More Proof Cryptocoins are Winning

Image courtesy of ddpavumba at

I am a big fan of innovation. I thoroughly enjoy the fact that, in today’s world, a significant innovation takes place on an almost daily basis. So most people are aware of innovation in the world today, though many may not share my enthusiasm for it, especially if they feel in constant fear of their jobs.

The really entertaining aspect of innovation is when something is invented that breaks out of the regulatory controls that government agencies have placed on a particular activity. Recent examples have been the ride-sharing apps like Uber and room-sharing apps like AirBnB. The taxi and hotel industries are heavily regulated (and taxed) by local and State government agencies. These innovations have allowed people who need a ride or place to sleep to connect directly to other people who have a car or room available.

The reactions to these innovations by effected regulatory agencies has not been warm.

This is not an anti-government screed. Corporations, large and small, who would benefit greatly by the right innovations and should welcome innovation with open arms, seem to have a kind of immune system that attacks innovation as soon as it rears its ugly head. This will be explored in more detail in a later post.

In the case of innovation that is crypto-coins (or crypto-currencies or cybercoins or digital currencies, whichever you prefer), the effected field is finance, the effected industry is banking and, through banking, the Federal Reserve Board and Security and Exchange Commission among others.

The banks are reacting much as expected. In fact, years after their appearance, they still seem to be firmly stuck in stage one: denial. Refer to the latest by Jamie Dimon, CEO of JPMorgan Chase.

Speaking of the Fed, they just held their 2017 Financial Stability and Fintech Conference. The speakers at this Conference, in contrast to Jamie Dimon, seem to have moved further along. (A video of the conference is , and at over 9 hours in length, no, I have not watched it in its entirety!) In fact, the first speaker (Maureen O’Hare) quotes the four stages of acceptance from J.B.S. Haldane:

1: This is worthless nonsense.
2: This is an interesting, but perverse, point of view.
3: This is true, but quite unimportant.
4: I always said so.

So we start to think that here is someone who knows what is going on. Here is someone who will be taking on any problems head on. But then she extends the list by adding a fifth stage…

5: This seems really promising, but maybe there are some unforeseen downsides, we want to be aware of and maybe even regulate.

It is not at all surprising that in a conference of regulators, we hear the word “regulate” quite a bit. Nor is it surprising to hear that the shortcomings of any unregulated phenomenon is caused by a lack of regulation. The flip side of that concept is, of course, the idea that no problem exists that can’t be solved by regulation. If you think I’m engaging in a little hyperbole here, listen to them yourself.

It’s at 4:06:35 that Randal Quarles, the Vice Chairman for Supervision at the US Federal Reserve is introduced as someone who brings “special expertise” to the conference, “not least of which” is in the “technical aspects.” So we start out with high hopes. However, I didn’t even get past the title, “” before my expectations begin to erode.

Prudent innovation? I always cringe when someone places an adjective in the wrong place. We, as a society or as individuals, may be prudent or wise to adopt a particular innovation and, of course, it would be prudent of us to carefully study an innovation to be as aware as possible of all the negative side effects, or even a clear idea of the expected benfits— inasmuch as they can be determined beforehand.

But if I may paraphrase Shakespeare: sometimes innovation is adopted and sometimes innovation is thrust upon us.

Meaning, sometimes we adopt innovation and sometimes our only decisions are how to adapt to an innovation that is already here. In fact, I submit we, as a society, rarely if ever get to positively cast our preferences for or against an innovation beforehand. In innovation springs forth and we can only accept it or reject it post hoc.

At over eleven thousand dollars each and seemingly no end in sight, Bitcoin seems well on its way to gaining enthusiastic acceptance by society at large.

The regulators, unsurprisingly, are reacting somewhat differently.

Early in the presentation, Quarles states:

In my new role as Vice Chairman for Supervision at the Federal Reserve, I see innovation as something that can and should be fostered, but of course I must also scrutinize these innovations from a different perspective. That is to say, it is appropriate not only to evaluate the potential of innovations to improve on existing services, but also to judge their ramifications for the safety and soundness of the institutions we supervise and for financial stability — the topic of this conference.

So all innovations should be evaluated according to how they may affect the safety and soundness of the institutions they supervise. We are safe to assume, then, that an innovation that threatens the very existence of those institutions will not be welcomed…even if the overall effect would be hugely beneficial to the financial world at large.

Next he discusses “the tension between the need for financial stability and the need to innovate…” This is a good point. Innovation means change and that transition period from pre-innovation conditions to post-innovation conditions can be very destabilizing.

So the tension cannot be between innovation and stability. Innovation by its very nature is destabilizing. The tension, therefore, can only be between innovation and how fast we can get through the transition period and restabilize under the new conditions.

All this is academic meanderings, however. We see in the entire conference the regulatory immune system turbo-charged and prepared for full scale war.

Let’s look at the ammunition fired against Bitcoin — or the crypto-currency world in general.

Today, the main payments networks use centralized technology to process and safeguard the public’s electronic funds transfers. Regulated banking institutions provide deposit money to the public and are a main source of trust for these systems.

Really? Sure, we all use our credit/debit cards for a lot of financial transactions with an overall expectation that it will go through. But there is an almost equal expectation that integrity of the system will allow unauthorized access to the information needed to penetrate the integrity of the system — meaning our money could be gone.

It is almost a statistical certainty that anyone who has used a credit or debit card in the last decade has had their vital data stolen — and almost invariably at exactly the points where the technology is most centralized.

If that is a “main source of trust” then I think Mr Quarles has a different meaning of “trust” than I.

…trust is necessary for the system to work.

Not really. The fact that the payment system is so heavily regulated means there are no other payment systems to be found. So it is “hope for the best” or stop using the system altogether. Trust has little to do with it.

Another pearl of wisdom:

By definition innovation means doing something new, which usually involves taking risk in furtherance of some gain. But at the same time, we should be vigilant in balancing the benefits of innovation with the safe and reliable operation of systems and critical activities.

This means that any innovation that would disrupt or replace current systems and activities with completely different ones are rejected out of hand, no matter how superior the new systems and activities may be. This would seem to be a small-minded attitude to take. This doesn’t even require innovation. Widening a highway is very disruptive of “the safe and reliable operation” of the highway. But if it needs to be done, it must be done.

What if the innovation is not something you are evaluating but something that has already been thrust upon you. Your decision is not “adopt or not adopt” but “respond in a reasonable manner or become obsolete.”

There are other such pearls, but let’s get down to the attacks.

…the “currency” or asset at the center of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all.

Always at this point, I ask a simple question: how does this differentiate the cyber-currency from, say, the US Dollar?

Roosevelt ended the ability to exchange a dollar of currency for a dollar of the backing asset and Nixon finally severed all ties between the currency and any backing asset. That is, the USD is not backed by any asset, secure or otherwise.

It is true that crypto-coins have no intrinsic value. But this is a universal truth. The USD has no intrinsic value. It is a fact of economics that nothing has intrinsic value. So crypto-coins are no different in this respect to the USD or any other economic good.

As for the third point, what exactly does it mean for a currency to have the liability of an institution? What is the institution liable for the Dollar? The Federal Reserve?

If so, what form does this liability take? Has the Fed ever taken responsibility for any of the myriad economic upheavals it has caused? Will the Fed reimburse us for the 96% loss of value the Dollar has suffered since it has been in existence?

Right. So as far as I can see, the Dollar also is without the liability of any institution.

During times of crisis, the demand for liquidity can increase significantly, including the demand for the central asset used in settling payments….Earlier in our history, the United States frequently witnessed bank runs that severely disrupted financial and economic activity…

This is a jaw dropper. This is from someone who is supposed to be the “go-to guy” for technology within the financial world. Yet he has not the slightest idea of the defining difference between fiat currency and crypto-currency and its significance in the financial world.

Yes, there have been times when liquidity has been a problem. A bank may have millions of dollars of funds on its books. That does not mean that it has all that cash sitting in its vault. Money sitting in a vault earns no interest so it is loaned out for mortgages, car and furniture loans and what have you.

Sometimes, generally during a time of crisis, the customers of the bank may demand more money than the bank has available. This is a liquidity problem, for sure. But it is a liquidity problem because the people don’t maintain possession of their own money — they deposit it into a central location, i.e. a bank.

There are no banks in a crypto-currency world. Or rather, each person who owns crypto-coins is their own bank, with all of the typical banking functions (borrowing, lending, funds transfers, investing, etc.) available to them. Each person is their own bank.

There is never a liquidity issue in such a world. If you need more crypto than you currently own (to buy that new car you want, say) you borrow it from other crypto owners. Or you may participate in a loan by lending the funds yourself. I have loaned crypto to people many times (and, being an early adopter, managed to receive a hefty interest rate).

Could there be a general liquidity problem in crypto-land? After all, most cryptos issue a small amount of coins and this amount increases at a fixed, known rate. Isn’t it possible for goods to go unsold because prospective buyers just don’t have enough funds and can’t borrow it?

Sure, that is technically possible. But what will happen under these conditions is that the prices of the unsold goods will drop relative to the crypto until the goods sell — or seen another way, the value of the crypto will increase until the goods sell.

But this is deflation. Isn’t deflation bad for the economy?

Yes, it is deflation. No, deflation is not bad for the economy. Under inflation, consumers wake up each morning a little bit poorer than the day before. Under deflation, consumers wake up each morning a little bit richer than the day before. Exactly how is this bad for the economy? Deflation has been the constant operating environment for the tech industry for decades now. The tech industry is not exactly suffering, is it?

The point is, liquidity is a problem for centrally controlled currency and crypto-currency is not centrally controlled. In fact, most if not all of the problems that regulation has “solved” for the centrally controlled currencies are problems that arise because the currencies are centrally controlled. Are there any of those problems digital currencies currently face or ever will face?

Finally, Mr Quarles examines the possibility of the Fed creating and controlling its own digital currency — and immediately rejects it.

For the United States, the alternative to privately issued digital currency is not necessarily a publicly issued digital currency. Instead, the near-term alternative is to build on the trusted foundations of the existing payment system and work to improve private-sector payment services. Importantly, this means looking to the banking system, which holds the bulk of the transaction deposits in this country, to improve services.

In other words, if Mr Quarles had been in charge of the transportation system when Henry Ford starting mass producing automobiles, his answer would have been, “This means we must make a better buggy whip!”



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Tomm Carr

Tomm Carr

A retired software engineer who hates retirement with a passion. My hobbies are economics, philosophy and futurism.