The Winklevoss twins explain the future of Bitcoin including how it compares to gold and how there is still so much more potential for growth.
In this episode of Keiser Report’s annual Summer Solutions series, Max and Stacy chat to Simon Dixon of bnktothefuture.com about his prediction that bankers could soon riot in the streets if central banks allow them to go bust, or if governments deny them a bailout. In the meantime, money is being destroyed as businesses collapse, that is causing central bankers to print faster which, in turn, is undermining the stability of the economic system and also creating a class of cantillionaires presiding over the debt ruin they created. Once it falls apart, however, Simon Dixon sees the central banks will start offering retail banking direct to consumers through technology. They also discuss a monetary renegotiation as the global fiat system struggles to recover from all the future production brought forward in the form of massive debts suffocating current economic activity. About Simon: Simon Dixon: co-founder and CEO of the largest Global Online Investment Platform – BnkToTheFuture.com | Author of best selling book on Amazon: Bank To The Future: Protect Your Future Before Governments Go Bust (the first published book to include the topic of Bitcoin) | Investor in over 100 of the most important and biggest FinTech and Crypto Companies in the world which include Coinbase, Kraken, BitPay, BitFinex, BitStamp, Circle, Ripple Labs, Blockchain.com, and Robinhood | Simon was invited as a guest speaker to the world’s first Bitcoin conference | Simon has been interviewed on BBC, CNBC, Reuters, PressTV, Bloomberg, FT, RT (A regular guest with Max Keiser on the Keiser Report) | Biggest Social Media interviews: London Real | Simon has been campaigning for monetary reform for over 20 years and has consulted Politicians, world leaders, and governments about the Future of Finance, Bitcoin and FinTech. Simon is seen as one of the most important people within the FinTech and Bitcoin/Crypto sector and has won admiration from big name entrepreneurs, investors, news anchors and now a growing community of people from all over the world. Simon Dixon’s following is growing and he appreciates it greatly. Please follow him on: Twitter: https://twitter.com/SimonDixonTwitt (He is most active on here) LinkedIn: https://www.linkedin.com/in/simondixo… Facebook: https://www.facebook.com/SimonDixonBTC/ Youtube: https://www.youtube.com/SimonDixonBF (Every Wednesdays from 7pm BST join Simon on his show LIVE AMA with Simon Dixon).
The future of money might be a digital version of the cash that’s already in people’s wallets—potentially upending the currency system that the world has known for many decades.
Such a future, of course, might be a disappointment to many libertarians and tech-savvy investors who are pinning their hopes (and in some cases their money) on private cryptocurrencies such as bitcoin.
Instead, central bankers and governments—the entities that cryptocurrencies’ backers hoped to render obsolete—are increasingly warming to the idea of “digitizing” their own national currencies. That is, they would issue money that would exist only virtually, without a paper or coin equivalent, and be universally accepted as a form of payment.
Central banks such as the Federal Reserve in essence already issue digital money, via the commercial banks that have accounts with them. Commercial banks then lend money electronically to households and businesses, and enable customers to make and receive payments digitally without exchanging cash. But a central-bank digital currency would be a leap beyond that.
Instead of working only through commercial banks, central banks might issue digital currency directly to the public that could be used as legal tender in the same way cash is today.
How it might work remains unclear, but countries are experimenting with it, and the implications could be profound for everything from commerce to interest rates to privacy. For instance, right now, most financial transactions—whether paying a credit-card bill or mortgage, sending money to a relative, or buying something online—involve settling payments over a patchwork of systems, meaning money can take two or three days to move between accounts.
A national digital currency managed on a single network could allow money to change hands almost instantly. Most bitcoin transactions, for instance, settle within 10 minutes. With a digital currency, transactions could happen in real time, and fees would be lower or nonexistent.
What’s more, putting the central bank in charge of a digital currency could undermine the role that commercial banks play. It would open the door to politically thorny questions such as what the Fed should do with the new electronic deposits it would hold from consumers, including whether it should pay interest on them or make loans.
In addition, national digital currencies could make it harder for private cryptocurrencies to catch on. Because government e-cash would be operated, backed and controlled directly by central banks, it likely would be viewed as more reliable than privately created cryptocurrencies, which operate on decentralized networks of users and fluctuate wildly in value.
Perhaps most significantly, a world of competing national digital currencies could set up a new kind of currency war. The U.S. dollar has been the world’s dominant currency since the 1920s. But if national digital currencies allow for faster, cheaper money transfers across borders, viable , embraced by nations and monetary officials concerned about the dollar’s outsize influence on the global economy.
“Technological developments provide the potential for such a world to emerge,” Mark Carney, the governor of the Bank of England, said in an August speech at the Federal Reserve’s annual symposium in Jackson Hole, Wyo. He highlighted the risks of the current dollar-dominant system, and sketched out an alternative where a new digital currency backed by a large group of nations, or even multiple currencies, vied with the dollar.
Mr. Carney’s speech came at a time when currencies around the world are falling to multiyear lows against the U.S. dollar, and after authorities in the U.S. and abroad said they would closely scrutinize an effort by Facebook Inc. to launch a cryptocurrency pegged to multiple sovereign currencies. But the current rancor only highlights what are long-term changes in the global economy.
The speech also was the most pointed sign yet that the revolution ushered in by bitcoin nearly 11 years ago is taking root. Mr. Carney and Christine Lagarde, the incoming president of the European Central Bank, have both talked about the advent of digital currencies. France, which opposes Facebook’s project, says a “public digital currency” along the lines of what Mr. Carney proposed should be considered. Central banks in Sweden, Canada, Switzerland and the Eastern Caribbean have experimented with or are exploring the technology.
The one that might beat them all to the punch is the People’s Bank of China. The PBOC is expected to launch a digital version of China’s national currency, the yuan, later this year or early in 2020. If it does, it would be the first major global currency to become digitized.
The benefits of digitization could be myriad. In addition to faster and cheaper money transfers across borders, a survey conducted by the International Monetary Fund found that central banks are looking at benefits like lower costs, more efficient monetary policy, blunting competition from bitcoin and its peers, and offering a risk-free payment network to the public.
The total market capitalization of bitcoin, the most popular form of digital currency, has grown dramatically since its creation in 2009, but still lags far behind the total value of U.S. dollars in circulation.
U.S. cash in circulation continues to grow apace, as seen in the expansion of M1, a basic money supply gauge that measures funds that are readily available for spending, including checking accounts that pay interest and those that don’t, and currency.
The result could be a sweeping change in the international financial system, affecting, among other things, how nations trade.
The country that is first to introduce a digital currency that is more easily stored and used abroad than its physical counterpart will have “a first-mover advantage to greater currency use, though not necessarily to reserve currency use,” says Tommaso Mancini Griffoli, deputy division chief of the IMF’s central bank operations division.
The increasing interest in national digital currencies dovetails with a changing marketplace. Developing nations increasingly make up a larger percentage of global gross domestic product while the U.S. share shrinks.
The dollar’s hegemony made sense after World War II, when the U.S. accounted for 28% of global exports. Now, the figure is just 8.8%, according to the IMF. Yet the dollar still dominates international trade. Around 40% of world trade is invoiced in dollars, roughly four times the U.S. share of world trade, according to data from Gita Gopinath, a Harvard University professor who is now the IMF’s chief economist. And the dollar is used in 88% of all foreign-exchange trades world-wide, according to the Bank for International Settlements.
The dollar isn’t going to lose its position overnight, Mr. Carney said at the August gathering. But bankers should be thinking about a post-dollar world now, he added, rather than waiting for the next crisis to force change.
The dollar’s status as the lingua franca of international business provides benefits: Companies in places like Argentina can export goods to Turkey, and get paid in dollars. Because those dollars are deposited in local banks, they can be lent to companies. In fact, because there are so many dollar deposits, it’s actually cheaper for overseas businesses to borrow in the U.S. currency, creating a feedback loop that maintains the greenback’s pre-eminence.
But as Mr. Carney noted last month, this convenience has a downside: When the dollar appreciates, debt denominated in dollars becomes more expensive for foreign businesses. At the same time, the price of those countries’ imports rises, which can feed inflation.
Because of the dollar’s status and the fact that economies are more interconnected than ever, dozens of countries are essentially beholden to U.S. fiscal and monetary policy. Fluctuations in the dollar’s value feed through credit markets, causing surges and withdrawals of capital that can cause financial crises in emerging markets.
“U.S. developments have significant spillovers onto both the trade performance and financial conditions of countries with even relatively limited direct exposure to the U.S. economy,” Mr. Carney said.
One countermeasure to that dynamic could be a “synthetic hegemonic currency,” as Mr. Carney called it, a fancier term for a global public cryptocurrency. The currency he proposed would be based on a basket of reliable currencies, including the dollar and China’s renminbi.
Not all policy makers like the idea of a global digital currency to rival the dollar.
The U.S. has been wary about the growth of cryptocurrencies. Federal Reserve Chairman Jerome Powell said this month that consumers have many payment options already. Moreover, he added, the cybersecurity risks involved with a digital currency are “quite daunting,” pointing out that if hackers gained access to the system, they could siphon off money from the electronic vault.
But the growth of online payments—from cryptocurrencies to Apple Pay and Venmo—raises the question of when the Fed will give people the same electronic access to cash that it gives banks, which earn interest on funds they deposit with the central bank.
Facebook’s proposal for a cryptocurrency, dubbed Libra, underscores how Silicon Valley is pressuring central banks to adapt. Unlike other private cryptocurrencies, Facebook already has a network—two billion users on social networks that double as marketplaces—to support the consumer demand that would drive use of a private currency.
“Central-bank digital currency, even if it were created by major countries, would likely have far fewer users and would not spread over this social-media platform,” says Tobias Adrian, director of the monetary and capital markets department at the IMF. “So there is something that intrinsically could be more disruptive about proposals such as Libra.”
That also makes it a potential threat to the Fed, which needs to control the money supply to modulate inflation and stimulate the economy.
“No central bank wants the currency to be something it doesn’t control,” says Jeremy Stein, a Harvard University economics professor who served as a Fed governor from 2012 to 2014. “In the extreme, if everything in the world is priced in Libra and not in dollars, the U.S. cannot set monetary policy—because setting interest rates in dollars, who cares?”
At the least, central-bank digital cash might raise interest rates. In a world where everyday consumers had accounts at the Fed or their country’s central bank, the supply of bank deposits would shrink, according to a November 2018 paper by economists at the IMF. Banks would have to pay more to attract deposits, and they might not be able to pass on those costs by raising interest rates on loans.
That wouldn’t be good for banks, Mr. Powell said in his news conference this month, underscoring how nervous the Fed is about upsetting the balance between the central bank and private business.
One way to reduce this threat: Central banks could have digital wallets for everyday people, but they wouldn’t pay interest on the balance. Another avenue: Consumers could hold digital cash only at their bank, leaving central banks as remote from everyday savers as they are today.
Still, the growth of digital payment services is forcing central banks to explore these new technologies, says David Chaum, a cryptographer who himself built one of the first digital-money systems, called DigiCash, in the 1990s, and today is working on another one, called Elixxir.
Central banks will have no choice but to make sure the new monetary infrastructure is secure, he says, adding: “What if that system breaks down? Are people going to be able to buy bread?”
In China, where mobile money apps like Alipay are ubiquitous, much of domestic commerce already has moved into the digital world. That might be one reason the People’s Bank of China appears to be moving faster than other central banks to digitize its currency, the renminbi. The bank hasn’t publicly commented on the timing, but stories from the state-run China Daily, among others, suggest the digital renminbi could be unveiled this year or next.
The renminbi would be a significant testing ground. Its use in world markets has increased over the past decade, and China has surpassed the U.S. to become the world’s leading trading nation.
For the Chinese, digitizing the renminbi is a way to get out from under the U.S.’s thumb, says Eswar Prasad, an economics professor at Cornell University and former head of the IMF’s China Division. China’s goal isn’t necessarily to overthrow the dollar, he says. But they want to give their allies an alternative to the dollar and create a system that couldn’t be disrupted by the U.S.
“Would the Chinese like to be less vulnerable to American sanctions? Happier if they didn’t have to use the dollar for their imports and exports? The answer to that is unambiguously yes,” he says.
China‘s digital currency would differ significantly from the bitcoin model, with the central bank keeping control of the money supply and tracking users’ identities.
The people and companies behind private cryptocurrencies believe their assets will still have value even if countries move to digitize their national currencies. People around the world won’t want to give up the anonymity and privacy associated with cryptocurrency, they say, even if they are pushed into using solely electronic forms of cash.
“What you end up with is a situation where the government has potentially perfect surveillance into all the financial flows in the entire economy,” says Travis Scher, vice president of investments at Digital Currency Group, owner of the digital-currency trading firm Genesis Trading. “In a world where a country like China issues its own digital currency and tries to move the entire economy onto that, it actually will increase demand for cryptocurrencies and digital currencies that are more private and create the potential for more autonomy.”
Whatever happens, it could be chaotic, the Bank of England’s Mr. Carney warned in Jackson Hole. When the dollar overtook sterling as the world’s dominant reserve currency in the early 20th century, the backdrop was economic upheaval and a world war that decimated Europe.
“History teaches that the transition to a new global reserve currency may not proceed smoothly,” he said.
Chamath Palihapitiya, the CEO of Social Capital and chairman of Virgin Galactic, talks about a wide range of issues, including Bitcoin, COVID, civil unrest, and broad economic trends and forecasts. We discuss:
- Whether his economic forecasts have shifted throughout COVID
- Why he believes a debt crisis will occur
- How he views the success of BTC as a hedge against the ruling class
- How the economic pendulum will swing back toward consumers
- Why he doesn’t mind if big corporations and hedge funds get wiped out
- Whether he subscribes to the thesis that Bitcoin is uncorrelated
- Why the pandemic has not spurred institutional adoption of crypto
- Why he sees no merit in Ethereum
- How the economy will become more decentralized in the future and whether blockchain will be a part of it
- Why he prefers SPACs over ICOs
- Why he started capital as a service
- Why he believes the government should bust up large corporations
Bitcoin, and more generally, cryptocurrencies, are often described as a new type of money. In this post, we argue that this is a misconception. Bitcoin may be money, but it is not a new type of money. To see what is truly new about Bitcoin, it is useful to make a distinction between “money,” the asset that is being exchanged, and the “exchange mechanism,” that is, the method or process through which the asset is transferred. Doing so reveals that monies with properties similar to Bitcoin have existed for centuries. However, the ability to make electronic exchanges without a trusted party—a defining characteristic of Bitcoin—is radically new. Bitcoin is not a new class of money, it is a new type of exchange mechanism, and this type of exchange mechanism can support a variety of forms of money as well as other types of assets.
Money vs Exchange Mechanism
The distinction between money and an exchange mechanism is not new to the field of payments. For example, according to a report from the Committee on Payments and Market Infrastructures (CPMI), a body within the Bank for International Settlements (BIS), money refers to the asset that is being transferred, for example currency in your wallet. In contrast, the exchange mechanism is the way in which the asset is transferred, such as physically handing the currency to a merchant in exchange for a coffee.
It is not uncommon for Bitcoin, and cryptocurrencies more generally, to be described as a new type of money. For example, this chapter of the 2018 Annual Economic Report released by the BIS “evaluates whether cryptocurrencies could play any role as money.” Similarly, Tobias Adrian and Tommaso Mancini-Griffoli categorize cryptocurrencies as a type of money in an IMF FinTech note.
With this in mind, it is worth asking what aspect of Bitcoin is truly unique: the type of money it represents or the exchange mechanism it uses? To address this question, we propose two simple classifications, one for monies and another for exchange mechanisms. For each classification, we make use of categories that are deliberately stark. While finer subcategories might improve the classifications in some instances, it is tangential to our main message.
Three Types of Money
We divide monies into three categories:
- fiat money,
- asset-backed money, and
- claim-backed money.
The distinction between asset-backed and claim-backed money is meant to replicate the distinction between secured claims and unsecured claims. These three categories are broadly consistent with the categories of money proposed by Adrian and Mancini‑Griffoli.
Fiat money corresponds to intrinsically worthless objects that have value based on the belief that they will be accepted in exchange for valued goods and services. A typical example is currency. The paper on which a twenty‑dollar bill is printed is worth almost nothing. But a consumer can purchase coffee by handing over that piece of paper because the barista believes that she can in turn use the latter to purchase something of value. Of course, central-bank issued currencies are different from pure fiat money due to its legal tender status. Examples of fiat money without legal tender status include Rai stones or Ithaca HOURs. And Bitcoin is just another example of fiat money.
Asset-backed monies derive their value, at least in part, from the assets backing the money. A prime example is commodity money. Gold coins are intrinsically valuable because it is possible to melt a coin and find someone who would like to use the metal for another purpose.
Finally, claim-backed monies derive their worth, at least in part, from the promise of some institution to exchange the money for something of value. For example, an (uninsured) bank deposit has value based on the promise the bank makes to exchange the deposit for currency. Non-financial firms could issue claim-backed monies as well. For example, a barista may offer a coffee in exchange for a (fully punched) loyalty card. In this instance, the loyalty card is a specialized type of money that can be exchanged for a valued item. In principle, if others believe that the barista will keep her promise to redeem the punch card in the near future, it could be used like money for other goods, as long as a sufficient number of people want the barista’s coffee.
Three Types of Exchange Mechanisms
Exchange mechanisms can also be divided into three categories:
- physical transfer,
- electronic transfer with a trusted third party, and
- electronic transfer without a third party.
While not identical, our categories are broadly consistent with categories of exchange mechanisms described in the CPMI report mentioned earlier.
Physical transfer is intended to capture the transfer of money through a physical means, such as currency or notes. This includes the exchange of goods and services for a physical money. In the case of currency, if a consumer wants to buy a coffee with a twenty-dollar bill, he needs to physically hand it over. Similarly, he could make a payment by sending a check in the mail, which would be transported physically to the recipient, for example, to pay rent to his landlord. (Technically, a check is a payment order, rather than money. That said, endorsed checks can circulate like money.)
Electronic transfers with a trusted third party represent the vast majority of electronic payments today. These transfers involve some trusted entity responsible for making sure transfers are valid. The Fedwire Funds Service® is an example of an electronic transfer system, with the Federal Reserve System acting as a trusted third party on behalf of banks and other financial institutions transferring central bank deposits to each other. (“Fedwire” is a registered service mark of the Federal Reserve Banks.)
This brings us to the final category: electronic transfers without a trusted third party. These are exchange mechanisms where the validation of transactions is decentralized, as is the case for Bitcoin and many cryptocurrencies.
To illustrate how monies differ along these two dimensions, we have built a 3-by-3 matrix combining the types of money with the types of exchange mechanisms and, for each combination, we offer an example. The following table summarizes this exercise.
Monies transferred physically include:
- currency—a fiat money;
- gold coins—the value of which depend on the gold backing the coin; and
- checks—which are backed by the promise of a bank to exchange the check for currency.
In the United States, many bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), so they benefit from greater protection than only the promise of the individual bank.
Monies transferred electronically with a trusted third party include central bank reserves, which in the United States can be transferred using Fedwire; money market mutual fund shares, a very liquid investment backed by assets (often Treasury securities); and (uninsured) commercial bank deposits.
Finally, monies transferred electronically without a third party include Bitcoin, which is not backed by anything; “stablecoins,” which are cryptocurrencies whose value is (in principle) tied to assets; and tokens from initial coin offerings (ICOs), for which issuers offer rights (though not necessarily legally binding) to a product or service in the future. In all these cases, the transfer of monies can be facilitated without a trusted third party. Notably, all of these examples are recent phenomena that have emerged in the post-Bitcoin era.
As is evident in the table above, Bitcoin and other cryptocurrencies are not a new type of money. Other examples of fiat monies have existed for a very long time. The same can be said for stablecoins, which are just the latest incarnation of monies tied to the value of an asset. By contrast, the third row of the table (“electronic without third party”) did not exist before 2009. The real innovation of cryptocurrencies is that they offer a radically new exchange mechanism. This type of exchange mechanism can support the transfer of different kinds of monies; fiat money in the case of bitcoin, money backed by assets in the case of stablecoins, and even future services or products, as in the case of ICO tokens. And this type of transfer mechanism could also support the transfer of other types of assets, like CryptoKitties.
In this post, we have argued that Bitcoin is not a new type of money. Instead, it is more accurate to think of Bitcoin as a new type of exchange mechanism that can support the transfer of monies as well as other things. Why should we care? History provides lessons about what makes a good money as well as what makes a good transfer mechanism. These lessons could help cryptocurrencies evolve in a way that makes them more useful. But to know which lessons are relevant, it is important to be clear about what is new about Bitcoin.
Michael Lee is an economist in the Federal Reserve Bank of New York’s Research and Statistics Group.
Antoine Martin is a senior vice president in the Bank’s Research and Statistics Group.
Harold Thomas Finney II (May 4, 1956 – August 28, 2014) was a developer for PGP Corporation, and was the second developer hired after Phil Zimmermann. In his early career, he was credited as lead developer on several console games. He also was an early bitcoin contributor and received the first bitcoin transaction from bitcoin’s creator Satoshi Nakamoto.