Money — the magical power it has over people is almost universal. But whether we earn it, spend it or save it, we hardly ever think about the following questions: What is money? Why does it exist? What will money look like in the future? And why should we think too much about it? Our money works. Day in, day out, we use it without much effort. So what’s the problem?
As August Friedrich von Hayek pointed out, we humans constantly use things we don’t know anything about. For example, you don’t need to know anything about internal combustion engines in order to drive a car. It’s no different with money. We don’t have to think deeply about money in order to use it successfully. This very fact is what makes us such a successful species and indicates how well our market and knowledge society functions.
Given recent developments, more and more people have started pondering the state of today’s money. This is indicative of the fact that strange things are happening in the realm of money.
What the general public is being told right now is that money can be created ad infinitum. With the coronavirus popping the so-called “Everything Bubble,” central banks have been interfering heavily by providing vast amounts of money — in all the different flavors that money or money-like substitutes exist in today’s financial world. On top of that, governments have set up stimulus packages in the trillions of dollars, exceeding anything the world has ever seen by far.
In the wake of the enormous money tsunami unleashed onto economies and societies, people have begun (rightfully) to start asking the question: What has become of money? Is money even worth anything any longer?
A Battle of Devaluation
Others, among them many bitcoiners, are asking the question: How has money gotten to this point? In order to answer this question one has to go back to 1971, when the dollar, as the last national currency, was cut off from gold. Perhaps surprisingly, government currencies did not crash to zero at that time; rather they moved to a system of free exchange rates.
Whereas the yellow precious metal had previously served as an anchor of value and price, henceforth a battle of national currencies was unleashed. This battle turned out to be quite costly. The different exchange rates of individual currency pairs led to an increase in currency risks. The latter increased transaction costs for international trade, which continue to weigh heavily on global trade to this day, representing a globally inefficient barter system on a national currency level.
Merchants, companies and politicians reacted to this situation. Within the political sphere, the U.S. dollar developed into the global unit of account for oil and other commodities due to U.S. hegemony being the strongest economic power around the globe. To this day, the U.S. dollar continues to function as an international reserve currency. In this way, the greenback facilitates global trade, but due to its importance it also let the U.S. exploit what is called its “privilège exorbitant.” The sheer dominance of the dollar and the advantages for U.S. markets are impressive.
Financialization of the World
The entrepreneurial response has been to financialize the world and create derivatives and more and more hedge funds. The former are financial products whose primary objective is the contractual hedging of risks over time and space. The latter, hedge funds, are entities that trade in these financial products in the form of actively managed investment funds. It is, therefore, hardly surprising today that hedging transactions to minimize exchange rate risks account for a considerable proportion of total financial transactions.
Government currencies beget ever greater financialization. It’s the entrepreneurs’ reaction to them. So the ever-increasing number of derivatives used today is ultimately a consequence of the costly effects of this diversity of national currencies. Anyone wishing to send money across national borders today pays hefty fees. The reason: the reality of different currency areas requires the involvement of banking and financial institutions. Countless banks, partner banks and financial service providers from different countries are involved and want their “fair” share. So, ultimately, our current international monetary order resembles a global barter trade based on numerous fiat monies. Legacy systems and regulatory requirements make their efficient and rapid transfer difficult.
The various fintech companies of today are therefore also actors in the entrepreneurial reaction to this state of affairs. The most popular and successful among them are those who want to remove artificial barriers in international payment transactions resulting from this global barter. Upstart companies such as TransferWise or Revolut are making possible those things that banks have barely managed to do. Sending and receiving national currencies is not only becoming faster but also cheaper.
Bitcoin: The Ultimate Reaction
The entrepreneurial reaction in the form of financializing the world has its drawbacks though. It might help investors, entrepreneurs and corporations to deal with the hassle of government currencies, but the system at large is being inflated and becomes ever more fragile. Ironically, this is also the reason why we see central banks floating the markets now. They are reacting toward something that has itself been a reaction to central bank national currencies in the first place. The problem is a closed loop that creates an ever greater problem.
In 2009, a new player entered the stage: bitcoin. In a sense, the crypto asset is the final reaction that aims to break this closed loop of national currencies and financialization. Born at the height of the financial crisis, Bitcoin represents the antithesis to the existing financial order. It is an attempt to wrest money as a force influencing the economy, politics and society from the hands of centrally planned God players.
Money again should be scarce and decentralized in order to tame the endless appetite of politicians, functionaries and economic giants. In the eyes of its supporters, Bitcoin is a counter-reaction to the shameful misuse of fiat money. Whether fiat money is supported by the state and issued by private banks or even corporations, the problem remains the same: It remains in centralized hands and users cannot keep self-sovereign control of it.
Digital payment solutions that promise to turn current money into “fiat money 2.0” are merely putting “lipstick on a pig,” according to the argument of Bitcoin aficionados. This would not solve the fundamental problem of monetary socialism that is ailing our current monetary system. Money is still tied to intermediaries and every payment made is recorded in a central database controlled by a third party. Transactions can be censored at any time.
A Real Alternative
For this reason, a distinction must be made between digital currencies and cryptocurrencies. The latter can be exclusively controlled by individuals using cryptographic methods. So-called cryptographic values can thus be held and used directly by their owners and without intermediaries, similar to bearer instruments or material objects. Instead of being managed by an intermediary, cryptographic values are based on a blockchain. This is a distributed database that nobody has sole control over. A blockchain is ultimately a computer protocol, based on programming code. From a technical point of view, this turns the crypto assets into pure information and mathematics.
Consequently, Bitcoin stands for an alternative way of thinking about financial systems. Today, our financial system is a conglomerate of abstract constructs such as contracts, promises and balance sheets. This bears witness to the fact that our economy has been becoming ever more abstract. Money is no exception. The great philosopher and sociologist Georg Simmel already noted this tendency toward ever greater abstraction in his work “The Philosophy of Money.”
There exists a hierarchy of money in today’s financial system: money in the narrower sense, which is also known as base money; and money in a broader, more abstract sense in the form of bank deposits, shadow banking IOUs, credit cards or mobile payment options. This development toward more abstract forms of money is driven by the financialization of the past decades, which has led to a stronger fusion of the economic and financial worlds.
This amalgamate requires a financial alchemy that is now based on three basic building blocks: institutions (technology), incentives and human participation. In the existing financial system, the human element predominates. Contracts and promises are framed by institutions, but they are executed and enforced by human hands.
An uneducated observer might regard Bitcoin as only the latest iteration in this constant evolution toward more abstraction. And although bitcoin truly is an abstract form of money, it is not a mere extension of this hierarchy of money in a seemingly endless game of financialization. It is a new form of base money for a new form of network or institution powered by what is today generally called an open, neutral, borderless, censorship-resistant public blockchain.
As a new form of base money, bitcoin will see financialization occur and with it, ever greater abstraction happening on top of the bitcoin base money. Interestingly enough though, on its most fundamental layer, the Bitcoin protocol reduces the human element to an unprecedented extent and gives technology and incentives more weight.
Incentives to keep the human element in check and technology are becoming more important due to mathematics, cryptography and computer science. A financial alchemy as we know it today, but one based on Bitcoin, is likely to depend less on the human element and more on computers, formulas and code in order to control, execute and enforce it. It’s the hope of bitcoiners that this sort of financial alchemy will be better in an objective sense than what we have today.
The Endgame Is Upon Us
So let’s come back to the question asked in the beginning. What has become of money? Quo vadis, financial system? It seems obvious that our current financial system can only go down this one path: Ever more money is needed to keep it alive. Helicopter money is imminent in the U.S., another chapter in the tragic but inevitable trajectory of money.
The ultimate chapter will finally be the adoption of what is referred to today as “modern monetary theory” or MMT. This theory, which ironically is not “modern” at all, holds that the state does not need creditors because it can create funds in its own currency at will. As a monetary sovereign, the state is, therefore, not dependent on borrowing on the market in the form of government bonds. It would much rather create the money itself via the central bank incorporated into it.
MMT has been growing in popularity, probably because more and more people seem to intuitively feel the inevitable endgame. Other reasons are also more pragmatic: MMT is a blank check for all kinds of political projects such as “jobs,” “education” or “climate protection.” Fewer and fewer people are able to resist financial resources for political “necessities” — after all, the ultimate aim is to enrich society.
Another argument at the heart of MMT is that of justice. Today, bankers and other financial actors seek to enrich themselves in the process of financing of the state, so the argument goes. A few people get richer and richer at the expense of the masses. The fact that MMT wants to end the whole financial circus around interest rates and government bonds by depriving commercial banks of the opportunity to create money is thus met with approval, especially from the political left. The entrepreneurial reaction of financialization will not be made possible anymore; the state will take over all on its own.
Debating whether MMT will be more just than today’s system really doesn’t make any sense, in the end. Once money has lost all its meaning, there’s no point in debating any justice because there won’t be any left. Money will truly be worthless; people will only use it under a state of coercion.
In the wake of this coronavirus crisis, the great triumvirate of our day and age — governments, central banks and banks — has set out to achieve the following: “Fiat iustitia et pereat mundus” or “Let justice be done, though the world perish.” The problem, however, is that in fiat money, there is really no iustitia left. Without justice, there is only pereat mundus…
So, as an antithesis to endless growth and the meaningless of money, Bitcoin stands firm: Its network is limited to 21 million bitcoin units only. There will never be more bitcoin. That is the message of it all, and in a world in which “relatively scarce” money in the form of state fiat currencies will soon only be suitable for lame jokes, such a message is more important than ever.
So if Bitcoin didn’t exist, it would have to be invented: As a psychological elixir of life, so to speak, it will give comfort and confidence to many more people in the light of the crazy money interventions of our times. What would we do without Bitcoin?
This is an op ed contribution by Pascal Hügli. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc.
Coinbase Secures Another Millionaire Deal With the US Government to Let Them Use Its Blockchain Analytics Software
Coinbase and the U.S. Homeland Security have struck a million-dollar deal to allow the U.S. government to use the exchange’s services to analyze American citizens’ data.
According to official documents, The Immigration and Customs Enforcement (ICE) – a branch of the U.S. Homeland Security Dept. dedicated to cross-border crime and illegal immigration – paid Coinbase $1.36 million in licensing fees for Coinbase Analytics software.
Pay to Trace, Pay to Tell
This would be the juiciest contract for Coinbase, which has a long history of collaboration with the U.S. government.
According to the official documents, there is no word on what information will be analyzed or shared by Coinbase. Data from the SAM.gov database assures that the exchange “is the only vendor who can reasonably provide the services required” by the ICE, and the information available to the public will be minimal due to the sensitive nature of the relationship between the ICE and Coinbase.
Previously, Coinbase had inked a deal with the U.S. Secret Service to license its Coinbase Analytics tools. The contract would last until May 2024 and for $183,750 would entitle the Secret Service to use its blockchain forensics tools.
Others interested in using Coinbase’s analytics tools include the Drug Enforcement Administration (DEA) and the Internal Revenue Service (IRS) which also paid Chainalysis $625.000 to develop a tool to deanonymize Monero.
Coinbase and the US Government: A controversial Relationship
Coinbase has received heavy criticism in the past for its collaboration with the U.S. government. Still, its CEO has never regretted its lucrative relationship with law enforcement.
In a previous Twitter thread, Brian Armstrong assured that the creation of this service is actually positive for the growth of his company and that they do not deliver information other than what is already available on the blockchain:
“Have seen a few articles talking about Coinbase Analytics – figured I would share my thoughts on it, since I don’t think it’s particularly newsworthy – and lots of conjecture out there. Blockchain analytics software is essentially just compiling publicly available data that is already out there on the blockchain … There is an existing market for blockchain analytics software, so we sell it to a handful of folks as well.”
Armstrong later deleted it due to the strong wave of negative comments and criticism, but an archived version is still available.
Generally speaking, many privacy purists argue that Coinbase’s interests are contrary to the very philosophy of cryptocurrencies. Others even claim that Coinbase could facilitate the cross-referencing of its KYC data with that of the tools it provides.
Coinbase collect private information about their customers due to AML regulations, track customer transactions before and after exiting Coinbase, and then onsell that private information and public data to law enforcement, all without ethical remorse. OK, it’s “just business”.
— DJ Booth (@djbooth007) July 12, 2020
The exchange maintains that its customers’ data is handled separately from its analytics tool so there is nothing to fear.
PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
$4.5 Billion Allocated to Expand the Hedera Hashgraph Ecosystem
The Hedera Governing Council recently announced that it had allocated 10.7 billion HBAR, Hedera Hashgraph’s native token, to fund the development and expansion of the ecosystem.
The official announcement revealed that the amount worth approximately $4.5 billion at the current market price ($0.42) represents 20% of the token’s total supply.
Interestingly, the value of the 10.7 billion HBAR has more than doubled since the Governing Council approved the allocation at a July 14 meeting. The tokens were worth about $2 billion on that date.
DeFi, NFTs, CBDCs and iGaming on Hedera
The Hedera council said it had already designated half of the funds to its recently established independent HBAR Foundation. The autonomous organization would be responsible for the distribution of the remainder.
As per the announcement, the remaining half of the fund currently held in Hedera treasury accounts will be deployed to partnerships and other initiatives that will strengthen the ecosystem.
The foundation will oversee the administration and development of the Hedera ecosystem by providing grants to developers, startups, and other organizations with the goal of expanding the network across products like DeFi, NFTs, CBDCs, and iGaming.
Hedera’s Governing Council also picked Shayne Higdon to lead the foundation. Higdon is a serial blockchain executive with significant experience in venture capital and private equity and has led 40+ M&A and corporate venture transactions in related fields.
Commenting on the development, Shayne Higdon noted that Hedera is the most widely used public ledger globally and the newly established HBAR Foundation will help foster adoption.
“Our mission is to fund a future where entrepreneurs form digitally-native economies and ecosystems, controlling their own assets, identities, data, marketplaces, and more. We are excited to engage with and support organizations and teams that share this vision,” he added.
Promoting a Decentralized Economy
Hedera’s Governing Council is a group of diverse organizations that currently consists of 23 members worldwide, including LG, Google, IBM, and Boeing. The council is responsible for governing the network, its funds, and operating nodes.
“In our mission to make the Hedera network the de facto standard for the decentralized economy, it is now time to empower additional organizations to speed up network adoption.
We are pleased that the Hedera Governing Council has made such a significant commitment to accelerate the decentralized growth and usage of the network,” said Mance Harmon, CEO of Hedera Hashgraph.”
PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Crypto Fraudster Gets Seven Years in Prison for Stealing $90 Million in a Ponzi Scheme
The 24-year-old Australian national – Stefan He Qin – will spend the next 90 months in federal prison for defrauding his customers out of $90 million. The courts also ordered him to forfeit nearly $55 million from the embezzled money.
The Road to Prison
According to a press release from the United States Department of Justice, Stefan Qin received a prison sentence for seven and a half years after stealing nearly $90 million from his clients.
The Australian was in charge of two cryptocurrency investment funds – Virgil Sigma and VQR as their headquarters were in New York. Both companies’ operational structure was to collect money from investors, which later to employ in arbitrage trading strategies. What’s more, they promoted themselves as “market-neutral,” meaning that the volatility of the digital market does not expose their clients to any risks.
Per the marketing reports, Virgil Sigma has had only one month where it did not register profits – March 2017. Qin was also in constant relation with his customers, often bragging about the success of his investment funds. He even reached the Wall Street Journal pages after Virgil Sigma had yielded an annual return of 500% in 2017.
However, it all sounded too good to be true, and “Qin’s investors soon discovered that his strategies weren’t much more than a disguised means for him to embezzle and make unauthorized investments with client funds.”
The 24-year-old actually used the money for his own purposes, such as services, food, and renting a luxurious penthouse apartment in New York. Qin did not stop there – he also used a substantial portion of the investors’ capital to make allocations in other entities that are not related to cryptocurrencies at all.
The investigation revealed that he received a prison sentence of seven and a half years and the court also ordered his investment funds to cease operations. Apart from this jail time, Qin would have to restore almost $55 million of the stolen funds.
Even More Time Behind Bars
While the aforementioned court decision of more than seven years in federal prison might sound like a long time, it is not the largest ever given for crimes involving digital assets.
As CryptoPotato reported, the Swedish resident – Roger Nils-Jonas Karlsson – was sent to prison for 15 years after luring more than 3,500 people into a fraudulent Bitcoin investment scheme.
Assuring investors that their money (mainly in cryptocurrencies) was in safe hands, he used the funds entirely for his personal enrichment, acquiring a resort in Thailand, luxurious condos, and even a racehorse.
Karlsson’s prison sentence could have been longer, but he pleaded guilty to all charges against him. In addition, the US authorities ordered him to forfeit the Thai resort alongside other properties as part of the punishment. He also had to restore all the money he stole from his victims.
PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
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