The WelderDestiny Compass

Death Of Cryptocurrencies - Issue #054

Wednesday, February 07, 2018 / Perth Australia / By Niekie Jooste

In this edition of "The WelderDestiny Compass":

• The Death Of Cryptocurrencies Seem At Hand
• Why The Push Against Cryptos?
• Why Are They Needed?
• What Is The Future For Cryptos?
  

The Death Of Cryptocurrencies Seem At Hand

The death of cryptocurrencies seems to be on the agenda of a number of governments and other organisations. A number of steps by the Chinese and South Korean governments have made it clear that they are not enamoured with the idea of cryptocurrencies.

Every second media article dealing with cryptocurrencies seems to highlight the big hacks of cryptocurrency exchanges, or the scams and fraud associated with cryptocurrency transactions.

Many of the big banks in the world are not allowing their account holders to perform transactions associated with cryptocurrencies.

Even Facebook has decided not to run any advertisements associated with cryptocurrency and initial coin offerings (ICO's).

The net result is that the price of the cryptocurrency markets have plummeted. Bitcoin, the biggest and oldest cryptocurrency is down by more than 60% from its December 2017 peak of US$20000. Many of the "alt coins" are down even more.

As part of our look at the future employment model offered by decentralized autonomous organizations, (DAO's) today we look at the role played by cryptocurrencies, and whether there is in fact a role for them in the newly emerging "blockchain" economy.

If you would like to add your ideas to this week’s discussion, then please send me an e-mail with your ideas, (Send your e-mails to: compass@welderdestiny.com) or complete the comment form on the page below.

Now let's get stuck into this week’s topics...

Why The Push Against Cryptos?

In one of our first issues of The WelderDestiny Compass, we looked at how self interest drives the adoption of technology, and how it shapes the future. (To read more, click this link...)

The problem with cryptocurrencies is that they upset the apple cart for many established market participants. That means that many very influential people and organisations would like to see the death of cryptocurrencies.

The most obvious are the banks. Up until now, the banks have had a monopoly on creating money through the fractional reserve banking system, when extending credit. Banks also get to charge transaction fees when we use our bank accounts to pay each other for goods and services. The financial industry has grown from being a small fraction of the overall economy, to being one of the largest sectors. As a general rule, established banks are pulling out their hair when they think of what cryptocurrencies are going to do to their business model.

Governments the world over like to have control of their own money. Whoever controls the money, has the power to bend the economy in the direction that they want to take it. This is done by just "printing" it, or by manipulating interest rates.

In addition, some governments can essentially kill opposition by limiting people's, or other counties' ability to perform transactions through the traditional banking system. Think of how the USA places sanctions on countries or individuals by not allowing them to transact through the SWIFT system for making international money transfers.

In addition, countries such as China, with currency controls, would no longer have those controls if they loose the ability to prevent their currency from leaving the country.

Many existing companies, especially "internet based" companies, would be the most obvious targets for DAO's. Especially a company like Facebook has huge amounts to loose if a DAO based social network gains traction. In essence their business models are under attack as you are reading this. Other big internet based companies in the same boat are YouTube, AirBnB and Uber.

Publishing platforms (media websites and print) and retail platforms (Amazon) are probably also in the firing line, as new models for publishing and retail are in the pipeline.

It is no surprize that these big companies, like Facebook and the media, are doing their best to undermine the world of cryptocurrencies. It is all a part of the drive for powerful people and institutions to protect their own self interest.

It is human. It is part of all change dynamics where existing winners become losers, and are replaced by new winners.

It is therefore no surprise that we are going through this fight for cryptocurrencies. There are potential new winners that are salivating at the prospect of taking over the mantle from the present incumbents, while the present winners will defend their territory for all they are worth.

From our perspective, we need to try and predict what the future will look like, based on the balance of probabilities. The chances are good that we may get it wrong, but then we can always change our minds! Better to have a theory that can be modified as new developments happen, than to be taken by surprise.

Why Are Cryptocurrencies Needed?

There are many pundits out there that believe that cryptocurrencies are not needed. Almost everybody sees the value in distributed ledger technology, (DLT) like blockchain, but many people believe that we could get the benefit of DLT without cryptocurrencies.

This would certainly be true if the blockchains were private. In fact, many companies are working on systems that use private blockchains. This gives them the advantages posed by the security of distributed and encrypted systems, while also keeping the advantage of maintaining control of their data and systems.

In other words, it is really just business as usual from a business model point of view. The only change is how their data is stored and accessed. As the masters of their universe, the organisations involved can change the rules as they liked, just as they do now. These organisations remain as the "trusted intermediaries" to leverage the value off any data that they have under their control.

In such a private blockchain world, there would not really be a need for cryptocurrencies. These private blockchains could very easily be interfaced with the traditional banking system to allow payments between participants.

The problem is that private blockchains do not solve any of the current issues associated with the world of fiat money or monopoly organisations that capture a great deal of the economic rent without sharing it with the broader society. (To read more about the concept of economic rent, go here... )

To see how this has unfolded in the last few decades, just look at a list of the richest people. They are dominated by people that have made their fortunes out of harnessing the computer and internet economy. People like Bill Gates from Microsoft, Jeff Bezos from Amazon and Mark Zuckerberg from Facebook.

Most of these internet based organizations are really just intermediaries. In the bigger scheme of things, their contribution is to offer a platform for people to interact with each other. In the process they take a significant portion of the transaction costs. It is very difficult for competitors to enter such a market, because the network effect has given them an almost unassailable advantage against newcomers.

So, the aim would be to develop "trustless" systems where monopoly intermediaries are not needed. Then each participant in the system can be incentivised to work for the benefit of the whole system, while also working in their own best interest. I am sure that you will recognise the basis for a DAO in that sentence!

Potentially, if such a system is designed properly, the rewards inherent in the system will be distributed fairly, based on the contribution of each participant. Inherent in such a trustless system is the ability to financially transact directly between participants, without the need for a financial intermediary such as a bank. This need for trustless financial transactions directly results in the need for cryptocurrencies.

In summary, cryptocurrencies are needed to solve the social and economic problems inherent in our current financial systems based on central control, and trusted intermediaries.

What Is The Future For Cryptos?

Obviously it is impossible for me to give a single and direct answer, but we can try to look through the mists that obscure our vision of the future, by trying to understand how most of the powerful incumbents can be satisfied, combined with an advantageous way forward for the broader society.

Firstly, the blockchain genie is out of the bottle, so it would not be a politically simple thing to just put it back into the bottle. In the democratic societies, there would be too much political opposition to a simple suppression of the technology. Politically a more nuanced solution would be needed.

Besides which, it would only take a couple of countries to break rank and allow cryptocurrencies, to totally sink those countries that have outlawed it. There are enough countries that have enemies, that they would not all stand together. If a single country like, say Australia decided to find a good way in which the cryptocurrency economy could interface with their own interests, while everyone else made it illegal, Australia would become the new base for all those blockchain based organisations that would add tremendous wealth, at the expense of all the other countries. It would not be long before everyone "wanted in" on the fat pickings!

Secondly, most governments have also seen the great potential in terms of control that a government controlled cryptocurrency would allow. Most larger central banks are busy looking at how they could implement a cryptocurrency system of their own, that they can control. Especially Russia seems to be quite a way down the road in this regard, but most countries are busy on this.

The problem with a government cryptocurrency is that it still leaves the power to the government to "print" money without adding value. The current fiat money system has shown that centralised control of the money supply invariably leads to corruption of the system, or at the very least, the playing field is tilted in the favour of those in power. As an example, recall how the "taxpayer" bailed out the big banks that made reckless bets with derivatives during the 2008 / 2009 GFC.

This means that they will not have the political support of a big enough sector of the voters to push through a single central government controlled cryptocurrency solution.

To solve this problem, governments can either resort to backing their currencies with commodities like gold, or they can try to institute controls on the decentralized cryptocurrencies in such a way that they still have enough power of control. I suspect that they may use a combination of those approaches to resolve the situation.

Governments can allow the use of decentralised cryptocurrencies, while using the tax system to ensure that the value flowing through the decentralised cryptocurrencies are captured as a flow through the government controlled currency.

The government controlled currency can then be structured in such a way that banks can use it to run a modified version of fractional reserve banking by lending it out. This will not necessarily prevent direct peer to peer lending from taking place in the decentralized cryptocurrencies, but such arrangements are by their very nature not fractional reserve, so there is no currency "created" by such peer to peer lending practices.

Such an arrangement would see a big clampdown from the governments to regulate the cryptocurrency markets as far as possible. I suspect that the current unregulated cryptocurrency exchanges may largely be shut down, with much of their functionality shifted over to the banks.

Laws could be instituted that any DAO system put in place, must have a "direct taxing" portion to their smart contracts. In that way, government tax authorities could actually be better off than with current business systems where they are largely reliant on the businesses and individual tax payers to comply with tax laws.

I suspect that the Facebooks of this world may find themselves offered on the altar of the crypto. They will have to either adapt or die!

Yours in welding

Niekie Jooste

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