Biden issues Executive Order to tame digital currencies President Joe Biden on Wednesday signed an Executive Order directing US government agencies to develop a framework to promote and police digital currencies. "The [Executive Order] will help position the US to keep playing a leading role in the innovation and governance of the digital assets ecosystem at home and abroad, in a …
My guess then is that you haven't seen that many arguments. I am not a cryptocurrency zealot, but I will lay out the arguments most often made and you can decide on your own how you value them.
The first common argument is about currency's value and governance. Most currencies issued by government are controllable by that government in that the government can increase the supply if they wish. This can be done disastrously wrong, causing hyperinflation. People don't tend to like hyperinflation, and some have decided that it would be better not to trust anyone with that power. They create cryptocurrency that has a limited supply and restrictions on how it can be created (if at all) so that nobody has the power to cause inflation in that way. This also eliminates the reasons governments tend to give that power to a regulator, for economic control including attempts at stimulation or stabilization. You decide whether you prefer fixed limits or central bank management.
The second argument is about the currency's convenience. If I have a bunch of money that I want to send to you in a different country, there can be obstacles to doing it. I have to get that money into an account that can transfer it internationally, wait for the transfer to complete, pay transfer and exchange fees, and possibly file paperwork to get that set up. It would be easier if I could just mail you an envelope of cash, but that would take some time, and if the envelope gets stolen, then we're stuck. Cryptocurrency is designed to allow transfers pretty easily, reducing the friction involved. Not every one has done that successfully. In addition, this ease of transfer without protections also makes it easier to lose and introduces new types of theft (some stealing is easier and some is harder with cryptocurrency).
The third argument is about privacy. There are a lot of records about my financial activity kept by the government and financial companies that report it to them. Some cryptocurrencies are designed to keep this data private. Some of them weren't designed to do that and really don't. Keeping the data private can give the user more control over their money and more ability to use it without interference from an untrustworthy government. It can also make committing crimes easier, perhaps most obviously tax evasion.
As a recent arrival to your planet, I am somewhat baffled by the term "money laundering". I have never seen an authoritative definition, and the best I could come up with from the usage is "monetary transaction between individuals kept from the Government knowledge". If there is a better definition, please illuminate me; if not, why is it often used as a pejorative?
But if BitCoin's valuation fluctuates by 40% from one day to the next, that is no problem.
There is a fourth argument about funny money : it can be stolen just like real money. And I don't mean by thieves pilfering your account, I mean by the very "institutions" you put your wallet in to be managed. There is an already non-negligeable list of exchanges that have mysteriously folded, taking all coins with them, or management has fled, taking all coins with them, or coins have been lost due to insufficient security (or somebody took the coins with them).
For my part, thank you but I prefer proper management by a fully-chartered bank that has the legal obligation of managing my account properly and executing the transactions I demand faithfully.
And I prefer not to have to pay €20 in transaction fees when I buy a €14 pizza.
Given the way the energy prices are currently going, your €20 estimate may even be on the low side although it's distributed through all that maintain the specific ledger.
Also, given how long it takes ti actually process a transaction it may be cold by the time that's done. There are a whole raft of very practical problems associated with crypto currencies too.
Inflation is still a thing for BTC and other crypto. The opportunity to add another decimal place and increase fractional trading means the supply is in fact, unlimited.
Generally, the checks and balances on items 2 and 3 you cite for "government-approved" currencies are only concerns where one wishes to make an illegitimate transfer. Who decides what is a legitimate transfer is of course, a problem.
Per the OP, the real value in Crypto is the ability to bypass legitimate routes.
There are plusses and minuses to be able to conduct such a bypass; if your government is hell bent upon destroying it's own economy in order to further a personal agenda; one probably does appreciate the ability to trade in something disconnected from government meddling.
And equally, if you're a cybercriminal extraordinare bypassing official channels gives you a route to evade control.
Ponzi scheme potential also applies to speculative use of Crypto. (It's hard to make a Ponzi scheme out of trading Fiat currencies).
Crypto has one very blatant risk. No internet, no crypto. Fiat currency - well yes - arguably that's also a possible scenario. No comms, no banko.
For all of the potential upside applications; the "cost" of operating crypto, both financial and environmental, and especially the mis-use which is absolutely rife... On the whole I don't think it's continued existence is particularly defensible in present form.
> There are a lot of records about my financial activity [..] Some cryptocurrencies are designed to keep this data private
Remember that (e.g.) Bitcoin is pseudonymous, not anonymous. I'm going to assume that if you don't take sufficient care and someone is able to associate that pseudonym with your real-world identity at any point, there'll be a complete record of transactions associated with you.
Pseudonymous, and that is surprisingly dangerous for users of cryptocurrencies. That is because at the same time it is fully transparent and each and every transaction and even individual 'coin' can be traced.
That means that it can be unknown right now who is the owner of wallet XYZ that everyone can peer into, that is not necessarily always the case for ever. If, at some point, the owner of a specific wallet is identified (for instance because they are a celeb who publicly buys, sells or auctions something on the blockchain) then all past activity in that wallet is instantly attributable for everyone.
In the case of celebs that is perhaps interesting for gutter journalism, but in the case of law enforcement going after criminals that is very interesting. No more need for court orders or convincing uncooperative banks to disclose information. Some small understaffed police team in Uruguay might arrest someone locally who was paid in cryptocurrency by someone on the other side of the planet. They can now trace that money back years and years sitting behind a computer screen in Uruguay. No need to convince a Russian/Vietnamese/Ghanaian court that you want access to someone's bank account. You already have it, transactions going back a decade perhaps.
One of the most striking things about the arrest of the couple that is accused of laundering billions from a past Bitcoin hack is that so many years later, every single detail of each and every one of their transactions was still publicly available. To police investigators but also to me.
You are correct. There are some cryptocurrencies designed for more privacy, but Bitcoin isn't one of them. People who want privacy should study which ones protect it, and a lot of people don't know what they're talking about. Still, it's a frequent argument and some of them make the argument valid.
That hyperinflation can occur is absolutely true. But the last time that happened to a serious currency is a century ago. If anything, the super brains (ever tried reading one of these? My head usually comes close to exploding after a few paragraphs) that discuss and set monetary policy have spent over a decade trying to get inflation up from its perilously low level. To no avail. It took a pandemic to get it above the coveted 2% a year. The definition of hyperinflation requires something in the range of 50% a month.
More interestingly, many cryptocurrencies suffer from a severe risk of deflation (and if you had to choose, you’d always prefer hyperinflation over even the lowest level of deflation) because the people who designed them either never read a single economics book or (if they had and took the warnings from economics text books as a manual for destruction) prefer to see the world burn and everyone being perpetually indebted to a small elite.
There are arguments for using the blockchain for finance but inflation isn’t one of them.
Good question, and a reasonable one to ask.
One of the biggest fears of most macro economists is deflation. That's when money increases in value over time. That seems nice at first sight, you get something (value) for nothing (waiting another day).
The big problem is that it causes a large economic collapse as most trade from micro to macro would grind to a halt. Why buy something today if you can hold off until tomorrow when you'll get more for the same money? If you thought the lockdowns were bad for shops, wait till you see deflation. That causes havoc for all sorts of things, from basic food supply to advanced manufacturing supply chains.
Skirting around that zero percent inflation is therefore sailing very close to the wind. The slightest disturbance can throw an economy into deflationary territory. And, importantly, stopping inflation that is too high (the current ideal is typically 'just under 2% per year') is a walk in the park compared to stopping deflation. Once you're in a deflationary spiral it's extremely hard to get out of. In modern times you might consider abandoning a currency altogether and switch to someone else's currency (just like the USD and EUR are used as secondary currency in some economies).
There is also another benefit of inflation. It's inherently democratic (not in the strictly political definition but more in the sense of equitable). Inflation favours the people who have little over the people who have a lot. Debts are slowly erased and people with (lots of) money are incentivised to invest their money instead of lazily leaning back and letting the passing of time increase their wealth. Deflation makes the 'haves' get richer while the 'have nots' get ever more indebted to the 'haves'. Inflation does the opposite.
Jimmy2Cows,
To add to Len's post, there are other problems with deflation. The biggest one is debt. It's debt that makes deflation spirals so intractable economically destructive and horrible. And politically desabilising.
Firstly it destroys investment. Todays investment is tomorrow's economic growth. So lets say I borrow a million quid to buy a machine tool. But there's 10% deflation. Assuming no depreciation, next year my tool is now only worth £900,000. But I still owe £1m on it. But worse, I've got to pay interest on that loan. So this year perhaps I need to sell 100 gubbins to pay off my interest. Next year, that'll be 110 gubbins. The year after 121. The year after that 133. And each year the value of my machine tool has dropped by 10% and the amount of my loan has effectively increased by 10% because money is getting more valuable.
This is called the debt denominator effect. If I borrow a million quid and there's 10% inflation, then that million is effectively getting 10% smaller every year. Fine if inflation is predictable, because the bank will just charge me 15% interest. But it encourages investment in growing the future economy, because it reduces the risk of debt. Reverse that process and borrowing to invest becomes horrendously risky. And the debt overhang gets bigger, and more crushing, year after year.
Add in the fact that deflation tends to be linked to economic recessions - actually depressions because historically it takes years to fix - and you can see that investing in the future is even less attractive during a depression.
The debt denominator effect plus recession combines to crush people and businesses with existing debts, which means you get sequences of business failures, causing cascades of failure taking out their customer businesses, until so many loans go bad that the banks start collapsing, which destroys economic confidence leading to a spiral of depression.
This is why despite Roosevelt's New Deal and government stimulus the US economy didn't really pull out of the 1930s depression (which started in 1929 of course) until that ultimate economic stimulus package: World War II. The huge demand for weapons took up the slack in the economy and caused it to boom.
One of the foremost academic experts on the 1930s Depression happened to be Ben Bernanke. Who just happened to be governor of the Federal Reserve in 2007. Which is one reason why the world ended up with QE - which was good for the world economy. Because the short answer is that inflation is way better than deflation.
"That hyperinflation can occur is absolutely true. But the last time that happened to a serious currency is a century ago."
That's a very charitable conclusion. For one thing, what's a serious currency? The Venezuelan bolivar is not a currency you or I may have to deal with very often, but fifty million Venezuelans probably care about the hyperinflation it's gotten.
In addition, I've also seen that "The definition of hyperinflation requires something in the range of 50% a month", and I don't know who came up with that definition. If that's your definition, there's a large area of "really bad inflation but not technically hyperinflation". 50% a month gives an annualized rate of 12975%. If you have 1000%, your economy is dead. If you have 100%, your economy is dying. If you have 20% (a year, not a month), you're likely to have people calling for your immediate removal from office. Coups have been launched for that. That number is not a realistic level at which to start using the term.
The case for using the blockchain for currency (if you want to call it that because the existing cryptocurrencies tend to act quite poorly as useable currency, they’re more like a commodity) does exist.
It’s usually not the ones that you hear crypto-bros talk about. Crypto-bros come in two flavours, they’re either clueless and are unknowingly doing the dirty work for someone who is not clueless, or they’re lying to you about their true motives and goals. Either way, don't pay too much attention to what they say.
I can’t be arsed right now to go into a full description of the pros and cons of Bitcoin, Ethereum, Dogecoin etc. etc. Perhaps another day. Besides, this article is mainly about something entirely different, a Central Bank Digital Currency (CBDC).
A CBDC is essentially a form of digital money like we already have. Most people barely carry coins and notes anymore, it usually sits digitally in a bank account. Like a digital IOU from a private company to give you the equivalent value in coins and notes if you ask for it. Those coins and notes, in turn, are an IOU from the Central Bank that has created the coins and notes, to give you the equivalent value in something else. Think: gold or something. This is so theoretical that it barely matters what they would really give you in return.
There is something funny happening in the above paragraph. A public institution like the Central Bank makes the money for the people but it actually has no real relationship with the people. Except for oversight of course, Central Banks are usually operating within boundaries set by a democratically elected body such as a parliament or government. But that is as close as you and me get to a Central Bank. In real life we tend to rely on private banks instead.
Our employers don't give our salary to us at the end of the month, they send it to a private bank of our choosing who will keep it for us and displays their IOUs to us in the form of a balance in a banking app. We rely on private banks to be truthful about what they keep for us and to always be there when we need access to our own money.
That system with its curious split between public and private banking has worked well for over a century until the Global Financial Crisis of 2008. That's when it suddenly became clear that even private banks that are worth billions could suddenly collapse because of a lack of trust. When it suddenly became hard for everyone to assess value of things, the actual value of things could magically disappear. Safety funds had to pay out, people lost chunks of their savings (haircuts) or their entire house (foreclosure), Governments had to step in to save 'systemic' banks. The super brains went looking for ways to better weather a similar storm in the future. Some of them think they have found it in CBDCs.
One of the things that a Central Bank Digital Currency (CBDC) can do is, for the first time ever, create a direct relationship between a member of the public and the public bank. It is explicitly not meant as a replacement for private banks, it's meant as an additional bank account that you and me can hold with a Central Bank. There may or may not be some benefits to having that separate account in normal times. It's in times of crisis, however, that it suddenly becomes vital. Central Banks don't go bankrupt like private banks do. Let's say there's a major crisis (financial crisis, a war, a pandemic) and a government decides it wants to give money to everyone (whether 'helicopter money', 'stimulus checks' or whatever form) then putting it straight into people's account at the Central Bank is much easier and safer (putting helicopter money in a bank that might be about to collapse doesn't help the government or the individual) than using private banks.
Why do this on the blockchain? Because having a permanently immutable ledger does some times have benefits. And a better designed blockchain with this specific goal in mind can prevent the negatives of most money-on-the-blockchain (deflationary, high energy use, cumbersome, expensive) projects.
Anyway, if this piques anyone's interest, I'd start with what the Bank of International Settlements (an industry association of Central Banks, if you will) has published about it. BIS: Central bank cryptocurrencies. The ECB has published some interesting stuff about a digital euro and China has already launched one: China’s digital yuan is a warning to the world.
"A public institution like the Central Bank makes the money for the people but it actually has no real relationship with the people."
Central Banks serve private banks. They raise or lower the interest rate for private banks to borrow from them and they raise or lower the reserves required by law for private banks.
It has nothing to do with individuals.
It's called corporate welfare.
Central banks don't serve private banks. They regulate them. Because of the basic design problem with banks, that they can be solvent and well run and still get destroyed by a bank run, central banks are also there to act as lender of last resort. As was done in 2008 when the Bank of England printed something like £2 trillion and forced all UK banks to take that as loans - and then all the money was paid back within 3 months and unprinted/destroyed. Similar policies were enacted by other major Central Banks. But this wasn't corporate welfare, as it was firstly necessary to save the economy, and secondly the banks were charged interest. So it effectively ended up as a tax on all banks - given none had a choice about taking it.
The role of a central bank is to make sure your banks are well run, and then be there to bail them out when a massive financial crisis hits. The problem before the crisis is that the UK government had removed the role of bank regulation from the Bank of England and given it to an separate regulator. Although given other jurisdictions did equally badly, I suspect the real problem was the lack of institutional paranoia, as nobody was around with direct memory of even the 1970s crises - let alone the 1930s So I guess we'll need to start seriously worrying about bank regulation in about 2050.
That was separate to the money given to the failing banks, eg. RBS and Lloyds/TSB. The Bank of England couldn't bail them out, because they didn't have sufficient assets, and the normal rule of central banking is you lend at slightly punitive interest to any bank that can provide assets to put up as collaterol (lender of last resort) - and wind-up any bank that can't. In the case of RBS and Lloyds/TSB they were considered too big to fail, so the government forced them to take large amounts of money, and took shares in return. Again, not corporate welfare, as the government ended up owning large chunks of them, in exchange for the cash. It's at least five years since we sold off the last bits of Lloyds/TSB at a profit to the taxpayer. So again, no corporate welfare in sight.
Thank you for your civil and reasonable reply.
To your first point, about value and governance, others have made eloquent and valid replies about the dread of deflation. I would only add that in the past century we've seen a wide variety of misgovernment in just about every country on earth, and only a handful of times has this resulted in runaway inflation. To borrow an old saw, monetary hawks have correctly predicted about 20 of the last 3 hyperinflations. To put it in more abstract terms: the government controlling the money supply is indeed dangerous, but when you realise that the alternative is the money supply controlling the government, it becomes pretty obvious which is the lesser evil. Nobody wants to play Russian roulette with an automatic.
The "convenience" argument - there are two likely scenarios. Either I'm paying money to an overseas business, or I'm sending it privately to a friend or relative because - reasons that are really no business of anyone else. In the first case (far more common in my experience), the whole thing is trivial - credit card networks solved this decades ago. In the second case, the whole thing used to be fairly straightforward, but has been made steadily more complicated over the past 25 years because of efforts to prevent money laundering. That tells me everything I need to know about where this "convenience" argument is coming from.
The third argument is really only relevant to people who want to keep their transactions secret from the government. Now, obviously there are such things as untrustworthy (in this context) governments, but if you have one of those, it's not clear how useful it would be to keep your finances secret from them. Look at Russia today. If you're a distressed oligarch, you're probably quite thankful for your cryptocoins right now. But if you're an opposition politician or just a regular plumber, it's not clear how they'll help you. If Putin wants you out of the way, Bitcoin won't help you.
Anything that makes money easier to transfer or to hide makes crimes involving that money easier, that's true. However, like a lot of life, we don't often operate on that kind of logic. The internet also makes a lot of crimes easier, but it's not a great excuse to ban it. Cryptocurrency is frequently used by criminals, but so are many other more established parts of the financial system. In short, just because money laundering is possible doesn't make some system immoral.
As for privacy, on that I must disagree. If I was a small-scale Russian citizen, I would be buying cryptocurrency as much as I could right now. Russia has been taking lots of restrictive steps regarding their citizens' money. You can't withdraw very much from the bank. You can't convert it into other currencies. You can't transfer it outside the country. Each of these is weak and has a few exceptions, but they really don't want the average citizen to have monetary control. This is the case for two reasons. They are going to have an economic collapse and they want to use their citizens' money to blunt it. As a citizen, that's not reassuring to me. The other reason is that they like the control that they have over the citizens by doing so; if they want to monitor or restrict the actions of one of them short of imprisoning them, financial control can do it for them. If I had to live with that, I would want as much value as I could get out of their control and ideally easy to take with me if I can manage to leave the country. It also helps if I'm going to use the money in a way that displeases them, for example by funding protest efforts or protecting those who participate in them.
Not really. This is an Executive Order for a raft of government agencies to form working groups to discuss the shape of the glass.
It's designed to look like something is being done when most agencies don't have a clue as to what could be or should be done and those that do have a clue disagree.
"This, the company said, represents progress, because lawful cryptocurrency usage is growing faster than criminal usage"
Buy lawful usage I assume they mean all the suckers who are buying bitcoin as an 'investment', as who is actually spending/accepting cryptocurrency for goods and services? Its no use for low value items do the fees and for anything of high value you run the risk that £10K of Bitcoin today could be worth £8K , £1K or zero tomorrow with the fluctuation in Bitcoins value.
It is incorrect to bundle Bitcoin under the generic term of cryptocurrency.
Bitcoin is the the only ‘decentralised’ peer to peer network coin. All other coins (Alternate Coins) are centralised, so just like all other banks or companies they can be manipulated. Therefore your Bitcoin can not be confiscated or shut down and it’s value comes from its scarcity. Fiat and Alternative Coins can be created indefinitely. Effectively you are your own bank with Bitcoin.
Bitcoin nodes can also have satellite connectivity in case someone thinks they can shut down the internet.
Your money in the bank doesn’t belong to you.
Your gold can be confiscated.
CBDC’s will track your every move, control your spending and control your access. They are the ultimate centralised control mechanism. That’s why governments can’t wait to implement them. The claims that Bitcoin, with all transactions visible and traceable on a public ledger, is used for wide spread criminal activity is all part of the fake news. It’s the worst currency in the world for criminals to use. Fiat is the most anonymous currency.
Bitcoin is essentially controlled by the owners of so called "stable coins". They often "print" money out of thin air by shady accounting and falsely claiming they have received real money in return for Bitcoin. A hundred or so people globally who together set the price of Bitcoin by fiddling with the numbers.
That the Bitcoin algorithm and past ledger are immutable does not act as a safeguard against 'wash trading' or artificial valuations. In fact, the complete lack of oversight makes it much easier. It's like time travel to the 19th century but taking a 21st century printing press with you.
One of the biggest values of cryptocurrency is that it isn't fiat currency. There is no fiat holder (i.e. the government) who can inflate it by "printing more". That is why the former vice president and his administration are opposed to it -- it's a good hedge against the US Dollar, which they continue inflating.
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