Recent discussions between WBC director Robert J. Marks and fellow engineers raise a question: Could new technology enable a global private currency to compete with government currencies? While the fact is not always evident in the Western world, government currencies depend on the stability of the government. Stories about people using discredited government banknotes to warm themselves, etc., are not fiction.
And today what about the unbanked billions of the world who work and create value but do not have access to financial institutions?
So in, for example, a national emergency, would cryptocurrency be any help? The option of private electronic currency is comparatively new and, as we might expect, expert views differ. We present them for your reflection (not investment advice of any kind):
Gary Smith, Fletcher Jones Professor of Economics, Pomona College, says no, basically:
Bitcoin transactions are much slower and more expensive than debit cards, credit cards, Zelle, and the like. The only potential advantage is secrecy and that is far from guaranteed. In June 2022, a group of 26 prominent computer scientists wrote a letter to U.S. Congressional leaders stating that blockchain technology is “poorly suited for just about every purpose currently touted as a present or potential source of public benefit.”
Here’s the letter.
A recent book, The Coinmen: Bitcoin Exposed (2022) by cybersecurity expert Bob Seeman sets out this case: “Bitcoin is a confidence game with the excitement of gambling, the marketing incentivization of a pyramid scheme, and the fake profits of a Ponzi. At the same time, bitcoin has the legitimacy of trading but, with no regulatory oversight, it is manipulated.”
Computer geek and philosopher Eric Holloway offers a “step back and look at the big picture” approach along the same lines:
My general thought is that there is a vast untapped market for a new currency, since the actual financial value created by the world’s population is multiple orders of magnitude greater than the amount of currency in circulation.
Crypto currency is one possibility for filling this untapped market, although it isn’t anywhere as convenient as cash, nor as stable. For a currency to become mainstream it needs to be reliable for the everyday financial transactions that sustain a household. That is the whole reason for existence for currency over a barter system: a dependable store of value.
Bitcoin, for instance, does not fit the bill, it lost 1/3 of its value over a week in June. It’s possible these fluctuations will calm down, but most likely not. The reason for drastic fluctuations is inherent in the nature of digital currency. Bits on a wire move at the speed of light, and massive amounts of currency can change hands in an instant. No matter how much crypto is in circulation, massive changes can always happen, so crypto will always be unstable. This means crypto will never become mainstream.
Crypto is also questionable medium of exchange for a national emergency. If the emergency is big enough, the communication network will be disrupted, and crypto is heavily reliant on the network to verify transactions. There is a shared ledger of transactions, and the crypto double spending is possible if the transactions cannot be verified. In a national emergency, national networks could be completely down, especially if there is a cyber attack on the communication infrastructure. If the network is down it becomes very difficult to prevent double spending. An individual can take advantage of this by cloning their crypto, and spending it in multiple disconnected regions. This means in a national emergency, cryptocurrency becomes an even more unstable currency. In times of necessity, when there are alternative widespread currencies, this will make crypto currency near worthless.
Physical non-fiat currencies address both these problems. Precious metals, such as gold and silver, have consistently maintained value over thousands of years, and though the value can fluctuate much more than fiat currencies, the fluctuations are not as drastic as crypto currencies.
In a national emergency where the network goes down physical currencies cannot be double spent. If the government loses the ability to regulate the value of its fiat currency, currencies like gold and silver will still maintain their value. Physical non-fiat currency is the ultimate decentralized currency in existence.
“Non-fiat” currency just means that the government has no role in the value of the currency. For example, if someone will give you a new RV for 500 grams of gold, that’s what the RV is “worth.”
This discussion was spurred by cryptocurrency Ethereum’s move this month to staking vs. mining as a means of creating value. With the environmentally unsustainable problem of “mining” out of the way, questions can refocus on the viability of cryptocurrency in itself.
Jonathan Bartlett addresses a number of the issues:
The problem I see with crypto is that people are talking less and less about practical applications, and just focused on it being “the future.” However, no one can describe what that future actually looks like, at least in a way that is different than today. The credit card companies already have easy-to-use electronic payments, and theirs actually favors the ordinary customer. The biggest use I see for crypto right now is transferring money in ways the government can’t control. That could become important if more and more people are dissatisfied with the government, but it isn’t exactly a productive use of resources.
Ethereum is the only crypto that is serious about adding value for transactions, but few people who don’t deal in crypto daily are familiar with it in anything other than its name. The move to proof of stake shows that they are thinking about long-term success, and the infrastructure itself allows people to do a lot more with it than with Bitcoin. However, I’m still not seeing anything really worthwhile coming out of it.
For usage during a national emergency, it depends on what the emergency is If the emergency is a state of unrest within the country, or a breakdown of governance, crypto could be useful for making money transfers happen when nothing else works. Ethereum is especially helpful here since a national crisis probably also implies an energy crisis, so its move to proof of stake is helpful. For other types of crises, I think that crypto would actually have much less of a role to play.
Can cryptocurrency become mainstream currency?
I believe that it can. Most places are set up to accept digital payments in the form of debt and credit cards, for the merchant and customer. It does not matter exactly how the agreed-upon balance is being transferred. From a technical implementation standpoint, the current system relies on a centralized system of banks to move money from the customer’s account to the merchant’s. This could easily be changed to using a decentralized blockchain to move money from the customer’s wallet to the merchant’s. There are already cards you can get from crypto exchanges that will let you ‘pay with crypto.’ However, what it is actually doing is selling you crypto at the current market rate for USD and then paying with that. This is generally not a good idea since you will have to pay taxes on the sale of the crypto to USD in addition to the total cost of the transaction itself. But this is just a regulatory issue though and could be changed. El Salvador and the Central African Republic have both made Bitcoin an official currency and the United States, China, and Russia are all investigating or testing the release of their own digital currencies.
One reason that perhaps they should not become mainstream is actually one of the main reasons they are popular now, privacy. While crypto wallets are not associated with someone’s identity publicly, if they are being used for your everyday purchases it would be possible to identify people based on shopping patterns. For example, if I know that you and your spouse ate at a particular restaurant on Friday night around 7 pm, I could go find all the transactions to that restaurant around that time of a reasonable amount for two people. Looking at those possibilities, it would be easy to narrow it down — with just one or two more details about a person that could easily be found online. Then you would know every transaction that person has sent, who they sent them to, and how much they currently have in their account.
Would crypto be of any use in a national emergency?
In terms of a natural disaster, it would be less useful than the current systems. Like current digital payment systems, it requires power and an internet connection. When those are lacking cash is king. However, in a financial emergency, it could be of use. If a country’s own currency is struggling or restricted for some reason then citizens would have alternative means of transacting available to them.
Where crypto might fit in the creation of currency, especially in places where there is political uncertainty?
In recent years, there has been an explosion of new cryptocurrencies created. The term for studying these crypto tokens is tokenomics and it has brought about the proposal and implementation of many new economic systems that have never been tried before. Most tokens created never grow in value to be anywhere near one cent. But some do make it and have the potential to become the next big thing like Bitcoin or Ethereum.
Unlike current currencies that are controlled by centralized authorities, like the Federal Reserve in America, cryptocurrencies are controlled by the code that defines them. This code can be changed to provide updates and new capabilities, like the recent switch to Proof-of-Stake by Ethereum, but only if the majority of node operators agree to change the code they use. So, if a country was subject to political instability that could cause issues with a traditional central authority the changing political leaders may not be able to make any changes to a cryptocurrency — particularly if it is also used internationally and has node operators outside of their own borders.
Where might crypto fit in circumstances under which — quite apart from creditworthiness as such — people cannot get access to more conventional systems?
This is a place where digital currencies really shine. Anyone with access to the internet can make a crypto wallet and start transacting. They can even access Web3 investing opportunities, without the need to work with any kind of brokerage firm. The biggest roadblock here is getting traditional currency into crypto since the easiest way to do this is with a bank account using an exchange. However, it is becoming more and more common for places such as gas stations, grocery stores, and malls to have Bitcoin ATMs where you can deposit cash in exchange for Bitcoin and other cryptocurrencies. Depending on the jurisdiction where the ATM is, often a certain amount can be deposited without even needing an ID.
Will it all flop after a few years? Alternatively, centuries from now, will Star-Trek type figures use crypto on the other side of Alpha Centauri — when the concept of a “national” Earth-based currency must necessarily be obsolete? All we know is, digital technology allows us to consider the possibilities.
You may also wish to read: Ethereum moves from mining to staking this month. As there came to be more and more “eth” in the world, the puzzles computers had to solve got very much harder, consuming vast energy resources. Robert J. Marks discusses with engineers Adam Goad and Austin Egbert the energy-saving transition Ethereum is making in how the coin is produced.