National overview
Beyond Bitcoin, It’s Time for Cryptocurrency Boards
In 1999, Milton Friedman, the world’s leading money cellar, predicted the rise of cryptocurrencies. This is what he had to say: I think the internet is going to be one of the most important forces to reduce the role of government. The one thing that is missing but that will be developed soon is a reliable e-cash method whereby you can transfer money from A to B on the internet without A knowing or B knowing A. How can I get a $ 20 account take, give it to you, and then there is no record of where it came from. You can get it without knowing who I am. These kinds of things will develop on the internet and it will make it even easier for people who use the internet. Of course, it has its downside. This means the gangsters, the people engaging in illegal transactions, will also have an easier way of doing their business. More than twenty years after Friedman’s prediction, the speculative mania surrounding cryptocurrencies is breathtaking. Just think that the price of Bitcoin has risen by 1,030 percent over the last twelve months and that its market capitalization has risen to $ 1.1 trillion, making it the sixth most valuable asset in the world. With the announcement by Elon Musk that Tesla would buy $ 1.5 billion in Bitcoin to start accepting bitcoin as a form of payment for [its] products in the near future, ”the frequency of Bitcoin’s listings on Google and its trading volume increased sharply in 2021 and remained closed. If we set aside Bitcoin’s meteoric rise in price, which has been suppressed by dramatic training and bust, it is important to note that its designation as a “cryptocurrency” is a misnomer. A currency is characterized by four fundamental characteristics. To qualify, it must be a unit of account, must be a standard for deferred payment, must be a value store and serve as a medium of exchange. How does Bitcoin just increase in terms of these currency criteria? The volatility of Bitcoin seems to be its Achilles heel. In 2020, the daily volatility of Bitcoin was an astonishing 67 percent. If we look at the most important price in the world, the USD-Euro exchange rate and the world’s international currency, the US dollar, the dollar’s annualized daily volatility in 2020 was only 7.8 percent. Since Bitcoin’s source code predicts that the supply of Bitcoin will eventually be fixed and completely inelastic, all market adjustments can only take place via price changes, not changes in quantity. As a result, it is destined to be inherently subject to extreme price volatility. This means that Bitcoin will never serve as a reliable unit of account. You will rarely see items with Bitcoin price tags. You will also never see deferred contracts (contracts under which payment is made under a long-term credit agreement) in Bitcoin. Can you imagine someone writing a mortgage contract in Bitcoin? The volatility of Bitcoin also makes it unattractive for most businesses to keep cash reserves instead. Indeed, Bitcoin, which is considered an intangible issue (something that incidentally has a contradictory and opaque accounting treatment in the aftermath), throws a significant risk on the balance sheets. In short, it is not a reliable value store. It is therefore no surprise that most companies do not want to take the risks of keeping Bitcoin on their balance sheet. A recent survey found that about 5 percent of financial executives said they “intended to keep bitcoin as a corporate asset by 2021” and “84 percent of respondents said they did not. to never hold bitcoin as a corporate asset “, citing volatility as their main concern. Furthermore, very few items are purchased with Bitcoin. Not only are items priced in Bitcoin, but the transaction costs associated with Bitcoin are prohibitively high for both buyers and sellers. Bitcoin clearly falls behind to meet the four standard criteria that must be designated as a currency. Therefore, it should not be considered as a currency, but as a speculative asset with a fundamental value of zero. That said, Bitcoin has an objective market price. The price is determined by speculators working in a whirlpool in which they buy an asset with very little or no use in the hope of selling it later at a higher price: bigger fools and all that. If Bitcoin’s failure to meet the currency criteria is not bad enough, it does not even fall short of the goals of the architect (or architects), the pseudonym Satoshi Nakamoto, who intends that Bitcoin would function as a currency. Nakamoto expected Bitcoin to address three issues with ‘government money’, which Bitcoin could not solve. First, Nakamoto claimed that Bitcoin would overcome the lack of confidence associated with money issued by central banks. But Bitcoin, which is fiat, has a history defined by fraud and breaches of trust, illustrated by the Mt. Gox scandal. Second, Nakamoto designed Bitcoin to address privacy issues. However, about 95 percent of all cryptocurrency trading takes place on central exchanges. These exchanges often collect identifying information from their users and have a history of not protecting such information. Finally, Nakamoto complained about the ‘massive overhead’ of commercial banking transactions that ‘makes micropayments impossible’. Due to technological limitations and fees charged by exchanges and providers of crypto payment, Bitcoin is impractical and too expensive to facilitate most transactions. For example, the popular currency exchange Coinbase charges a base rate for all buying and selling transactions in the US [of] 4%. In addition to Bitcoin, there is enough potential for innovation in private money, specifically a price-stable digital asset. Several attempts have been made, such as the popular stablecoin Tether and Libra of Facebook, but these attempts are chock-full of problems. Tether claims that he is ‘100% backed by our reserves’. In 2021, however, an investigation by New York Attorney General Letitia James found that “Tether’s claims that the virtual currency was at all times fully backed by US dollars were a lie.” In addition, as reported by Bloomberg, JPMorgan Chase & Co. strategists, including Josh Younger and Joyce Chang, wrote in a report that Tether was’ famous for conducting an independent audit and claimed in court reports that they did not need not retain full support. ‘ This is less than reassuring. Libra has failed to establish itself in its original form, and, renamed and restructured, it is supposed to be restarted in the near future. Thanks to convenient access and competition, inferior cryptocurrency products will eventually struggle to survive. Just look at Bitcoin. Although market capitalization soared, Bitcoin’s share of the total crypto market fell from 94 percent in April 2013 to 61 percent today. Eventually, the current limited use value of Bitcoin is likely to be obscured by the offer of superior challengers. So, what can an effective competitor look like? It is in the form of a private cryptocurrency board. A traditional currency card issues a currency that is freely convertible at an absolutely fixed exchange rate with a foreign anchor currency or gold. Therefore, there is no capital control under a currency control arrangement. The currency issued by a currency board is backed 100 percent with anchor currency reserves. So, with a currency board, its currency is merely a clone of its anchor currency. Currency boards exist in about 70 countries, and none have failed – including the North Russian currency board installed on November 11, 1918 during the Russian Civil War. What all currency boards – present and present – have in common is that they are public institutions, but that there is no requirement for currency boards to be publicly owned. A private cryptocurrency board would be the ideal institutional arrangement for the crypto world. Its home offices and reserves could, for example, be located in Switzerland, a financial center for safe haven, and it could be controlled under Swiss law. It can be operated with a small staff, as is the case with all traditional currency boards. As for its anchor, it could be a currency issued by a central bank, or gold, not issued by a sovereign. Given its digital nature, the balance sheet information of a private cryptocurrency board, including its reserves, may also be regularly available and audited by independent auditors. With such a system, the crypto world would eventually have a product that is more than just a speculative card house. Steve H. Hanke is a professor of applied economics at Johns Hopkins University in Baltimore. He is a senior fellow and the director of the Troubled Currency Project at the Cato Institute in Washington, DC, Robert J. Simon, is head of the economic intelligence group at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise. .