The monster has been released from the bottle. The lid of the Pandora's box was torn open. The cryptocurrency will stay and will not disappear.
The recent controversy surrounding the US dollar exchange rate has sparked a lot of discussion about cryptocurrency and some reserve banking business. Given this paradigm shift in cryptocurrencies, we need to narrow the scope and start to imagine what an economy based on cryptocurrency would look like. In order to do this effectively, we need to leave behind our indoctrinated ideas and look at the issues from an anarchist perspective.
The innovation of bitcoin and other cryptocurrencies is the separation of money and country. In short, bitcoin is the black market currency. If the state does not use the financial system as a means of surveillance and control, we do not need cryptocurrency.
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The whole value proposition of a cryptocurrency is that it is decentralized, no one or organization (including a nation state) controls it, and it allows you to trade without the need for state approval. One of the earliest use cases for Bitcoin is the sale of illegal goods on the dark, for a reason.
According to the current situation, under our current system, the banking industry is a rent-seeking monopoly industry. The country works with banks, and financial institutions are already ancestors. The Mises Wiki defines rent-seeking as “a concept used to describe an individual or company activity that attempts to acquire or sustain a wealth transfer, primarily with the help of the state. ” “A person who is much smarter than me proposes a portion of the reserve banking business. A lot of criticism, but I will try to summarize.
• The central bank monopolizes the counterfeit currency approved by the state.
• They print their own bills, by doing so, depreciating the currency through inflation, systematically plundering the wealth of others.
• It is often referred to as an “implicit tax”.
• That's why the rich get richer. By printing money, they make all the existing money less valuable. They directly benefit from the Cantillon effect, while others (those who have no special relationship with the central bank) do not. .
On the other hand, bitcoin is limited in supply, with a cap of 21 million. This has created a problem for central banks accustomed to using particularly loose monetary policies, which have led to a cycle of economic chaos. This stems from the manipulation of the money supply and the intervention of the natural self-regulation mechanism of the free market to achieve equilibrium. We live in a strange era, and usury has been fully normalized and accepted. In the early days, it was considered a crime and was considered immoral by various religions. Initially, usury was defined as any kind of accrued interest. Now we have institutionalized usury in the form of a partial reserve bank.
In order for us to try to imagine what a banking system based on deflationary cryptocurrencies (such as Bitcoin) would look like, we need to know what a sound currency is. The definition of a sound currency is “a currency that is not prone to sudden appreciation or depreciation in the long run with the help of a self-correcting mechanism within the free market system”. Mises means that a sound currency is a currency whose purchasing power is not affected by politics. Traditionally, gold is our reliable currency. This is because it has a very high inventory flow ratio. The supply of world gold is the result of thousands of years of human mining activity, and the newly discovered gold has little impact on gold prices, as newly discovered gold accounts for only a small fraction of total supply.
Bitcoin is an attempt by Nakamoto to create a digitally scarce asset with a high ratio of stock to cash flow, similar to the quality of gold as a scarce precious metal. That's why he designed block rewards for miners who provided proof of work to ensure network security. This high stock circulation rate is also the motivation for Nakamoto to split Bitcoin into two halves. This phenomenon is coded into the emissions table of the block rewards earned by miners. Next year, Bitcoin’s stock and circulation ratio will exceed gold, and supply-side inflation will be lower than gold.
So how does the banking industry actually operate under the currency backed by gold?
Precious metals have traditionally been the best-selling goods and have emerged as a natural medium of exchange. This is because they satisfy all the attributes of a robust currency. They are portable, replaceable, separable, almost indestructible, and rare. In order to understand what the banking industry under the bitcoin-based financial system would look like, we need to look back at how the banking industry has emerged under the gold standard in history.
For the sake of safety, people began to store gold in the goldsmith. The goldsmith will issue a deposit slip and charge for the storage of gold. Because gold is very bulky, and banknotes are not, people start to simply trade paper money as if they were real gold. Because banknotes are more convenient, goldsmiths realize that they can create banknotes without gold because people rarely exchange their real money. In this way, part of the reserve bank was born. The goldsmiths began printing paper money and lending them interest. The first was under the Knights Templar during the Crusades and continued in the Fugue and Medici families of the Renaissance.
In an economy backed by gold, there are two main problems: measuring the purity of gold and verifying that it is actually the correct gold. The market's response to these problems is to create a mint. Mint rises as a reputable coin manufacturer that meets uniform quality standards. For example, a gold coin from a mint can be reliably calculated to contain 1 troy ounce. 9999 pure gold. People will send their gold to the mint, in return, receive standardized coins, then deposit them into the bank and use the banknotes issued from their gold deposits as their actual currency.
Under this system, a banknote is a promissory note that represents a certain amount of gold stored in the bank. This is a bearer note, and anyone who holds this note can use it to redeem the gold it represents. Banknotes are usually only used as cash because they are easier to handle than gold itself.
A check is an order in which a bank pays a certain amount of gold to a specific person. It is not a bearer note, it is just a bank order to pay a specific amount to a specific individual. A loan or credit is a voucher such as a ticket or a check. There is no support for the actual reserve, and the bank will issue the reserve at an interest rate. These notes, checks and credits are all substitutes for money and are called trust media. The trust medium is issued by the bank but is not entirely supported by metal. As the distribution of trust media becomes more common, the purchasing power of real money declines.
In a system backed by gold, those who want to save money can save the money and earn interest. If the interest rate falls and it is no longer worth the risk of depositing your coins in the bank, you can withdraw your deposit. This self-regulating free market force motivates banks to compete and provides an interest rate to ensure that customers deposit coins into banks. If the loan interest rate is too high, entrepreneurs who finance the business will stop borrowing, thus making them incapable of repaying the loan. This is another self-regulating free market mechanism that motivates competition between banks and provides the best interest rates to keep profitable.
Another self-regulating free market mechanism of the gold standard is the price-species flow mechanism. This economic phenomenon was first proposed by the 18th century Scottish economist David Hume. The price-money flow mechanism is that when a country's trade balance is positive, gold flows from neighboring countries until the export value is greater than the import value.
Basically, when a country's economy becomes too rich, the cost of buying goods in neighboring countries will become too high, but it will also be beneficial for rich countries to buy cheaper imports from neighboring countries. This will lead to a gold outflow, from a rich economy to a less affluent economy, until a natural equilibrium is reached, goods are no longer cheap, no longer wealthy.
In our modern times, the central bank can distort this self-regulating free market mechanism by simply printing more money and artificially suppressing the price-species flow mechanism by artificially suppressing price behavior. Or they can reduce the money supply and increase the exchange rate of the national currency.
In our current economy managed by the central bank, the money supply is managed by the central bank. They decided how much new money to print. They also set a reserve requirement ratio and a short-term low-risk interest rate for interbank loans. This interest rate is the basis for all other interest rates in the entire economy. When we have a free bank gold standard, the money supply is managed by the mining company and how much gold they have mined. If they mine too much, inflation will reduce the profits of the mining industry, and companies that invest in the mining industry will also decrease. If they mine too little, mining becomes very profitable, causing more resources to be invested in more mining operations. This is another natural, free market balance that controls everything.
In the purest sense, the gold standard refers to the partial reserve banking system under the free banking system. This means that banks will not be regulated . There are no deposit reserve requirements. They will be free to issue their own gold-backed bank notes, checks, and issue credits they deem appropriate. The government will only use gold as the currency, and the bank will be able to issue trust media at its discretion.
The market will self-regulate through bankruptcy. There are no things that are too big to fail. If you run a bank that is irresponsible with monetary policy, the consequences will be bankruptcy. Competition between banks will be the driving force behind the operation of a legitimate bank: ample deposit reserve ratio and a prudent monetary policy.
In a free bank partial reserve system, depositors are responsible for studying the institutions that do business with them and ensuring that they are an honest and reputable institution. It has much in common with the currently unregulated Bitcoin.
Due to human nature and the lack of a lender of last resort, part of the reserve free bank is a highly unstable system. When people can create money, they are often irresponsible. Some reserve free banks are also more susceptible to the business cycle. During the economic boom, banks tend to issue loans far beyond their level. In times of prosperity, they should be more conservative in monetary policy to prevent recession and inflation. When they tighten their policies, it is usually too late and the recession has begun. Then they decided to adopt a conservative monetary policy at the worst time, because they tend to stop lending when they need the most loans and loose credit, or even stop lending each other to stimulate consumption, bringing a much-needed mention to the troubled economy. Vibration.
Early banking industry
Under our current system, depositors are considered unsecured creditors. This means that if the bank goes bankrupt, if you get compensation, you will be the last person to get compensation. This is true both in the United States and in Europe. We saw that depositors in Cyprus were forced to write down the funds they held in the bank. In our current system, depositors are at the mercy of banks, have no recourse, and are completely deprived of their rights. When you deposit money into the bank, the ownership of the funds is legally transferred to the bank. You can thank the Dodd-Frank Act, passed in 2010, which changed the law and made things what they are.
In the early days of the US banking industry, banks were privately operated and issued their own bills. This era is known as the era of free banking. Each bank issued its own beautifully carved banknotes. When it reached its peak in 1860, more than 10,000 different banknotes were in circulation. During this period, a large number of bank failures and successful forgery occurred, which led to the birth of a national currency. In the United States, the Office of the Comptroller of Currency has begun to oversee the banking industry nationwide. These newly established national banks purchase securities from the government in exchange for national bank notes. This is the central bank based on the gold standard.
This system is how our economy works in the “Beauty Age” (La Belle Epoque). La Belle Epoque was a period from 1871 to 1913, and Saifedean Ammous praised this period as the most prosperous period in human history in his book The Bitcoin Standard. This is due to the fact that the gold-backed currency and the national banking system provide a solid currency. Until the establishment of the Federal Reserve System. With the establishment of the Federal Reserve, we see the replacement of Keynesian economics and the end of the free market. This is our current financial system, the central bank controls the money supply, interest rates, and formulates monetary policy.
The economic problem we have recently encountered is due to the use of soft inflation currencies rather than hard currency. Historically, this has been the cause of the Great Recession and collapse. This is indeed the root cause of the market bubble, and we have seen time and time again that the central bank has developed a very loose monetary policy. Nakamoto knows all about this. He even added a newspaper to the bitcoin origins, alluding to this reality. The headline of the newspaper is "The Second Minister of Finance is on the verge of a second bailout for the bank", which is about the rescue of banks during the 2008 financial crisis.
Banking using bitcoin standards
What would the banking industry look like in a cryptocurrency like Bitcoin?
Now that we have a certain understanding of the banking industry in the gold standard era, let us speculate on what the world of Bitcoin will look like.
First, we will see explosive growth in loans and credits denominated in Bitcoin. This is not a secured asset secured loan that is denominated in French currency and secured by cryptocurrency. (In the context of this article, this is not a true cryptocurrency-denominated loan because its value is still calculated in fiat currencies as the unit of account.) As usage increases, we can see an increase in price stability. Because the current cryptocurrency is too volatile, it cannot be effectively borrowed or borrowed.
We cannot take it for granted that the banking industry will appear on the Bitcoin standard in the same way as gold. Although Bitcoin has some similar features, it is a new technology that is fundamentally different from gold. I suspect that we will see new and completely innovative ways to solve the old problems of managing wealth. The use case of Bitcoin as a programmable currency makes it more versatile than any other asset or commodity.
One of the most important technological advances in cryptocurrency is the multi-signature wallet address. Multisig (Multi-Signature) is a technology for storing tokens and using multiple private keys, held by two or more people. This is safer because the tokens cannot be moved and no coordination parties hold the keys. It is based on the Pay 2 script hash (P2SH) address. Multisig will allow many different untrusted services. People can use it for untrusted hosting, untrusted agency hosting, untrusted transactions, and very high levels of security. Multisig eliminates the risk of losing keys or wallets and greatly reduces the risk of theft, hacking and $5 wrench attacks.
Multisig is actually equivalent to having a safe in the bank, they have a key, and you have another key. The safe can't be opened without two keys, adding an extra layer of security. Multisig will help create untrusted and encrypted security solutions for many of the financial products and services currently offered by trusted third-party intermediaries. This non-intermediation will create cheaper, safer and more convenient unmanaged services, replacing highly centralized and regulated managed services.
This will also fundamentally affect how these services are designed. We may see that instead of a service, you can put your token in a multi-sig wallet and keep another key in a censored company. As long as you choose to move or consume your token, the company will authorize you to trade. They will not be involved in the custody or keeping of funds from others.
This will greatly reduce the heavy regulatory burden that companies must comply with today's hosted solutions. This will also alleviate the violations of your privacy by regulators requiring “anti-money laundering”/KYC and other ineffective ways to combat fraud and crime. Everything can be done with a private key instead of using personal information, and we only need to see people starting to build the infrastructure in this untrusted, unmanaged way.
Another important factor in the Bitcoin banking standard is that as a decentralized private non-government fund, it must protect itself from backdoor control and manipulation. We must resist the use of bitcoin to define the government's legal currency. If a government can link its currency to the underlying cryptocurrency, or define its currency in cryptocurrency, it will be manipulated. A currency unit with the same name as the debt unit can cause problems.
People will use sound currency units to store value, and the exchange medium will be the unit of debt. They are indistinguishable in trade. This will mean that the trust medium will become the medium of exchange, and as the supply of debt-based trust media continues to expand, we may still see inflation and other problems caused by unfettered credit expansion.
Bitcoin needs to form a floating free market exchange rate with fiat currencies. Even if the number of bitcoins is strictly limited to 21 million and will never change, the scale of credit that can be created may also be manipulated, controlled, expanded and distorted in the context of legal currency or bitcoin-denominated currency units. This will allow the government and the central bank to manipulate the money supply through credit expansion. Unlimited credit expansion is still a very real risk, even if the base money supply is limited. The credit expansion opened the cycle of the Austrian business cycle theory.
In an unlicensed financial system based on cryptocurrency, we can expect a large number of bank-type entrepreneurial experiments in the free market we see. In a sense, we may even see the recovery of the free banking industry. There may be a variety of different banking theories applied to real life. We may see the rise of many different types of banks, some of which use extremely conservative monetary policies, while others are complete partial reserve banks, similar to banks under the US Federal Reserve System. Some may be complete reserve banks, others may focus on securities and custody services, as well as charged coin warehousing. Others may be commercial banks offering a variety of business services.
What kind of bank can we see?
Immutable records of transactions that are easily verified by all participants may cause the instability of free banks to disappear. If anyone can see the bank's balance sheet on the blockchain, they can see what assets and liabilities are on the company's books and decide whether it is worthwhile to do business with the bank. What's really interesting is that we will witness what kind of unregulated service emerges from the black market. We may see that competitive services are decentralized and self-sustaining, just like DAOs that provide shadow banking services, they are only competing with regulated alternative services.
The future of Bitcoin is here.
Retail Banking – Retail Banking is the bank where most people have check and savings accounts. These banks use the general public as their customers. Currently, these banks generate income by providing interest deposits to customers and offer a variety of consumer credit products such as home loans, small business loans, money market accounts and credit cards. We can see that these banks are easy to turn to cryptocurrency-based systems. We can see entrepreneurial experiments in terms of interest rate setting and deposit reserve ratio. We can see that the retail bank collects the full amount of the reserve, or we can see that the retail bank issues the loan to the depositor and pays interest.
Commercial banks – commercial banks, in their current iterations, are banks that focus on customer business. They offer similar services to retail banks, but they also provide them to businesses. Businesses often require credit lines, higher levels of financing, letters of credit, and other services that can be issued and valued in bitcoin. These banks can also easily switch to Bitcoin or cryptocurrency-based systems.
Investment Banking – Investment Banks focus on business customers who need to trade on financial markets. Investment banks can help companies issue stocks or raise money with bitcoin or other cryptocurrencies. Bitcoin can be used by companies with security tokens, asset tokenization, IPOs, and bond issues.
Savings and Loans / Mortgage Banks – These banks collect deposits from depositors and then lend to other customers who want to buy real estate. They usually finance consumer housing loans. They are critical to getting millions of people to dream of owning a home. We can expect that some retail banking sectors will focus on promoting their own homes. These loans can also be easily priced in bitcoin or cryptocurrency.
Federal Bank or Public Bank – A good example of such a bank is the national banking system prior to the implementation of the Federal Reserve System or the North Dakota Public Bank. These banks work with local banks and credit unions to provide public services that exceed profits. For example, the North Dakota Bank's loan portfolio includes commercial, agricultural, residential mortgages, and student loans. Instead of lending directly, it facilitates the secondary market and acquires existing loans from banks and credit unions in the state. This system works both on cryptocurrency and at the national level.
Central Bank – The Central Bank formulates monetary policy for a nation-state, sets interest rates for inter-bank loans, controls the expansion of money supply and credit, and acts as the lender of last resort. If we have a central bank system based on bitcoin, then the established monetary policy of the Bitcoin network will weaken many of these roles. These banks need to reserve bitcoin as they currently do and issue bitcoin-backed notes. They are still able to create credit as they wish, but they are subject to the auditability of the blockchain, the public's confidence in their balance sheets, and the price and species flow mechanisms that may result from international trade imbalances. In other words, they are still likely to exist, but their ability to control monetary policy, human intervention or market distortions, leading to the cycle of crisis and prosperity will be greatly limited. Their most important role will be to play the role of the lender of last resort, just as they do now.
Credit cooperatives – credit cooperatives are not actually banks in the traditional sense. They are non-profit financial cooperatives. They are owned by customers, not banks owned by investors who are trying to make a profit. Credit unions typically offer services similar to retail or commercial banks, but they are usually local and are service members of the communities in which they belong. Credit unions can operate on cryptocurrencies with little or no recalibration.
Mutual Aid Bank / Cooperative Bank – Mutual Aid Bank is a profitable bank owned by members. In this regard, they are similar to credit unions. They provide similar services to retail and commercial banks. There is almost no difficulty in implementing the Bitcoin standard.
Merchant Bank – Merchant Bank is a bank that lends money to merchants in exchange for returns. Merchant Bank usually lends to well-known and profitable institutions. They donate credit to the business, and the company will repay the loan from the commercial profits from the loan financing. Commercial banks are crucial to the development of the bitcoin industry.
Private Banking – Private banks are usually owned by individuals or partnerships. They usually serve high-net-worth individuals (HNWI) and provide a variety of services to wealthy clients. They focus on wealth management solutions such as tax services, insurance, portfolio management, real estate planning and trust services. All of this can be done with cryptocurrencies, and with the rise of a new crypto rich elite, Bitcoin could become one of the more important bitcoin-based banking industries.
Islamic Banking – Since Bitcoin is officially considered to be in compliance with Islam and Islamic law, we cannot ignore the important sectors of this global banking industry. Islamic banks are non-interest banks because Islam prohibits usury. Unlike paying interest, Islamic bank customers pay the bank in a similar way to the 100% reserve bank's customers paying for bank and warehousing services. This is a banking industry that cannot be ignored, because 1.8 billion people around the world are Islamic believers and can expect to seek Islamic banking services.
In the free market, we want to see banknotes that can be traded or redeemed in bitcoin and verify the proof of the reserve in an encrypted manner on the blockchain. A company called Bitnotes is already developing physical cryptocurrencies. They use multisig, so you can rest assured that they are safe. They also look cool, like the money of the future. They even have a QR code so you can quickly verify the funds.
Or, the bank may release an Open Dime-like device from Coinkite, a mini-u disk on which you can store bitcoin and then use it as cash in the real world. A device can be used commercially hundreds of times before anyone redeems Bitcoin stored on a device.
For example, if I have $20 bitcoin, you can verify that the funds are there and I can give you $20. Then you can spend money on something else and then transfer the money to another businessman. This can be done as many times as needed. It is a way to take cryptocurrency transactions offline in a cash-like use case.
One of the more controversial aspects of the Bitcoin banking system is the partial reserve bank. Bitcoin was created by anarchic capitalists who were deeply influenced by the Austrian school of economics. In other words, if someone can print money out of thin air, they are likely to do so. That's why we will see some reserve banks using cryptocurrencies, not just loans denominated in cryptocurrency. Part of the reserve system is somewhat contrary to the original intention of using a sound currency, but this does not prevent it from happening. The current trend of cryptocurrency bets is a form of banking with a partial reserve system and an inflationary monetary policy using cryptocurrency.
The main problem with mainstream Bitcoin is that it is designed to be resistant to sovereign review. Governments and banks want a fully regulated, fully supervised market that requires a license. They want to control. They want to freeze your account, and if you post something they don't like, they will remove you from twitter. Bitcoin is the opposite of this view. With Bitcoin, anyone can download the software and start using it. Of course, there are criminals, terrorists and money launderers. Although this is not desirable, it is still a reality we must face. It is a fact that there are always crimes and crimes in life. From an anarchist's point of view, what is more important to us is the financial freedom of all people. This is something we absolutely have nothing at the moment. (For solutions to such disputes, please refer to “Wanzi Long: Exploring the Feasibility Framework for Encrypted Currency Privacy and Supervision”)
We will see that the states either accept the technology or ban it. The current efforts of the Financial Action Task Force (FATF) are a good example of a nation-state trying to exercise this level of control. This will lead to a split that allows innovative governments to benefit from paradigm shifts and become exceptionally prosperous.
In any case, when people use it, those countries that make it illegal will suffer enormously, they will become powerless and have no authority to stop it. One thing is certain, the governments are also competing with each other, so they can never agree on a policy and coordinate a ban. Some countries will see the benefits of taking the lead and they will benefit the most. Even if every country bans it, they can't stop it because they can't even stop the drug trade or illegally share files on Bittorrent. The game theory designed in Bitcoin will make the implementation of the ban much more difficult than the regulators realize.
This topic is one of the reasons I first started learning Bitcoin. When one of my friends told me about the Silk Road, I first discovered it. I started reading as many books as possible about it, and I fell into the rabbit hole of Austrian economics. Before Bitcoin appeared, I was a golden fan, and many of the reasons were the same. I am attracted by the possibility of anarchic capitalism provided by this technology.
I was amazed to see the rapid rise of Bitcoin and the success so far, and I can't wait to see more people start using it, when user experience becomes easier for non-technical types. I really think we are witnessing an extraordinary phenomenon. From the prediction of cryptocurrency by Milton Freidman in the 1990s, we can see its real-time operation.
We are witnessing the emergence of a new asset class with amazing potential. Once the traditional financial world begins to “understand”, we may see a new era of revival or a new era of beauty, as people create amazing new financial services, products and opportunities. It will be very interesting to see that most people in the world have greatly improved their lives by regaining control of their financial situation.
Author: Ricardo Martinez
Compile: Sharing Finance Neo