This is the first in a series of articles examining the problems of the fiat monetary system and comparing the various possible solutions, with particular reference to the 2nd generation cryptocurrency: Nxt.
Cryptocurrency (which is a decentralised form of digital currency)1 has now reached such an advanced stage of technological development that it would be remarkable if there was a national government anywhere in the world that was still not yet paying it serious attention; at the same time, the debt based fiat monetary system, following the ‘global’ financial crisis of 2007/8,2 remains in a critical condition.3
What exactly the world’s financial and monetary systems will look like beyond the short time horizon of the foreseeable future is impossible to know but we can at least be sure that the powerful private vested interests (primarily the commercial banks) who support the fiat monetary system in its present form will seek to preserve it substantially unchanged as far as possible and for as long as possible (a subject which is discussed in more detail in the forthcoming second article in the series: ‘Is fiat a fraud? From false commodity to false economy’).
Has war been declared and, if so, where are the battle lines?
As yet there has been no internationally co-ordinated government level response to the disruptive potential of decentralised ledger technology (i.e. cryptocurrency 1.0 and 2.0), although work is currently being carried out which will ultimately lead to a response at the European Union level specifically regarding investments.4
In the meantime there has, to date, been a number of responses from individual countries, either specifically in respect of bitcoin or otherwise regarding all forms of digital currency, including for example:
- declaring the use of bitcoin as a parallel currency to be illegal (Russia).
- (whilst allowing citizens to buy or sell bitcoins amongst themselves), banning the country’s banks from processing transactions involving bitcoin (China).
- stating (or at least intimating) that they do not recognise digital currencies as legal tender and therefore do not regulate them (Ireland).
- treating bitcoin as a commodity and banning its use as a currency (Japan).
- treating bitcoin as a foreign currency and banning its exchange with the national currency (Iceland).
- announcing the creation of a national digital currency and banning all others (Ecuador).
- regulating digital currencies to the extent of requiring ‘digital currency businesses’ to comply with anti-money laundering laws (Isle of Man).5
- announcing proposals to consult on how best to regulate digital currencies and in the meantime issuing guidance regarding their status/treatment for tax purposes (the US and UK).
So, whilst some governments apparently see digital currencies as constituting an immediate, existential threat to their financial and monetary systems (even their national sovereignty)6 others are for the time being more welcoming, at least as regards the potential for blockchain technology to confer a competitive advantage on their economies.7
Financial and monetary stability is, quite rightly, of paramount importance to governments but, despite the growing body of evidence to the contrary, they still regard that stability as best being achieved by the continuation of a debt based, fiat money creation and allocation system run by profit-maximising private banks, ostensibly subject to central bank control.
Happily, there are signs that this inter-governmental consensus may perhaps finally be starting to break down:
For more than half a century, Iceland has suffered from serious monetary problems including inflation, hyperinflation, devaluations, an asset bubble and ultimately the collapse of its banking sector in 2008.
Other countries have faced similar problems. Since 1970, bank crises have occurred 147 times in 114 countries causing serious reductions in output and increases in debt. Despite its frequent failures, the banking system has remained essentially unchanged and homogenous around the world….[a] necessary step toward monetary reform is to increase awareness of the drawbacks and risks of the present system and why reform is needed.
This report will hopefully serve as a useful source of information for the coming debate on the money creation process in Iceland and how it could be reformed to serve society better in the future.
Extract from the Preface to ‘Monetary Reform – a Better Monetary System for Iceland’ (March 2015)
The solution to the debt based fiat money problem being proposed for Iceland is the Sovereign Money System.8 How this potential solution, which is also being advocated by the Positive Money campaign, compares with Nxt will be discussed in the third article in the series (‘Comparing the potential of sovereign/positive money and Nxt to solve the debt-based fiat money problem’).
Regardless of the success or otherwise of the Positive Money campaign or the Icelandic initiative, the existing fiat monetary system looks set to continue, fundamentally unchanged, in the rest of the world indefinitely, thanks partly to the entrenched network effect that the existing system enjoys, partly to the commercial vested interest of the disproportionately powerful commercial banks9 and partly also to:
- the collective bureaucratic inertia of the ‘four pillars’ of global economic governance (the International Monetary Fund,10 the World Bank, the World Trade Organization, the Financial Stability Board of the G2011) and of the Bank for International Settlement;
- large parts of the financial press; and last, but by no means least,
- mainstream economic theorists.12
To be as effective as possible in getting our message listened to with attention it’s not enough for cryptocurrency advocates only to refer to the fact that the current fiat monetary creation and allocation system
leads to socially and economically damaging results and that it remains in a critical condition, we must also demonstrate that we understand why it does so (topics which are examined in more detail in the next article in the series: ‘Is fiat a fraud? From false commodity to false economy’).
Six years after the launch of blockchain technology (in the initial form of Bitcoin),
the commercial banks are becoming increasingly aware of the competitive threat which this rapidly developing technology poses to their business.13
They understand that their long-established centralised system of financial networks based, as they are, on restricted access to the APIs14 on which they run is now being challenged by a rapidly developing and expanding decentralised system of financial networks based on open API access which, in effect, makes possible the democratisation of financial power worldwide.
The banks also understand that cryptocurrency technology does not just represent a competitive threat to their dominant position in the provision of financial services in general it also represents (at least in theory) an existential threat to their virtual monopoly position as money creators and allocators which came about purely as an accident of history.
It’s hardly surprising therefore that most of the major banks are now working on blockchain solutions/strategies albeit that, under the mantra of Bitcoin is bad, blockchain is good they seem to be currently focusing their attention on trying to adopt/adapt the capacity of bitcoin’s blockchain technology to store data and execute financial contracts without needing to use the reward mechanism of the bitcoin currency to secure the integrity of the ledger. Their objective appears to be the creation of a private, federated blockchain in which every hashing institution is known and trusted.
Whether that would work and, assuming it did, what effect, if any, it would have on the continuing development, implementation and rate of adoption of genuinely decentralised, trustless, mathematically secure, blockchain technologies, such as Nxt, remains to be seen.
Much more promising than private, federated blockchains (technologically speaking and also in terms of social utility) is the idea of hybrid systems that, in effect, bridge the gap between the banks’ existing infrastructure and blockchain technology. A prime example being 44 Phones’ hybrid cash and cryptocurrency platform15 which has been developed as a mobile banking application using the Nxt blockchain technology to deliver mobile money via SMS, mobile app and the web.
Systems such as these may well prove to be the salvation of the fiat monetary system which otherwise left to its own devices seems set to go that one step further than it did in 2007/8 and irretrievably implode.
In the meantime, many cryptocurrency enthusiasts appear to welcome the prospect of a mainstream financial collapse believing that it would clear the way for cryptocurrency to take its rightful place in the world.
In practice, though, it is much more likely that in the event of such a collapse national governments would take emergency powers 16 and impose a top down solution designed in collaboration with, and therefore favouring, the banking industry rather than adopting a solution from the genuinely free market, unless that solution had already achieved such widespread acceptance that public and commercial pressure to adopt it was irresistible (an unlikely scenario admittedly, but anything is possible).
Are we ready for war?
The short answer is no, we’re not. At least not one against a common enemy. Instead, the cryptocurrency industry appears to be engaged in its own permanent civil war. Have a quick read of some of the discussion threads on bitcointalk.org and it soon becomes obvious that many, perhaps most, people involved in cryptocurrency seem to regard the only enemy as being the developers, owners and promoters of any cryptocurrency they don’t currently own which is doing better than the ones they do.
Although some people do genuinely invest in cryptocurrency for the long term, most seem to be looking to make as much ‘fiat money’ as quickly as possible. Moreover, whilst all of us (long and short term investors alike) say that we welcome competition as a force for catalysing innovation and improvement, which it undoubtedly does, competition also inevitably has the effect of engaging our instincts for survival and dominance, hence the feeling of despair that some may feel when a crypto in which they decided not to invest suddenly increases significantly in value and then the feeling of relief if, as they had been fervently hoping, it subsequently collapses.
What we must always bear in mind however is that the cryptocurrency industry is still in its infancy and until the various (competing) blockchain technologies become established and their real value gets priced by the market, the price and purchasing power of their native currencies will continue to be subject to much greater potential volatility than that of fiat currencies. In the longer term, of course, the reverse may well eventually turn out be the case.
Can war be avoided?
Answer: it depends if you listen to your heart or your head.
Emotionally speaking, war is inevitable and the ‘enemy’ is either other cryptos or fiat money or both (including their respective providers, users, supporters and fellow travellers), depending on what your unmediated instinct for self-preservation tells you.
Strategically speaking, yes, war can be avoided as there shouldn’t, in reality, be any enemy to fight, at least not as far as cryptocurrency is concerned.
To acknowledge someone as an ‘enemy’ is to acknowledge that instead of merely competing with them one wants, if possible, to destroy them in a ‘zero-sum’ fight to the death where the winner takes all and the loser ceases to exist.
However, there seems little possibility of blockchain technology on its own destroying the fiat based monetary system and absolutely no advantage to be gained by claiming that it could.
Moreover, other cryptocurrencies aren’t the enemy either; no one single coin, not even Bitcoin itself, will be able to monopolize what will inevitably become an ever-expanding and diversifying market.
Every cryptocurrency that gains a foothold in the mainstream (in particular, it must be said, when one of those cryptos is part of SuperNET 17) will help to educate the wider population about the benefits of the technology, thereby opening up the market for cryptocurrency usage more generally.
In my opinion, the language of war is not the most appropriate category of discourse to use in the ongoing struggle to establish cryptocurrency. Instead we should be more inclined to use the language of diplomacy in recognition of the fact that whatever ‘best case’ scenarios we might imagine for cryptocurrency, the financial landscape in which cryptocurrencies will be operating in the future will, in the absence of a complete and irretrievable global financial collapse, almost certainly continue to be dominated by the existing debt based fiat monetary system.
It may even be that cryptocurrencies, by strengthening local economies and thereby building greater resilience into national economies and ultimately the global economy, will actually help the existing fiat monetary system to survive and traditional banks to continue in business.
Seen in that light, it would actually be in the banks’ own best interests to be more accommodating in their attitude towards independent cryptocurrencies and, for our part, perhaps we should be thinking of making a virtue out of the fact that cryptocurrency usage in the mainstream economy, if sufficiently widespread,
could have the unintended consequence of actually bolstering the fiat monetary system.
The non-crypto, potential solutions to the fiat problem include:
- a fundamental reform of the debt based fiat system as advocated by, for example, the positive money campaign, which argues that money creation should only be used in the public interest.
- Abandonment of the debt based fiat system and a return to the gold standard.
In articles 4 to 6 in the series each of the above solutions is examined in turn and the case is made for why the blockchain based, financial platform known as Nxt is the better solution.
1. ‘Cryptocurrencies [which are a type of digital currency] typically feature decentralized control (as opposed to a centralized electronic money system, such as PayPal) and a public ledger (such as bitcoin’s block chain) which records transactions.’ http://en.wikipedia.org/wiki/Cryptocurrency
‘Cryptocurrencies are designed to be capable of replacing cash…No central power has arbitrary control over the money supply.’ https://bitcoinmagazine.com/15862/digital-vs-virtual-currencies/
cryptocurrency 1.0: decentralised, P2P, cryptographically secured, digital payment systems.
cryptocurrency 2.0: ‘…is the application of block chain or distributed ledger technology to things other than digital currency. The block chain offers the ability to facilitate decentralized ownership and store, transfer and process information in a decentralized, programmable way. Many consider that innovation to be the true value of this technology.’ http://www.coindesk.com/crypto-2-0-roundup-bitcoins-revolution-moves-beyond-currency/.
2. ‘While the housing and credit bubbles [the immediate causes of the financial crisis] were building, a series of factors caused the financial system to both expand and become increasingly fragile, a process called financialization.’ http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308
3. Is the debt based fiat monetary creation and allocation system sufficiently robust to be able to respond adequately to the ‘extraordinary’ demands that are being placed on it?
‘…extraordinary central bank action has become the new normal in the developed world. Faced with the twins threats of deflation and economic stagnation, monetary policymakers are reaching for their interest rate levers and digital money-printing tools in a bid to stave off recessions and debt deflationary dynamics.’ http://www.telegraph.co.uk/finance/economics/11378193/How-central-banks-have-lost-control-of-the-world.html
4. On 22 April 2015, The European Securities and Markets Authority (equivalent to the Securities and Exchange Commission in the US) issued a call for evidence regarding ‘Investment using virtual [sic] currency or distributed ledger technology’.
ESMA states on its website that it:
‘…is interested in how different virtual currencies and the associated blockchain, or distributed ledger, can be used in investments. There are now facilities available to use the blockchain infrastructure as a means of issuing, transacting in and transferring ownership of securities in a way that bypasses the traditional infrastructure for public offer and issuance of securities, trading venues like exchanges and central securities depositaries or other typical means of recording ownership. ESMA would like to find out more about these market developments and in particular to know to what extent the use of the blockchain could enter the financial mainstream, and how it could be used.’
Nxt is the example of the digital currency platform ESMA uses in its ‘call for evidence’ to illustrate how distributed ledger technology works.
The NXT Foundation will be submitting a ‘NXT Community Response To ESMA’s Inquiry On Investments Using Virtual Currency Or Distributed Ledger Technology’ a week before the July 21, 2015 ESMA deadline. For more information visit the related discussion on the Nxt forum.
5. ‘Digital currency businesses [as defined below] will have to comply with the Isle of Man’s anti-money laundering (AML) laws from 1st April  and will likely fall under the remit of the Financial Services Commission from the Summer.’
‘[Those in] the business of issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including crypto-currencies or similar concepts where the concept is accepted by persons as a means of payment for goods or services, a unit of account, a store of value or a commodity.’ http://www.coindesk.com/isle-of-man-introduces-regulation-for-bitcoin-businesses/
6. ‘A senior Central Bank [of Ireland] official has warned that virtual and digital currencies have the potential to challenge the sovereignty of states.‘
7. ‘Osborne looks to virtual currencies in bid to make UK world fintech capital’.
Further details regarding the UK government’s attitude towards ‘digital’ currency is contained in two recently published reports: ‘Digital Currencies – response to the call for information‘
and ‘Banking for the 21st Century – driving competition and choice ‘.
‘Virtual Currency Schemes – a further analysis’, European Central Bank, February 2015.
‘Cryptotechnologies, a major IT innovation and catalyst for change’. European Banking Authority, 11 May 2015.
8. Sovereign Money System: this, in effect, nationalises money by giving the central bank the exclusive power to create money and parliament the power to allocate how the money is used; the government then spends/invests it into circulation.
9. ‘The network of global corporate control’ Stefania Vitali, James B. Glattfelder, and Stefano Battiston published in the New Scientist Magazine 22 October 2011 (Issue no. 2835) ‘An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.‘
10. But see: ‘IMF report from 2012 by Jaromir Benes and Michael Kumhof. The focus of the study is the so-called Chicago plan of the 1930s which the authors have updated to fit into today’s economy. The basic idea is that banks should be required to have full coverage for money they lend. Under this proposal, banks would no longer be allowed to create new money in the form of credit in connection with their lending activities. Instead, the central bank should be solely responsible for all the creation of all forms of money, not just paper money and coins. The advantages of such a system, according to the authors, are a more balanced economy without the booms and busts of the current system, the elimination of bank runs, and a drastic reduction of both public and private debt. The authors rely on both economic theory and historical examples, and state that inflation, according to their calculations, would be very low.’
11. It should be noted however that the chair of the policy development committee of the Financial Stability Board, Adair Turner, wrote in his foreword to ‘Monetary Reform – a Better Monetary System for Iceland’ (March 2015) that the efforts to make the existing financial system more stable: ‘have still failed to address the fundamental issue – the ability of banks to create credit, money and purchasing power, and the instability which inevitably follows. As a result, the reforms agreed to date still leave the world dangerously vulnerable to future financial and economic instability.’
12. ‘Mainstream economists’, those who subscribe to ‘…neoclassical equilibrium theory and assimilated Neokeynesianism, or to put it differently, American textbook standard economics…Mainstream economics for the most part rests on the assumption of neutrality of money…If one believes in neutrality of money, then of course dysfunctions of the money system are not an obvious subject of concern, despite all financial crises. As a consequence, most mainstream economists find it difficult to see why monetary reform might be of relevance.’ Joseph Huber http://www.sovereignmoney.eu/sovereign-money-in-critical-context/
13. The banking industry is now organising conferences to consider questions such as:
What is the future of money?
Do you know what cryptocurrencies mean for your business and for the future of financial services? Are you leveraging [the] blockchain? Are these developments an opportunity or a threat for traditional financial services providers?
SWIFT Business Forum London, 23 April 2015
14. An example of an API (Application Programming Interface) in the mainstream financial system is the VISA network’s merchant API which only the merchant, as a trusted party, is allowed to program. Examples of APIs in cryptocurrency based systems include: the transaction scripting language, the P2P network protocol and the ‘Northbound’ client, all of which are open source and are therefore available for anyone to program.
15. ‘UK’s 44 Phones Building Blockchain-Based International Mobile Network, Mobile Money Service.’
16. For example (in the UK) the Civil Contingencies Act 2004, Part 2 Emergency Powers, S. 22 (2) (h) http://www.legislation.gov.uk/ukpga/2004/36/pdfs/ukpga_20040036_en.pdf
17. SuperNET is an association of the most reliable blockchain technologies. Giving you access to all their innovation from one place.