IF NOT BITCOIN THEN WHAT? (PART 2): Underwritten Crypto-Currencies

February 2015

The below post is a continuation of IF NOT BITCOIN THEN WHAT? Where we discuss the challenges Bitcoin faces and the impact that has on it’s future as a means of exchange for businesses.

The problem with Bitcoin is like Gold not just because of the mining process but because the large majority is controlled by a few entities. You can track the wealthiest wallets here and will see that just 500 people own 35% of all Bitcoins. In effect they are the market makers. If they gauge more benefit in volatility than stability they will game the system. This creates a self-reinforcing circle where the rest of the system as soon as they receive Bitcoin, offload it back into the system, something I believe adds to its volatility.

Companies like BitReserve are creating digital currencies pegged to fiat currencies like USD and GBP to mitigate some of the volatility. This only works if enough people accept their coinage otherwise you still need to exchange it. Similarly, on the consensus networks of Ripple, Stellar and Hyperledger gateways are providing digital tokens pegged to fiat currencies. In all these cases, the value of the digitized fiat is guaranteed by one or a few organizations which the holders of the “digital fiat” have to trust.

Government-backed digital money

So similar to gold either a sovereign entity corners the market and buys all the Bitcoins up or they decide to ‘mint’ their own. The latter would benefit from being able to entirely rewrite the rules.

Addition: The Greek Finance Minister considers as much back in Feb ’14.

When talking about EU periphery countries and alternatives to ECB Debt; The answer is yes: They can create their own payment system backed by future taxes and denominated in euros. Moreover, they could use a Bitcoin-like algorithm in order to make the system transparent, efficient and transactions-cost-free. Let’s call this system FT-coin; with FT standing for… Future Taxes.

 

But in order for that sovereign entity to avoid the current fate of Bitcoin and stabilize its coin they would need to effectively underwrite it by pegging it to some something real world be it metals or fiat. The Ecuadorian Government has already made the bold move of creating a government backed digital currency. However just as they previously used the US Dollar there are only a few financial institutions that could back a truly global coin; the IMF, Bank of China or the Federal Reserve.

 

I believe this game will be played out over the next few years for first movers to offer a truly global digital currency of exchange. Politically this could offer a powerful tool for a financial hegemony to extend its reach and attack or subvert the economies of others. Imagine if the US got the Russian people to start using a USD backed digital currency, because it offered greater stability, whilst in parallel they attack the integrity of the Ruble.

A commercially backed worldwide currency?

There is however a more left-field argument to be had whilst the use of something like Bitcoin is still small compared to other world currencies. I believe there is an opportunity for commercial entities with a direct interest in the payments space or that individually / collectively handles a huge volume of global online transactions to take the lead. Apple alone have a cash pile of $178bn so I think its a really big missed opportunity to have not gone it alone with Apple Pay especially now Google / Android are exploring the opportunity. In 2013 Bitcoin was just 2.5% of Google’s Market Cap so more than doable. But similar to how The Fed was formed by a group of private bankers why not a tie-up between; Amazon, Alibaba and eBay? Assuming they could form consensus and act quickly enough it would solve many of the Governance issue faced by the Bitcoin Foundation that inhibits wider commercial adoption.