Friday, 26 May 2017

Cryptocurrencies could fix our broken monetary system

In turbulent and fast-changing times, it helps to know that some of life’s uncertainties are anchored to something solid and dependable.

So it will come as no solace whatsoever to remind you that the global currency system is anything but solid or dependable. That is one reason the world’s finances are in such a mess - but new digital cryptocurrencies like Bitcoin could bring us back down to earth.

Let me explain. Once upon a time, the currencies we used to buy and sell things had real tangible value; coins were literally made from silver and gold. When governments introduced paper money and coins made from non-precious metals, they needed a proxy for their former value. So the so-called “gold standard” effectively made coins and notes into an IOU against gold, and everything remained stable.

But when President Nixon ripped up the gold standard in 1971, currency floated free - the dollar became a so-called “fiat” currency, untethered to anything except its central bank’s ability to print more money.

This is critical, because the printing of more and more money is actually what is crippling the global financial system. In response to the global economic crisis, the UK has undertaken a programme of “quantitative easing” (QE) - pumping more new money into the system to keep its structures afloat.

But ongoing and excessive money production is counter-productive. When more cash is made available, it necessarily devalues existing money from the rest of us. To put it brutally, QE is a theft of money from the people by the government, which is devaluing everyone’s money in order to take cash for itself.

The current system is locked in a pattern that depends on more and more of this debt being created. Now the debts of many western economies are in the trillions. In effect, our financial system is a giant ponzi scheme - that is not sensible, and that can’t be sustainable.

Here is where cryptocurrencies come in. In recent years, Bitcoin and its ilk have gained notoriety as a system of currency dependent on solving algorithmic problems, that includes a built-in public ledger and that, to many, has been a speculative investment.

But cryptocurrencies’ real benefit is in its limitations - or, rather, one core limitation. You see, the life of a Bitcoin is somewhat tragic. Built into the system is a rule that puts a cap on the maximum number of Bitcoins that can ever circulate, reckoned to be 21 million.

This rule makes cryptocurrency finite. In other words, there can be no unadulterated, never-ending supply of Bitcoin, no quantitive easing for crypto, and no government or central bank gaming the system. Just like the historic gold standard, the currency is tethered to something finite.

Now, I don’t necessarily think Bitcoin will be the cryptocurrency everyone adopts - the value of Bitcoin specifically still fluctuates considerably, and it is still regarded largely as a speculators’ pursuit.

I think that one flavour of cryptocurrency or another will, eventually, become a ubiquitous currency standard the world over. Many banks are already creating their own cryptocurrencies and, whilst consumer adoption is currently small-scale, I expect future uptake to be considerable, for both individuals and institutions alike.

What will be the impact when that happens? Financial liberation. Cryptocurrency will put control back into the hands of people who own the currency, rather than leaving the banking system and governments in control.

Today, all this cash being pumped out into the system by the banks is not helping ordinary citizens. Much of it is finding its way to already-wealthy organisations or is being put into property investments and other super-inflationary assets, which only serves to alienate ordinary consumers from vast sections of the economy and, indeed, society. How many more trillions will be misdirected in this way?

It’s time to tie down our financial system again, to peg it to rules we can all agree on. Cryptocurrency carries possibility in its DNA. We may not be on the verge of this future right now, but I think the gold standard is in them there hills.

Lee Murphy
Owner & CEO

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