so old fashioned and holding back productivity growth.

        But what good is productivity growth if it simply incentivises mindless consumerism? As in GDP. This is the problem with money. It incentivises and rewards the wrong kind of behaviour. Greed, envy, theft, pollution etc etc.

        Our coin is designed to counter balance the negative effects of money so that the more it is earned into existence the more resources that were once un- or under-employed can be met with the unmet needs of the same community.

        The “wider community” that is.

        I’m rambling now – let me know if you need further info as we want to work with social activists that care. We love business but not as it is right now. We know it has the capacity to make the world a better place and that’s what we’re setting out to do.

        I’m not going to upload our info to your listing service until we’ve out of the beta but thanks for offering.

        Keep in touch.

        Mike.

        • Hi Mike. Very interesting and we wish you the best of luck. We are all for Transparency and ‘Open Business’. I actually co-authored a book called ’10 Principles of Open Business’ a few years ago. Transparency was principle 4 😉