In this post, I discuss briefly about the current state of monetary system and effect of digital payments on privacy. Later, I suggest that these developments set a perfect stage for cryptocurrencies to be introduced to our society. Then, I discuss why cryptocurrencies are different from fiat money, how society’s attitude toward them has changed in the last decade and finally I leave you with a couple of initial use cases that are starting to gain acceptance. In later articles, I look forward to build on these initial use cases and suggest potential future use cases.
Where are we?
We are in an uncharted territory for monetary policy of central banks. Fiscal deficits are high, interest rates are at lows and trillions of dollars have been printed and injected in the global economy post 2008 global financial crisis. Negative rates were almost unthinkable up until a decade ago. Now, north of $10 trillion of global debt is yielding negative returns. We are near the peak of the business cycle and there is constant chatter about interest rates cuts. Historically speaking, central banks have hiked interest rates at this stage.
Not only are we discussing interest rates cuts, but there are also discussions happening around new methods to keep the economy growing and servicing the fiscal debt. That brings us to ‘Modern Monetary Theory (MMT)’, which states that governments can avoid defaults on debt denominated in its own currency by simply printing more money. What about the possible inflation? MMT proponents state that just increase taxes and issue new bonds to take money out of circulation and the world will continue to be a happy place. Millions of people across the world are not buying this argument.
Also, we are in a huge wave of digitization. As our payments get digital and physical cash is used less and less, we are exposing our financial transactions to corporations and governments. Once you give access to your financial history to someone, it is easy to modify your behavior to suit their needs. It is easy to manipulate you for their goals—be it profit or votes. There is no use of freedom of speech if you will not have freedom of thought. The argument that you have nothing to hide lacks depth as it is like giving someone access to your daily life, practically speaking. Is that acceptable? Again, there are millions of people for whom this answer is a ‘No’.
Where are we going?
As traditional central banks and technology companies are experimenting on the rails of legacy fiat system, innovation is happening at the edges – as is always the case with innovation. But this time what we are experimenting with is money itself. Experts from various disciplines such as cryptography, mathematics, computer science, economics and others have come together and proposed a new way to look at money – cryptographically secured money called Bitcoin. It is likely to be the biggest invention since the Internet. And its impact on our society is hard to overestimate. Instead of trusting central banks to keep our money safe, at which they do not have a stellar record, we can choose cryptography and code to do it for us.
Bitcoin has ushered in an era where money creation is decentralized. Money is provably scarce. You do not need to take permission from your bank to send money to anyone across the globe. You do not have to pay huge transaction fees to banks or remittance services. You do not have to worry about someone stealing your money (do not forget or give away your keys). You can keep your transactions private. Also, money has become digitally native and programmable. In just the same way how internet made everyone a publisher, Bitcoin will make everyone a bank – their own bank. What Internet did to messages, cryptocurrencies are going to do to payments. What physical postcards are to Tik-Tok, today’s cash may be to future digitally native programmable money.
Over the last decade, society has had its own rough journey with cryptocurrencies. It has gone through five stages of grief and is arriving at the final stage – acceptance. I would say, pre-2013 we were in the denial mode. Many people could not come to terms that code can drive world’s monetary system. I do not blame them. It was a pretty outlandish idea – just the same way I do not expect many people to be able to explain Albert Einstein’s General Theory of Relativity. Then until 2015, when we did not see it go away, we were angry at the criminal use cases and said it can never go mainstream because look how bad it is. When it did not go away this time, until 2017/8 we were bargaining (‘Blockchain, not Bitcoin!’), saying that the technology is great – but Bitcoin has no chance because governments will eventually crush it.
And, now that it is still around, we are coming out of depression and entering the acceptance phase. Why do I believe that? Look around – millions of people own cryptocurrencies, globally reputed corporations CME, Fidelity, Microsoft, etc. are providing a host of financial services in this market, building tremendous amount of infrastructure, and rate of adoption is increasing massively. Smart people are flocking into this space. Thousands and thousands of jobs have been created. Blockchain Engineering was the most sought-after talent on LinkedIn in 2019 and it is expected to be in 2020 as well. Technology will pile on technology. Starting from the simplest, we will grow into this complex ecosystem where foundational use cases will act as modules and enable more complex, programmable and yet unimagined use cases.
Use Case 1: Decentralized money creation
In a country, why should money creation be controlled by one entity? That is a lot of power. And one school of thought suggests that power eventually corrupts. But honestly, until recently we did not know better. We lacked technology that was smart enough to create money in a decentralized way. Here we are now – we have the technology – how will you rationalize not giving it a shot? You can’t. There was never a time in history and never ever will be in future when a scientist/economist/financier will create something, and world will immediately accept it as money. Money owes its existence to our desire to exchange and therein lies the subjectivity. Not only what I think is money, but also what others think is money qualifies anything as money. So, here we are, an open source protocol is up and running that is creating digital assets called Bitcoin. Millions of Bitcoiners are betting on it to become the money of future. Nocoiners are betting it will fail. Just like any experiment in any human endeavor – we have supporters and opposers. As it stands right now, Bitcoiners are enjoying positive slopes on a host of metrics linked to adoption. It is going to be a long journey, but guess what, it has started.
Use Case 2: Store of Value
People save money for various reasons. Savings are what become investments or expenditures later. It is important that the purchasing power of savings can at least stay about the same if not increase over time. USD 1,000 in 1914 is worth only USD 40 today. This is when dollar is world’s reserve currency today. There have been several hyperinflations along the way for other global currencies – where the purchasing power of fiat was totally destroyed. That is not the case with gold. Gold cost ~$20 an ounce in 1914 and is ~$1,550 an ounce today. In current fiat system, as mentioned in the first paragraph, world is printing money at the fastest speed ever and there are no visible signs of slowing down. There is no concept of scarcity. Also, interest rates are negative. Yes, this is all very dumbed down version but the bottom-line is that it is unwise to save in fiat.
But why Bitcoin when we have gold? Gold already has thousands of years of established history; it is durable and fungible. While that is true, you cannot divide gold into extremely tiny amounts, you cannot transport it on the Internet, you cannot easily verify its purity, it is not censorship resistant exactly and you need to spend money to secure physical gold (holding ETFs is not the same as having your own physical gold). Also, it is not provably scarce. Last, but not the least, younger generations are increasingly comfortable with digital ecosystem. All of this gives Bitcoin an opportunity to become an alternate store of value (SoV).
I, like many others, believe that SoV is the killer application that Bitcoin has already delivered on. People have a spectrum of opinions on the same. I am sure that there is a negative correlation between the health of critic’s country’s financial system and their acceptance of SoV use case. Venezuela vs USA could be a great recent example. Listen to a Venezuelan for firsthand experience. It is very difficult to appreciate what Bitcoin is doing for the world if you stay in the US. What about the volatility argument? How can anything so volatile be used as SoV? Oh, please! Check gold’s historical chart – best SoV known to mankind and you’d still see volatile periods – and that too after thousands of years of adoption. Bitcoin is just a decade old phenomenon.
Summary
To summarize, current monetary system and digitization of payments provide a great setting for cryptocurrencies to be introduced to the society. Cryptocurrencies have several significantly advantageous properties compared to fiat money and gold – such as scarcity, divisibility, portability, censorship resistance, counterfeit resistance and seizure resistance. It is likely to be the most disruptive technology since the Internet and programmable money will transform our lives just as Internet did. Adoption is increasing across the world and infrastructure is built at a breakneck speed. Current use cases that have emerged are our ability to create money in a decentralized fashion and using Bitcoin as a Store of Value.