Cryptocurrencies – a new monetary relationship or a global scam

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Cryptocurrencies – freedom or scam?

The modern global financial system requires major changes. And if 20 years ago only some economists thought so, then today, this statement is a 100% axiom. Fiat (paper, credit) money that is not backed by gold or other real assets lives out its last days. They have long been a convenient tool of deception, as for such giants of the world economy as the USA, China, Japan or the United Kingdom, and for the underdeveloped countries. A dollar that many would like to get rid of, but do not know how to do it with minimal losses, is a real threat to the entire world economy.

In this situation, no one dares to become the initiator of radical reforms. More precisely, almost no one. The semi-mythical programmer Satoshi Nakamoto (many researchers of this topic claim that the well-known businessman and scholar Craig Stephen Wright is behind this name) created a new electronic money – Bitcoin cryptocurrency. But is it worth to trust this invention? Is military-technical cooperation the money of the future or is it one of the biggest scams of today?

In the era of the Internet, powerful computer technology and modern gadgets, the emergence of a fundamentally new electronic currency can be considered a completely natural phenomenon. Despite the fact that this topic is one of the most discussed around the world for more than a year, many people have little idea what cryptocurrency is and how it functions. If you do not delve into all the nuances, you can select the following main features of this new means of payment:

● All transactions using cryptocurrency are carried out anonymously and directly between the participants of the operation.

● No one can influence or cancel a completed transaction (even the courts, administrative authorities or law enforcement agencies).

● Anyone can earn a cryptocurrency, but no Central Bank of the World can influence this process.

The foundation of new electronic money is blockchain – an innovative technology that allows you to keep effective records in any field of human activity. Formed a chain of blocks filled with certain records. In addition, each next block contains information from the previous one, which excludes the possibility of adding false data. One more important point is distributed information storage. You can destroy the system only if you simultaneously break down all the computers of its participants, which is practically impossible.

● Cryptocurrency is not subject to inflation.

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All the above signs characterize a new digital currency only from the positive side, but everyone knows that any thing / phenomenon will always have some flaws. In this case, the following negative points can be identified:

● The government of any country may prohibit the circulation of cryptocurrency at the legislative level.

● Practice shows that over time, even the most reliable systems can be hacked by intruders.

● If the owner of the crypto profile loses access to it, it will lose its savings.

But against the background of the listed advantages of new money, given the transparency of all operations carried out with the help of digital currencies, these problems are quite surmountable.

Who does not benefit from the development of digital money?

Among the above disadvantages of cryptocurrency is not listed one of the most important. They are ideally suited as an anonymous means of payment for representatives of the underworld, terrorists, various religious sects, etc. But, if we consider this issue solely from the position of a financier, these problems should be solved by the police and other law enforcement agencies. Although not all agree with this opinion.

Analyzing the latest news and statements of well-known businessmen, bankers and politicians about the new money, one can find a lot of opposing opinions and convincing evidence of both opponents and supporters of cryptocurrency. Naturally, countries that have a real impact on the global economy are unlikely to want BTC, ETH, BCH or LTC to become the main world currencies. Fiat dollars provide an opportunity for almost nothing to acquire resources in the third world countries. Transparent digital money clearly does not like bankers, insurance companies, large corporations and other firms that, along with the legal business, conduct questionable operations. But this is on condition that the tax authorities will have full access to all crypto chains of commercial structures.

If we analyze the attitude towards digital money of specific countries, then we can say that their obvious opponents are: China, Indonesia, Bolivia, Ecuador. Over time, the policies of some individual states in relation to cryptocurrencies can change dramatically.

But, it is also worth being sober-minded and realize that a cryptocurrency may not be what you think. Absolutely all digital money can be tracked if desired. A logical question arises: are they trying to slip the next fable of a free life? After all, identifying a user by his currency purse will not be difficult. Is it all the way they really tell us? The governments of countriesbehave very strangely in relation to cryptocurrency and do not resort to tough measures. Doesn’t that seem strange to you? After all, cryptocurrencies incur losses for fiat money of all countries of the world. There is something to think about. But, let everyone draws conclusions himself.

What will happen to cryptocurrencies in the short term?

Despite all the positive aspects of cryptomonet, at the moment they remain a speculative asset. And according to well-known analysts, the situation will not change until legislation has been passed that regulates the circulation of digital money. Much depends on the position of China on this issue.

In addition to political and economic factors that may have a significant impact on the rate of cryptocurrency in the next year or two, we should not forget about the role played by the media in this matter. Serious traders are quite happy with the situation when around popular digital currencies artificially create “much ado about nothing.” This allows you to earn good money on small, but controlled changes in the rate of popular cryptocurrencies (first of all, Bitcoin). Many financiers believe that in the first half of 2020, serious shocks are not expected in the considered market. And if the first countries of the world do not show any legislative initiatives that can seriously affect the turnover of cryptomonet, then their value (in relation to the dollar) will significantly decrease by the end of the year.

In another scenario, in a year a serious growth in the rate of the main digital currencies is expected. But this requires a serious political or economic factor that will force potential investors to pay attention to the cryptocurrency market, as it is the safest in the current situation.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

Global Monetary Reset, Bitcoin Mining, and Cryptocurrencies

By Dee McLachlan

In 1988, the Economist had an article entitled, “Get Ready for the Phoenix”. A phoenix, of course, obtains new life by arising from the ashes of its predecessor. Well, in volume number 306 (p 9-10), this is what was written:

“Thirty years from now, Americans, Japanese, Europeans, and people in many other rich countries, and some relatively poor ones will probably be paying for their shopping with the same currency. Prices will be quoted not in dollars, yen or D-marks but in, let’s say, the phoenix...

“In all these ways national economic boundaries are slowly dissolving. ..The phoenix zone would impose tight constraints on national governments. There would be no such thing, for instance, as a national monetary policy. The world phoenix supply would be fixed by a new central bank, descended perhaps from the IMF.

Talking about the IMF. This is what Christine LaGarde said when interviewed at a World Economic Forum at Davos, 2020.

“I think the reset is on multiple fronts… They’ve [Central Banks] done a great job at keeping the crisis the at the level where it was, but now gradually they’re going to have to move to another monetary policy. I don’t know whether it would be the old monetary policy but it will certainly be different from what we have seen…”

She went on to talk about Iran in the strangest terms, saying that they are going to “reset” the economic relationship with Iran. And that it is all about cooperation. (Videos here and here.)

Gold and Global Reset?

It was several years ago, when there was all the talk about the monetary collapse, I followed the advice offered on several alternative sites and bought two ounces of gold. It was at its very peak — and a month after my very humble purchase, the price of gold dropped dramatically. Since then, I have pondered why gold has been so low — and it seems logical that it has been deliberately depressed, so that those in the know could accumulate the metal cheaply.

I quote Shftplan’s article “A Global Financial Reset Is Coming: A Deal Is Being Made Between All The Central Banks”:

“There is an unprecedented reset coming to world financial markets and if you’ve been paying attention it’s impossible to ignore the signs. In fact mega-investment funds, governments and central banks have been secretly buying up and storing physical gold in anticipation of an event that will leave the US dollar effectively worthless and governments around the world angling for a new global currency mechanism, according to mining executive Keith Neumeyer. [Video here]

“…the dollar will be allowed to crash and we should prepare for a total financial, economic and monetary realignment… And though Western mainstream media pundits argue that the recent strength of the U.S. stock market and the U.S. dollar are proof positive that an economic recovery has taken hold, Neumeyer says exactly the opposite is happening.

“Once deleveraging by governments and central banks has been completed they will unleash an economic, financial and monetary storm that will change the very fabric of the global order.”

It makes sense that those running the banking monetary system are planning a reset. They don’t want to crash and burn. Nick Hubble writes:

“Every few decades, the world’s financial system goes through a reset. Just before a complete collapse, the powers that be come together in an obscure place and hash out the terms of the new currency system. That new system usually gets named after the random place they decided to meet…”

Presently, the debt problem seems so big, that inflation can’t even solve it. Inflation is needed to pay off future debt — but then more debt is required to deal with inflation. You only need to look at house prices in Australia to understand future paid employees will never be able to buy into the system — let alone rent in the system.

Enter Bitcoin

Now property is being sold for bitcoin. The owner of a mansion on Victoria’s Mount Macedon is the first Australian to sell in exchange for cryptocurrency bitcoin.

Money is created in several ways. You can dig gold (or resources) out of the ground, or, if you are a central bank, you can loan money into creation. And then that money becomes a claim against resources, or a claim against future resources. Or you can be great at maths.

On 18 August 2008, the domain name bitcoin.org was registered (linked to “Satoshi Nakamoto”). On 22 May, 2020, two Papa John’s pizzas were paid for using 10,000 units of bitcoin — about $30 at the time. A few years later that $30 stake was worth millions.

Now you can mine Bitcoin. Someone please explain! Here is a photograph (right) of Haobtc’s bitcoin mine site manager, Guo-hua, checking the ‘mining equipment’. Huh!

So where do Bitcoins come from? I’m still trying to get my head around Bitcoin (and cryptocurrency) creation — that “miners” use special software to solve math problems, and are thus issued bitcoins in exchange? Sounds similar to how the central bankers create money… puzzle through some maths. But for the banks it’s much easier — they have a licence to just add a couple zeros to a number.

And while banks try “centralize” control, cryptocurrencies operate as a decentralized payment system. People exchange coin directly — not through the banking system. They function outside government control, and beyond the influence of central banks.

The creators of cryptocurrencies have found a way to play the money game, so to speak.

The Cryptocurrencies

I also had no idea of how many new cryptocurrencies there were — and they are gaining traction — fast. There will soon be 260,000 stores in Japan accepting bitcoin using the Air Regi app.

And in the Daily Reckoning, Louis Basenese writes:

“There are now over 831 cryptocurrencies exchanging hands on the ‘open markets.’ The vast majority trade for just pennies, just like Bitcoin did back in 2020. That means there’s a chance to strap yourself to the next cryptocurrency rocket before it launches into the stratosphere.”

A snapshot of 28 August, 2020 – percentage gains in the alternative currency markets, Source Daily Reckoning Business Insider

1210% rise in one day? What!

But James Rickards, in the Daily Reckoning, writes:

“Governments have been patiently watching blockchain technology develop and grow outside their control for the past eight years. Libertarian supporters of blockchain celebrate this lack of government control. Yet, their celebration is premature, and their belief in the sustainability of powerful systems outside government control is naïve.

“Governments don’t like competition especially when it comes to money… A group of major companies, all regulated by government, have announced a joint effort to develop an open-source blockchain as a uniform standard for all blockchain applications.

“Cryptocurrencies and the Super-Elites Plan …developments all point toward an elite group including the IMF, JPMorgan, the Davos crowd, the IRS, SEC, and other agencies converging to shut down the existing free-wheeling blockchain ecosphere, and replace it with a ‘permissioned’ system under ‘consortium’ control.”

Over the next few months, there is probably an opportunity for the little guy to amass a fortune. Maybe I should try. But the powerful “elite” have invaded countries that opposed the central banking system — so what are they going to do about cryptocurrencies? It would have to be in their “reset” plan. And they are probably working on how to tax and control all the Bitcoin wallets out there.

In the meantime, maybe Gumshoe should start a Crytocurrency subscription — that might, for a few pennies now, fund the organisation into the future?

Will governments ban cryptocurrencies? (video)

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Finance & Development, June 2020, Vol. 55, No. 2 PDF version

Monetary Policy in the Digital Age

Crypto assets may one day reduce demand for central bank money

The global financial crisis and the bailouts of major financial institutions renewed skepticism in some quarters about central banks’ monopoly on the issuance of currency. Such skepticism fueled the creation of Bitcoin and other crypto assets, which challenged the paradigm of state-supported currencies and the dominant role of central banks and conventional institutions in the financial system (He and others, 2020).

Twenty years ago, when the Internet came of age, a group of prominent economists and central bankers wondered whether advances in information technology would render central banks obsolete (King 1999). While those predictions haven’t yet come to pass, the rise of crypto assets has rekindled the debate. These assets may one day serve as alternative means of payment and, possibly, units of account, which would reduce the demand for fiat currencies or central bank money. It’s time to revisit the question, will monetary policy remain effective in a world without central bank money (Woodford 2000)?

For the time being, crypto assets are too volatile and too risky to pose much of a threat to fiat currencies. What is more, they do not enjoy the same degree of trust that citizens have in fiat currencies: they have been afflicted by notorious cases of fraud, security breaches, and operational failures and have been associated with illicit activities.

Addressing deficiencies

But continued technological innovation may be able to address some of these deficiencies. To fend off potential competitive pressure from crypto assets, central banks must continue to carry out effective monetary policies. They can also learn from the properties of crypto assets and the underlying technology and make fiat currencies more attractive for the digital age.

What are crypto assets? They are digital representations of value, made possible by advances in cryptography and distributed ledger technology. They are denominated in their own units of account and can be transferred peer to peer without an intermediary.

Crypto assets derive market value from their potential to be exchanged for other currencies, to be used for payments, and to be used as a store of value. Unlike the value of fiat currencies, which is anchored by monetary policy and their status as legal tender, the value of crypto assets rests solely on the expectation that others will also value and use them. Since valuation is largely based on beliefs that are not well anchored, price volatility has been high.

Deflation risk

Some crypto assets, such as Bitcoin, in principle have limited inflation risk because supply is limited. However, they lack three critical functions that stable monetary regimes are expected to fulfill: protection against the risk of structural deflation, the ability to respond flexibly to temporary shocks to money demand and thus smooth the business cycle, and the capacity to function as a lender of last resort.

But will they be more widely used in the future? A longer track record may reduce volatility, boosting further adoption. And with better issuance rules— perhaps, “smart” rules based on artificial intelligence— their valuation could become more stable. “Stable” coins are already appearing: some are pegged to existing fiat currencies, while others attempt issuance rules that mimic inflation- or price-targeting policies (“algorithmic central banking”).

As a medium of exchange, crypto assets have certain advantages. They offer much of the anonymity of cash while also allowing transactions at long distances, and the unit of transaction can potentially be more divisible. These properties make crypto assets especially attractive for micro payments in the new sharing and service-based digital economy.

And unlike bank transfers, crypto asset transactions can be cleared and settled quickly without an intermediary. The advantages are especially apparent in cross-border payments, which are costly, cumbersome, and opaque. New services using distributed ledger technology and crypto assets have slashed the time it takes for cross-border payments to reach their destination from days to seconds by bypassing correspondent banking networks.

So we cannot rule out the possibility that some crypto assets will eventually be more widely adopted and fulfill more of the functions of money in some regions or private e-commerce networks.

Payment shift

More broadly, the rise of crypto assets and wider adoption of distributed ledger technologies may point to a shift from an account-based payment system to one that is value or token based (He and others 2020). In account-based systems the transfer of claims is recorded in an account with an intermediary, such as a bank. In contrast, value- or token-based systems involve simply the transfer of a payment object such as a commodity or paper currency. If the value or authenticity of the payment object can be verified, the transaction can go through, regardless of trust in the intermediary or the counterparty.

Such a shift could also portend a change in the way money is created in the digital age: from credit money to commodity money, we may move full circle back to where we were in the Renaissance! In the 20th century, money was based predominantly on credit relationships: central bank money, or base money, represents a credit relationship between the central bank and citizens (in the case of cash) and between the central bank and commercial banks (in the case of reserves). Commercial bank money (demand deposits) represents a credit relationship between the bank and its customers. Crypto assets, in contrast, are not based on any credit relationship, are not liabilities of any entities, and are more like commodity money in nature.

Economists continue to debate the origins of money, and why monetary systems seem to have alternated between commodity and credit money throughout history. If crypto assets indeed lead to a more prominent role for commodity money in the digital age, the demand for central bank money is likely to decline.

Monopoly supplier

But would this shift matter for monetary policy? Would diminished demand for central bank money reduce the ability of central banks to control short-term interest rates? Central banks typically conduct monetary policy by setting short-term interest rates in the interbank market for reserves (or clearing balances they keep with the central bank). According to King (1999), ceasing to be the monopoly supplier of such reserves would indeed deprive central banks of their ability to carry out monetary policy.

Economists disagree about whether massive adjustments in central bank balance sheets would be necessary to move interest rates in a world where central bank liabilities ceased to perform any settlement functions. Would the central bank need to buy and sell a lot of crypto assets to move interest rates in a crypto world?

Regardless of such disagreements, the ultimate concern is similar: “The only real question about such a future is how much the central banks’ monetary policies would matter” (Woodford 2000). To Benjamin Friedman, the real challenge is that “the interest rates that the central bank can set . . . become less closely—in the limit, not at all— connected to the interest rates and other asset prices that matter for ordinary economic transactions” (Friedman 2000).

In other words, if central bank money no longer defines the unit of account for most economic activities—and if those units of account are instead provided by crypto assets—then the central bank’s monetary policy becomes irrelevant. Dollarization in some developing economies provides an analogy. When a large part of the domestic financial system operates with a foreign currency, monetary policy for the local currency becomes disconnected from the local economy.

Competitive pressure

How should central banks respond? How can they forestall the competitive pressure crypto assets may exert on fiat currencies?

First, they should continue to strive to make fiat currencies better and more stable units of account. As IMF Managing Director Christine Lagarde noted in a speech at the Bank of England last year, “The best response by central banks is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.” Modern monetary policy, based on the collective wisdom and knowledge of monetary policy committee members—and supported by central bank independence—offers the best hope for maintaining stable units of account. Monetary policymaking can also benefit from technology: central banks will likely be able to improve their economic forecasts by making use of big data, artificial intelligence, and machine learning.

Second, government authorities should regulate the use of crypto assets to prevent regulatory arbitrage and any unfair competitive advantage crypto assets may derive from lighter regulation. That means rigorously applying measures to prevent money laundering and the financing of terrorism, strengthening consumer protection, and effectively taxing crypto transactions.

Third, central banks should continue to make their money attractive for use as a settlement vehicle. For example, they could make central bank money user-friendly in the digital world by issuing digital tokens of their own to supplement physical cash and bank reserves. Such central bank digital currency could be exchanged, peer to peer in a decentralized manner, much as crypto assets are.

Safeguarding independence

Central bank digital currency could help counter the monopoly power that strong network externalities can confer on private payment networks. It could help reduce transaction costs for individuals and small businesses that have little or costly access to banking services, and enable long-distance transactions. Unlike cash, a digital currency wouldn’t be limited in its number of denominations.

From a monetary policy perspective, interest- carrying central bank digital currency would help transmit the policy interest rate to the rest of the economy when demand for reserves diminishes. The use of such currencies would also help central banks continue to earn income from currency issuance, which would allow them to continue to finance their operations and distribute profits to governments. For central banks in many emerging market and developing economies, seigniorage is the main source of revenue and an important safeguard of their independence.

To be sure, there are choices and policy trade-offs that would require careful consideration when it comes to designing central bank digital currency, including how to avoid any additional risk of bank runs brought about by the convenience of digital cash. More broadly, views on the balance of benefits and risks are likely to differ from country to country, depending on circumstances such as the degree of financial and technological development.

There are both challenges and opportunities for central banks in the digital age. Central banks must maintain the public’s trust in fiat currencies and stay in the game in a digital, sharing, and decentralized service economy. They can remain relevant by providing more stable units of account than crypto assets and by making central bank money attractive as a medium of exchange in the digital economy.

DONG HE is deputy director of the IMF’s Monetary and Capital Markets Department.

This article draws on “Virtual Currencies and Beyond: Initial Considerations,” January 2020 IMF Staff Discussion Note 16/03, by Dong He, Ross Leckow, Vikram Haksar, Tommaso Mancini Griffoli, Nigel Jenkinson, Mikari Kashima, Tanai Khiaonarong, Céline Rochon, and Hervé Tourpe.

References:

Friedman, Benjamin M. 2000. “Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking.” International Finance 3 (2): 261–72.

Goodhart, Charles. 2000. “Can Central Banking Survive the IT Revolution?” International Finance 3 (2): 189–209.

He, Dong, Ross Leckow, Vikram Haksar, Tommaso Mancini Griffoli, Nigel Jenkinson, Mikari Kashima, Tanai Khiaonarong, Céline Rochon, and Hervé Tourpe. 2020. “Fintech and Financial Services: Initial Considerations.” IMF Staff Discussion Note 17/05, International Monetary Fund, Washington, DC.

King, Mervyn. 1999. “Challenges for Monetary Policy: New and Old.” Speech delivered at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, WY, August 27.

Woodford, Michael. 2000. “Monetary Policy in a World without Money.” International Finance 3 (2): 229–60.

ART: ISTOCK / ISTOCK_ONESPIRIT
Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.

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