Transformative Transactions: What's in Your Digital Wallet?
Illustration by Thuan Pham
Consumers are very astute when it comes to seeking a bargain, often to the precise penny they’re willing to spend for a valued item. Some purchases require extensive bargaining, a back-and-forth process that could even involve mediation. Most daily purchases, however, are simply based on predetermined prices. Two critical questions stand out for each occurrence: 1) How much is the transaction truly worth to buyers and sellers? And, 2) What form of currency is acceptable to both parties?
In 2013, New York magazine printed a story about illegal drug sales being conducted via bottles of Tide, the ultimate money launderer. You might ask: Does the orange container of cleaning delight pass the test as valid currency? Here are some of the traits that test the detergent’s transactional legitimacy: wide acceptability (what’s in your laundry room?), portability (sort of), durability (the leading U.S. laundry detergent since 1949), consistent value (seems to stay close to the same scanned price in the grocery store), cognizability (Proctor and Gamble spent $197 million promoting Tide in 2019 alone), and stability of value (any chance children will stop playing in the mud?). No wonder street dealers stopped accepting cash.
As you read more about the emerging power of digital currencies, it’s time to decide whether they embody legitimizing characteristics that could elevate each to the “full faith and credit” status of the fiat Jacksons that flow from our ATMs. Or, at least, to a jug of Tide.
Perhaps akin to the American hesitancy to convert from the footing of our current measurement system to the ubiquitous metric system, we must probe: is there foundation underneath our unease toward digital currencies? Are they simply intangible, untrustworthy blocks of chained data that can be hacked by any Ne’er-do-well with a laptop?
Enter into the discussion the Battling Bobs, Candor’s addition to the Mount Rushmore of notable economic analysts, Robert Litan and Bob Love. Each provides insight to help clarify the murky future of digital currencies. Read both compositions, then decide if you’re in need of a different wallet.
Cryptocurrencies: A Guide, Questions, and Risks
By Robert Litan
Cryptocurrencies are privately issued currencies or assets -- the distinction is not so clear, and I will refer to them here interchangeably as “crypto” -- secured by decentralized blockchain technology, which operates through a public, though encrypted, public “ledger,” which assures anonymity, security, and privacy. Crypto has aroused much fascination, confusion, and concern, hence this essay.
Fascination because of all the conventional money, issued by many different governments around the world, that has gone into them. The total global crypto market hovers around $1.5 trillion, a figure that wildly fluctuates from day to day, but is so large that it is highly unlikely to disappear.
Confusion, because outside of the techies, some sophisticated investors (individual and institutional), and criminals (we’ll get to them) who buy and sell them, these new currencies are not well understood. Are they good for anything, or are they the 21st century equivalent of overpriced Dutch tulip bulbs?
Concern because cryptocurrencies, especially bitcoin, have been the currency of choice for many criminals, especially ransomware hackers who love the anonymity and security, making it exceedingly hard for law enforcement officials to find and prosecute those who use crypto to facilitate their illegal activities (there are some exceptions: the US government was able to crack and return about half of the ransom in the Colonial Pipeline ransomware attack).
Are cryptocurrencies even currencies or money? Not quite, under the standard tripartite definition of “money” – something that is accepted as a medium of exchange (you can pay with it instead of bartering), is a store of value (you can hold onto it and know that it will be good for paying for things indefinitely into the future) and is a unit of account (it is measurable and widely used to price goods, services, and other assets).
Let’s put the two most popular crytocurrencies or crypto-assets – Bitcoin and Ethereum – to these tests. Bitcoin is an encrypted digital currency that is “mined” by solving increasingly difficult mathematical puzzles. Because the process of transferring bitcoins is cumbersome, bitcoin is not a widely accepted medium of exchange, although recently one Latin American country, El Salvador, has accepted it alongside its national currency.
Bitcoin is a store of value, however, so much so that it is analogized to “digital gold,” an asset that, unlike gold, requires no storage costs (aside from super-careful protection of passwords) by the holder. Indeed, because US tax authorities consider bitcoin an asset, gains or losses on its sale are taxed as capital gains. Likewise, some assets and goods are priced in bitcoins, and bitcoins themselves are divisible into fractions, which make it a unit of account.
Ethereum also has its own currency, “Ether” or ETH, and allows transactions to be completed in seconds -- rather than minutes, as with bitcoins -- yet it, too, is still not widely accepted for transactions. As with Bitcoin, Ethereum also is a store of value and a unit of account.
There are two big differences between the two major cryptocurrencies. One is that although both have limited transaction uses and both are stores of value, Ethereum has a broader use: as a cryptographic method for facilitating and monetizing the use of Ethereum “smart contracts,” coupled with its decentralized application (dapp) platform, using its own programming language. The other big difference is that whereas the supply of ether is unlimited, there is a fixed supply of bitcoins, ultimately 21 million.
Why then have both cryptocurrencies increased so much in value – that is, in relation to conventional currencies like the dollar? Their slow but limited acceptance as media of exchange can’t explain the price run-ups (or the recent sharp decline). The value of Ethereum’s platform for digital contracts has been increasingly recognized, but this, too, doesn’t really explain ether’s exponential price increase (and recent fall) either.
For a time, many thought that both currencies/assets represented safe havens against sharp increases in inflation (in the prices of a basket of goods and services). But that theory has been punctured by two events: crypto prices surged last year and early this year even as inflation remained relatively quiescent, while crypto prices sharply declined as inflation surged this spring (in my view, due largely to continuing pandemic-related bottlenecks throughout the economy, which hopefully should ease over coming months).
So how does one explain the extraordinary rise in crypto prices? There are probably as many answers to this question as there are holders of crypto assets, not counting those who don’t own them, especially the skeptics or critics. Nonetheless, it is possible to identify some combination of the following forces that clearly have been at work: the known fixed supply, in the case of bitcoin, which gives buyers comfort that value cannot be inflated away; a libertarian mistrust of government and government-sanctioned fiat money, especially as central banks in the developing world have greatly expanded money supplies since the 2008-09 financial crisis (but which has not led to the explosive rise in inflation as monetarists predicted); and, of course, continuing demand from criminals. Initially, probably most of the demand for crypto has come from young techies, mostly male, but as crypto prices have risen, various institutional investors have dipped their toes into crypto markets, and one exchange, Coinbase, has recently gone public through an IPO.
But even all these factors don’t explain the rising demand and prices. The only plausible explanation for this is a bubble-like narrative: once crypto prices started rising, more buyers bought in expecting further price increases and not wanting to “miss out.” To be sure, real world negative events, from time to time, have interrupted this narrative, contributing to the extraordinary volatility in crypto prices. “Downer” examples include China’s efforts at halting crypto mining and continuing ransomware attacks carried out by hackers accepting payment in crypto (because it is untraceable), which raise the specter that other governments, most importantly the U.S., may one day ban or significantly raise the cost of buying and selling crypto.
So far, however, enough investors continue to place their trust in crypto, which keeps the underlying narrative alive. Trust, after all, is the basis for the acceptance of conventional currencies, too. Rapid inflation eats away at the value of money and trust. Crypto holders believe that other people will continue to believe that crypto is just as, if not more, trustworthy than conventional currencies.
Looming on the horizon, however, is that privately issued digital currencies will soon be joined by central bank digital currencies (CBDCs). China has already run trials in several large cities of a such a system. Here in this country, the Fed is studying the issue, as is the European Central Bank. The main impetus seems to be to ensure that the currently unbanked have secure places to hold their money without the expense of using conventional banks, as well as to eliminate lags in the clearing and settlement of financial transactions both within countries and across borders. In addition, another not so widely advertised rationale for having a CBDC is to reduce criminality, since the Fed then could share digital transactions data with tax authorities and law enforcement (although theoretically the Fed could be prohibited from doing this without a valid search warrant).
Current Fed Chair Jerome Powell has expressed caution about the Fed jumping into digital currencies, which are not the same as cryptocurrencies. Transactions using the latter are decentralized and anonymous; Fed digital money is both centralized and easily tracked. Because of this difference, even if the Fed someday issues digital currency – essentially electronic funds rather than metal coins and pare currency – it should not make much of a dent in the demand for current (and possibly new) cryptocurrencies.
In any event, it is far from clear the Fed will even issue digital currencies, for at least two reasons. One is that the Fed would have to replicate the branch and ATM network of existing commercial banks. It might enlist the post office in this effort to reduce redundancy in federal buildings, but the transition would be difficult and costly. More fundamentally, Powell and others have openly worried about the adverse impact that creating Fed retail deposit accounts would have on the commercial banking system. Specifically to what extent would those safe deposits only or primarily attract funds that are not now parked in banks, or to what extent it would siphon off deposits from commercial banks, thereby reducing available funds for loans? In principle, existing finance companies that rely on commercial paper and other wholesale funding that is not federally insured could step into the breach, but that funding is more expensive than deposits and so would lead to increased interest rates on commercial loans, an outcome that could prompt substantial resistance to the creation of official digital money.
If Fed-provided digital currency won’t dampen interest in crypto, two other risks might.
One is that ransomware could become such a significant problem that irresistible political pressure mounts for the US and other developed country authorities to effectively ban cryptocurrencies, either directly with stiff financial and even criminal penalties for its use, or indirectly, by prohibiting any crypto exchanges from operating in the U.S., or by imposing prohibitively high taxes on crypto transactions. In the past, various experts have highlighted how difficult it would be to enforce any ban, largely because cryptocurrencies exist through software on the Internet, meaning that any prohibition would have to be coordinated among all of the major countries in the world. Up to now, the likelihood of this level of coordination has seemed far-fetched, but if ransomware attacks grow not only in number but in havoc they wreak, do not dismiss the possibility that governments will react, however clumsily, by doing the best they can to ban or severely crimp the use of crypto. If that happens, crypto prices almost certainly would plunge.
The other risk is demographic, and time-contingent. Young techies around the world drove interest in, demand for, and thus the price increases in, crypto. What will happen as they age? Will they turn back toward more conventional assets, especially to diversify their holdings, and if so, will their demand be replaced or augmented by increased institutional interest in crypto, or by a new generation of buyers? What if new forms of cryptocurrencies, much more usable as a transaction medium are invented and widely used – thus potentially displacing the demand for currently popular crypto assets?
No one really knows the answers to these questions. If I were a crypto holder – and I’m not – these are the questions and the risks implied by the answers that would keep me up at night. Or at least induce me to diversify.
Lessons from Bitcoin
By Bob Love
“The only thing necessary for the triumph of evil is for good men to do nothing.” ― Edmund Burke, 1776
“The [Bitcoin] system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.” - Bitcoin: A Peer-to-Peer Electronic Cash System, Satoshi Nakamoto, 2009
Bitcoin was pseudonymously conceived in 2008 and introduced to the public in 2009.
In 2010, the first known commercial transaction using bitcoin occurred when programmer Laszlo Hanyecz spent ₿10,000 to buy 2 Papa John's pizzas [₿1=$.002].
By Dec 2020, the same ₿10,000 could buy 20,000,000 pizzas [₿1=$20,000].
This represents a massive deflation in the “₿ price” of a pizza … or a massive inflation in the “$ price” of a bitcoin … while the “$ price” of a pizza remained relatively constant.
In the interim years, everyone from speculating geeks to regulating central bankers have more or less carefully studied, adopted, scorned and/or feared this “open source peer-to-peer [P2P] digital money” as the future of currency.
Bitcoin’s apparent success as an alternative currency spawned an outbreak of numerous other digital currencies [DCs] … and now central bank digital currencies [CBDCs] … all sharing essential attributes with their own idiosyncratic twists. The result has been nothing less than a virtual course in what a currency is, can be, should be … or not. Let’s
examine a few lessons bitcoin [and the other DCs] are teaching us about currency and
draw some conclusions about the best currency options available to us.
Currency is public
Sect. 47. And thus came in the use of money, some lasting thing that men might keep without spoiling, and that by mutual consent men would take in exchange for the truly useful, but perishable supports of life. Second Treatise of Government, Chapter 5: Of Property, Locke, 1690
“The use of metals [as currency] was attended with two very considerable inconveniencies; first with the trouble of weighing; and, secondly, with that of assaying them. ... To prevent abuses, to facilitate exchanges, and thereby to encourage all sorts of industry and commerce, it has been found necessary ... to affix a public stamp upon certain quantities of such particular metals, as were in those countries commonly made use of to purchase goods. Hence the origin of coined money, and of those public offices called mints ... to ascertain, by means of a public stamp, the quantity and uniform goodness of those different [coins] brought to market.” Wealth of Nations, Of the Origin and Use of Money, Book I, Chapter IV, Adam Smith, 1776
“We are not afraid to entrust the American people with unpleasant facts, foreign ideas, alien philosophies, and competitive values. For a nation that is afraid to let its people judge the truth and falsehood in an open market is a nation that is afraid of its people." ― Remarks on the 20th Anniversary of the Voice of America; Department of Health, Education, and Welfare, John F. Kennedy, 1962
The first and most important quality of any currency is public acceptance. This can arise from
nature [physical fact eg. AU-gold],
convention [agreed rules transparent to and enforceable by public scrutiny eg. ₿] or
fiat [positive law eg. US$].
Bitcoin’s rules and the entire ledger of all bitcoins [and all their exchanges over time] are not only open to the public, they are kept by the public … or rather by all those who have the time and resources to do so in return for the privilege of generating new bitcoin “blocks”. Openness for bitcoin is not political but tactical.
The socio-logic of bitcoin rests on the assumption that transparency maintained by an honest majority exposes and checks the threat of hidden injustice by a dishonest minority … which sounds alot like democracy [demos+kratos = people+power].
If/when conditions ever allow “cooperative dishonesty” to overpower “collective honesty”, bitcoin will fail as a viable social medium … as a currency.
This risk notwithstanding, bitcoin’s open ledger convention is obviously superior to the closed books and systemic dishonesty of the private Federal Reserve which Congress adamantly refuses to open to public scrutiny … and that tells bitcoiners everything they need to know to reject the Fed’s fiat currency. The fact that bitcoins cannot [yet] be clandestinely counterfeited like the US$ makes bitcoin an attractive store of value … extending the “current” in currency well into the future.
Taxes should be public
“Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they require, print [central bank] notes for the balance.” ― The Economic Consequences Of The Peace, JM Keynes, 1920
Holders of bitcoin avoid being robbed by history’s most massive, regressive and secret wealth tax scheme … the funding of fiscal deficits with fiat currency [ie. the counterfeiting of fiat currency to monetize perpetual fiat debt].
I say “robbed” not because I am opposed to the honest and open collection of taxes to fund the public’s legitimate business, but because the use of monetary counterfeiting by private central bankers to enable and obscure fiscal irresponsibility by national public officials for the benefit of crony special interests is the definition of collusive treason against the People at large … and, as was the case in early American law, should be punishable by public execution [see below]. Holders of bitcoin want out of this perverted money-tax scheme.
And while this crime is grave in any republic, it assumes an unforgivable scale when those guilty of it are the fiduciaries for what [under the Bretton Woods convention] is the entire world’s reserve currency … the US$. Originally it was not supposed to be this way.
The failed separation of money and taxes
In the US Constitution Article 1 Section 8 Clause 5 and Clause 6 and in Section 10 Clause 1 enacted in 1789, the US Congress was exclusively entrusted with the power and charged with the responsibility
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures [and]
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States [provided that]
No State shall ... coin Money [or] make any Thing but gold and silver Coin a Tender in Payment of Debts.
The unambiguous foundational intent of the Constitution regarding money was clarified and codified in the Coinage Act of 1792 which
declared the Silver Dollar as the official unit of money in the United States,
pegged [aka regulated] the US$ to 371 4⁄16 grain (24.1 g) pure [or 416 grain (27.0 g) standard] silver while it
pegged the proportional value of gold and silver as 15 units of pure silver to 1 unit of pure gold,
defined Standard gold as 11 parts pure gold to one part alloy composed of silver and copper and
defined Standard silver as 1485 parts pure silver to 179 parts copper alloy,
provided under Section 14 that "Persons may bring gold and silver bullion, to be coined free of expense" and
established under Section 19 [which remains in effect today] a penalty of death for debasing the gold or silver coins authorized by the Act, or embezzlement of the metals for those coins, by officers or employees of the mint.
Money was constitutionally separated from Congress’ power to tax. But by using a central bank, Washington and Wallstreet colluded [led by Hamilton from the beginning of the Republic] to bypass the US Constitution and to collect taxes by de facto counterfeiting the currency in a perverse and clandestine scheme which anybody in his right mind would prefer to avoid if possible. [For more on the history of US central banking, read Central Banking: a Fatal Conceit.]
Banking should be private
“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” ― Thomas Jefferson
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” ― Henry Ford
Bitcoin also allows users to avoid the most abusive sociological system ever devised by evil minds: central banking.
Bitcoin is P2P … peer-to-peer … money that neither arises from nor is exchanged through 3rd party banks. In fact, the very concept of a P2P DC threatens the entire central banking “system” with competition and collapse … which is why it will be attacked and regulated into irrelevance by politicians and central bankers globally ASAP.
Just as maintaining money is separated from collecting taxes in the Constitution, it should also be separated from all forms of banking which should be nothing more than the 100% reserved private intermediation of real private or public savings to real private or public investments.
Identity is private
“Arguing that you don't care about the right to privacy because you have nothing to hide is no different than saying you don't care about free speech because you have nothing to say.” ― Edward Snowden, 2015
The fact that currency is public need not compromise the privacy of those using it.
Bitcoin is not merely a currency … it is a crypto-currency. This means that in spite of its public ledger, bitcoin keeps the identities of its users private by requiring both a public key and a private key [theoretically known only to its holder … which means it can be lost] for every transaction. This part of the logic allows for
direct peer-to-peer transactions without the revelation of the transactors’ identities to some 3rd-party intermediary for validation of legitimacy/ownership.
And, of course, the fact is that many parties [especially those engaging in illegal activities] have much to hide in the transaction of their “busy-ness” and so this aspect of bitcoin is VERY attractive … and gives bitcoin another boost in its value as a currency of choice.
Currency is permanent
“Lay not up for yourselves treasures ... where moth and rust doth corrupt, and where thieves break through and steal.” Matt 6
“The greatest part of things really useful to the life of man ... are generally things of short duration; such as, if they are not consumed by use, will decay and perish of themselves.” ibid, Locke
A desirable quality of currency is “save”-ability … which means its value is more or less preserved from loss or destruction over time … its “purchasing power” is reliable for planning purposes.
In its infancy, all digital information was notoriously unreliable due to computer “crashes” of all sorts. But over time, technologies improved presenting us with the opposite problem: digital information can be reliably created and indefinitely preserved as long as the distributed and redundant digital infrastructure does not experience multiple [complete], simultaneous failures. Indeed, bitcoin is simultaneously [not instantaneously] staged and continuously coordinated across multiple “ledgers” any one of which can “go dark” without affecting the overall, on-going integrity of the system.
However, vulnerabilities of the structures in and through which digital information is stored and exchanged make the theft and misuse of digital currencies a rapidly growing problem.
Credit is [supposed to be] temporary
“[Credit is a system whereby] a person who can't pay [in currency], gets another person who can't pay [in currency], to guarantee that he can pay [in currency].” ― Charles Dickens, Little Dorrit
As we have seen, bitcoin addresses some key criteria for a viable currency, but can it function as credit too?
Modern central banks’ increasingly desperate and lawless manipulation of fiat currencies in the economy at multiple levels is conjuring and backstopping wild speculation in many real goods and all financial instruments [including bitcoin]. This is destroying historically useful longterm debtor-creditor relationships as predicted by Keynes in 1920 … well before the advent of computers much less digital currencies:
“As the [fiat currency debauchment] proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.” ― The Economic Consequences of the Peace, JM Keynes, 1920
This means that bitcoin is unsuitable for long term contracting, saving or lending at this moment in history. But that is not a fault in bitcoin as a currency but rather in the still dominant but rapidly failing US$ fiat currency system into which perpetual US$ fiat credit is being intentionally injected to function as a currency substitute. This vicious adulteration of the US$ currency with perpetual US$ credit was a subtle, subversive strategy spawned by Alexander Hamilton and sponsored by George Washington in the earliest days of the republic. It was recognized and opposed by many through the decades of American history and held in relative check until the US$ was declared fully fiat by the Nixon Shock in 1971.
Today US$ currency and US$ credit are both fiat and are both becoming virtually indistinguishable.
Indeed, the current inability of bitcoin to function in a credit system is actually reassuring, since it reminds us that bitcoin enforces the distinction between currency and credit which Washington and the Federal Reserve have merged in their perverted and collusive acts of financial adultery.
My solution
The best solution is to restore money as a civil right. Those who know me know that in 2015 I did “my duty and share” [as Einstein admonished] and sued the Federal Reserve pro se in Central Kansas Federal District Court for unconstitutional and illegal departure from its mandate contained in The Federal Reserve Act Section 2A which sets forth the only legitimate Monetary Policy objectives as follows:
"[t]he Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of [not to attempt to redefine and manipulate directly] maximum employment, stable prices, and moderate long-term interest rates."
My Complaint Arguments, exhibits and case documents are part of the public record and are available on the left side of the FROTH blog.
As I explained to the Pachyderm Club, a cowardly Congress has abdicated its constitutional responsibilities and a rogue Federal Reserve has violated its statutory charter.
The recent result [not counting all the booms and busts] is a proliferation of desperate DCs which will likely annihilate more innocent people.
The wisest answer is not to press on with further perversions such as MMT or fiat CBDCs but rather to reconstitute the US$ by returning to the clear language of the Constitution and the Federal Reserve Act. This would accomplish two things:
require Congress to obey the Constitution and regulate the value of the US$ by periodically tying it [through promised redemption on demand as the Silver Certificate did domestically and as Bretton Woods did internationally] openly and transparently to one or more real commodities [with gold and silver being excellent candidates] and
require the Fed to obey the law and become a boring institution that ties changes in the money and credit aggregates to real production [a purely quantitative approach to monetary policy] leaving free markets to make decentralized economic decisions accordingly.
This approach is not novel. Indeed … it has long been common knowledge essentially set forth in Ruskin’s terse comments on money over 150 years ago … and most lately championed by the likes of Milton Friedman.
If we were to do this … a vast range of seemingly unrelated sociological and ecological problems would begin to resolve themselves almost overnight. Furthermore, the system I am proposing would not be inconsistent with DCs or even with CBDCs redeemable in US$ [known as stablecoins]. And although it would not be painless to turn from our currency perversions … it could, as Ruskin recommended, be just … and that is doubtless the best we can do as finite, human stewards of a finite, natural world.
Editor’s Note: Read all of Mr. Love’s response here.