The Future of Money Video

This article explores the reasoning behind why it is necessary to rethink money. It brings to light the problems surrounding traditional fiat such as hyperinflation and an over-powerful central government, by using specific countries as case studies to exemplify each issue.

We also introduce “Social currencies” such as the Brixton pound to validate how money as a community construct can solve the dilemmas posed by traditional fiat.

Centralized Government

There are typically terms of engagement governing social contract-based transactions, which include information regarding each party’s rights and responsibilities. Unfortunately, there is often a lack of trust between parties, and the need arises for a power structure to enforce the terms of engagement. In the case of fiat, the government steps in to legislate agreements previously entered into by voluntary and mutual consent.

The centralized authority establishes fiat, which operates based on coercive as opposed to voluntary market relationships. They virtually monopolize the exchange of value by seeking to eliminate or at least regulate alternative currencies.

Venezuela is a crucial case study that reveals what might be the most dangerous flaw of government fiat currencies; they make it easy for incompetent or corrupt leaders to loot the nation’s wealth. All the authorities need to do to increase wealth is to print more currency(1). The powerless citizen has no choice but to accept the devalued paper money, while the autocrats can easily exchange it through the banking system for other currencies.

Ordinary people are at the mercy of this horrendous system because they cannot spend the tyrant’s worthless paper outside the nation. Nor do they have a suitable means of moving cash outside the country because nobody else accepts their national paper.

Another example illustrating the problems of centralized governments controlling fiat occurred on November 8, 2016. On this day, India’s Prime Minister, Narendra Modi, declared 86 percent of his country’s cash worthless(2). According to CNN Money, Modi went on television and told the Indian people that their two most substantial bills, the 500 rupees ($7.50 or £5.40) and 1,000 ($15.00 or £10.81) notes were immediately worthless(3). In a moment, Modi showed the world that the fiat’s buying power for an entire nation could be instantly destroyed or taken away.

The most outspoken foe of cryptocurrency, former International Monetary Fund (IMF) Chief Economist Kenneth S. Rogoff, is also a critic of government-issued fiat. Rogoff, a professor at Harvard University who teaches public policy, recommends that governments altogether abolish paper money(4). Rogoff accuses the world’s central banks of promoting the black market by profiting from the sale of paper bills and depriving legitimate enterprise of cash(5). As put by Joerg Platzer in the film Cryptopia, “The problem I have with banks is that we in our society have managed to build an unreliable caste with the banks, a criminal syndicate that cannot be jailed and that are too big to fail, too big to jail, and with their products and their businesses plunder from individuals, via pension funds, municipalities, entire societies — who can commit any crime for which no people have to go to jail. HSBC is a great example with 10,000 times complicity in murder. No one even had to go to court because the US chief prosecutor made it clear we couldn’t do it… and then the economy collapses.”

Although Rogoff denounced Bitcoin (BTC) as “Crypto Fool’s Gold” in a Project Syndicate column, he thinks present-day fiat currencies are worse(6). Rogoff believes that governments will eventually soon replace fiat with national cryptocurrencies. He predicts that governments will merely takeover cryptocurrency(7). Historically, banks printed paper currencies, but ultimately, governments took over the process because they were the superior ruling entity. Fiat currency operations allow those who arbitrarily control the currency to redistribute purchasing power and, consequently, wealth by altering the money’s availability, quantity, and distribution. This manipulation is little more than legalized theft, where a privileged minority benefits from government deficit spending based on an unfair operation of hidden taxes on savers and wage workers.

Crime & Counterfeiting

The counterfeiting of currencies is a significant threat to national economies as it represents a financial loss to its citizens. Counterfeited currency causes a reduction in the value of real money and inflation due to an unauthorized artificial increase in its supply in the economy. The counterfeit currency also undermines the official currency’s trust, which results in losses for traders because banks do not reimburse them for confiscated counterfeit money when detected(8).

Aside from paper currencies being subject to counterfeiting, they can also be subject to abuse by criminals. For example, Rogoff notes that the $100 bill, which average Americans rarely see, makes up 80 percent of the American money supply; it is the favorite medium of exchange for the world’s criminals(9). He argues that cash mainly facilitates violent crime and economic growth in the underground economy, not the official one.

In The Curse of Cash, Rogoff cites an example from when the Swedish government lowered the amount of cash in circulation and significantly reduced bank robberies(10). Ironically, critics claim that Bitcoin and other cryptocurrencies benefit criminals when the reality is that they are far more likely to use cash.

Remittances in Fiat Currency

A few months ago, while attempting to transfer £300 from the United States to the United Kingdom via Western Union, I paused to compare the costs to do an international wire transfer through my bank. The transfer via Western Union was $100 more expensive, primarily because of their exchange rate.

Cryptocurrencies enable the unbanked to bypass government-issued fiat, which is subject to high transaction processing fees. A primary advantage of cryptocurrency is that it gives the poor and the unbanked the ability to make cross-border transactions with little to no exchange rate, giving them spending and money transfer capabilities once only reserved for the rich. The award-winning producer of Cryptopia, Torsten Hoffmann, has a convincing take on this phenomenon, “after all… it’s just moving data; I can send a picture or video to anyone on the planet — almost instantly, for free. We live in the internet age, but the banks won’t send the data after 5 pm or on the weekend? That doesn’t make any sense! What if those slow and expensive middlemen with their multiple ledgers could be replaced by a giant database synchronized over the internet? that’s the big idea behind bitcoin, and it’s run by a decentralized global network of powerful mining computers and regular laptops.”

Coercion in Fiat Currencies

“Fiat currency schemes are immoral because the primary behavior that makes them acceptable is coercion.” (11)

In my book the Social Currency, I write in the chapter Herd Morality and the Abuse of Power that morality is primarily transactional. Parties intentionally and voluntarily enter a simple contract to gain value, which essentially means that they are free from coercion.

In fiat, coercion is undeniable, and in fact, necessary for its adoption. For example, in 1933, the United States government threatened criminal penalties of $10,000, ten years in prison, or both, to force citizens to accept irredeemable Federal Reserve Notes in place of money backed by gold(12). As a result, the government forced people to take the fiat currency against their will. The government continues to effectively execute coercion through economic taxes that legislate the use of fiat as mandatory in the marketplace.

Hyperinflation in Fiat Currencies

In 2008, the Bank of England created £375 billion of money, thereby devaluing what was already in supply and considerably depreciating the economy (13). Cryptocurrencies prevent this type of inflation by restricting the amount of currency in circulation. Bitcoin, for example, has an upper limit of 21 million coins (14).

Venezuela residents are experiencing severe hyperinflation and have seen prices rise by 12,875 percent during 2017 (15). The International Monetary Fund forecast that inflation should have increased by 13,000 percent in Venezuela during 2018 (16).

Given the horrid economic conditions in Venezuela, thousands of Venezuelans have turned to mine Bitcoin (BTC) and Ethereum’s Ether token (ETH), where they can potentially make $500 a month (17). Venezuelans can use their mined cryptocurrencies to purchase essential items like food and medicine using e-commerce, which is more efficient than bartering for consumer goods on the street.

Occasionally mining equipment is seized, which ends up being sold by policemen as their only way of gaining income. The mined cryptocurrencies themselves cannot be stolen or confiscated by authorities at gunpoint because the tokens are stored on password-protected wallets. Again, Torsten Hoffmann shares his take on the subject in his film Cryptopia, “this is the Berlin Wall — still a powerful symbol of a government trying to control its citizens. but this is what happens when people want to be free.”

Failure to link fiat currencies to physical reserves, such as commodities, puts them at risk of becoming worthless due to hyperinflation (18). Hyperinflation results in the currency’s devaluation because its supply and distribution spikes trigger price instability, which can artificially stimulate or depress the economy (19).

As Voltaire famously wrote, “paper money eventually returns to its intrinsic value — zero,” which is why the future of cryptocurrencies needs to be explored.

Problems with Fiat Summarized

Fiat is simply a currency created by a national government that has been declared legal. Physical commodities, such as gold, previously backed it, but now it is supported by fundamental principles of supply and demand and the credit of a nation’s economy. Fiat currencies are secure in that they are highly controlled and thus tend to be stable. However, if a fiat’s control is in the wrong hands, then instability will conquer.

It is unlikely that fiat will continue to last because it is now just an abstract concept. Modern-day fiat longer exists primarily electronic numbers in a computer (instead of physical notes or coins) which have no literal value.

Furthermore, fiat is imposed upon us and allows its governing authority to redistribute wealth as seen fit by altering quantity and availability, often leading to hyperinflation. We are forced to use fiat as it is the only currency option available, effectively making it a monopoly.

As a monopoly, fiat currencies consolidate wealth, which destabilizes economies. The more concentrated the wealth becomes, the higher the risk for corruption.

If corruption continues within an entity governing fiat, then trust and confidence in the currency are lost. As a result, the money reverts to its intrinsic value of zero. Therefore, communities must rethink their currencies. The examples below represent communities that did precisely that and ultimately ended up minting their currencies.

The Brixton Pound

In September 2009, activists in the United Kingdom made a liquidity injection into Brixton, South London. They created a currency designed to support the local community. The Bank of England does not control the Brixton pound, and it is transmitted by text from a cellphone (20). The Brixton Pound is an additional payment method for people who do not have a credit or debit card or do not want to get involved with the banks. There are around 500,000 Brixton pounds in circulation, and over 200 businesses across Brixton accept it(21).

Brixton is described as a significant town center with an international reputation based on its markets, cultural and creative energy, and diversity. It is where the Brixton Pound (B£) was launched in September 2009. According to the Brixton pound website, an electronic pay-by-text platform, which is now retired (22), was an attempt to enhance the physical paper-based money.

The Brixton pound’s mission was to support diversity and build resilience in the local Brixton economy, considering the challenging economic times and dominant chain of power. The Brixton pound further sought to raise community awareness of the local social economy and facilitate a self-help model to protect the Brixton residents’ financial future. Another aim was to promote regional sourcing of goods to decrease carbon dioxide (CO2) emissions and raise Brixton’s profile locally and nationally (23).

The currency, which has a fixed one-for-one exchange rate with the pound sterling, is accepted at over 150 local shops and businesses that can use it to pay local taxes (24).

A 2017 article by Business Insider shows around 500,000 Brixton pounds in circulation (25). “If you spend £5 on a cup of coffee in a chain store, the majority of that money just flies straight out to whoever owns the shares in the coffee chain,” said the Brixton pound Director, Charlie Waterhouse, in a Business Insider interview (26). “If you spend 5 Brixton pounds with a local, independent coffee shop, that money stays circulating in the area. It’s about empowering people to be able to make positive, economic decisions in their everyday lives.” (27)

The innate nature of Brixton pounds to circulate within the local environment exemplifies how a community can use it’s currency to increase its economic status, especially for small businesses. By challenging the control of money by a central authority, Brixton pounds users determine the currency’s value, which gains it more trust. Furthermore, the Brixton pound removes coercion as participants voluntarily decide whether to use it at their convenience.

Tom Shakhli, the Brixton pound engagement manager, believes that the more popular other mainstream crypto coins become, such as Bitcoin, the more people are likely to adopt local virtual currencies like his own (28). He states, “we all (virtual coins) fall under the same umbrella, which is an alternative to the national currency. We are all part of that family, I guess. Each one gives the other more credibility.” (29)

In Conclusion

This article explained the numerous problems evident in fiat currencies, such as over-powerful centralized governments, crime, counterfeiting, remittances, coercion, and hyperinflation. Please refer to the citations or inline links within this article for more exciting and requisite information regarding Bitcoin and cryptocurrency.

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“Bitcoin: The End of Money As We Know It” Torsten Hoffmann Film Trailer
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The author, Cecil (CJ) John, is a chartered graduate of the Royal Institute of British Architects and computer scientist. He is the CEO of virtualdeveloper.com, LLC, an IT technology firm based in the USA that has worked with some of the largest organizations in the world, including the World Bank, IMF, US Federal Government, Deloitte Consulting, and Ernst & Young.

CJ is the inventor of the world’s first blockchain-enabled digital workplace. Probably. In 2019, he caught the attention of Microsoft, who awarded his company with the highly coveted status of Microsoft Managed Partner. As a philanthropic endeavor, CJ is the founder of the John Charitable Trust, a 501(c)3 foundation.

References

  1. Carmody, Michelle. “What Caused Hyperinflation in Venezuela: a Rare Blend of Public Ineptitude and Private Enterprise.” The Conversation, 12 Feb. 2020, theconversation.com/what-caused-hyperinflation-in-venezuela-a-rare-blend-of-publicineptitude-and-private-enterprise-102483.
  2. Rowlatt, Justin. “Why India Wiped out 86% of Its Cash Overnight.” BBC News, BBC, 14 Nov. 2016, www.bbc.com/news/world-asia-india-37974423.
  3. Ibid.
  4. "The Problems with Fiat Currency & How It’s About to Go Digital.” ELEVENEWS, 13 Jan. 2020, elevenews.com/2020/01/13/the-problems-with-at-currency-how-its-about-to-go-digital/.
  5. Ibid.
  6. Rogoff, Kenneth, et al. “Crypto-Fool’s Gold? by Kenneth Rogoff.” Project Syndicate, 9 Oct. 2017, www.project-syndicate.org/commentary/bitcoin-long-term-price-collapse-by-kennethRogoff2017-10?barrier=accesspaylog.
  7. Ibid.
  8. “The Effect Of Counterfeit Money On The Economy And How To Identify Them.” Avansa Money Counters, avansa.co.za/the-effect-of-counterfeit-money-on-the-economy-and-how-to-identify them/.
  9. Rogoff, Kenneth, et al. “Crypto-Fool’s Gold? by Kenneth Rogoff.” Project Syndicate, 9 Oct. 2017, www.project-syndicate.org/commentary/bitcoin-long-term-price-collapse-by-kennethRogoff2017-10?barrier=accesspaylog.
  10. Siegel, Robert. “‘The Curse Of Cash’ Makes Case For A World Without Paper Money.” NPR, NPR, 1 Sept. 2016, www.npr.org/2016/09/01/492288888/the-curse-of-cash-makes-case-for-aworld-without-paper-money.
  11. Financial Sense. 26 Mar. 2012, www.financialsense.com/contributors/ron-herafteenfundamental-problems-with-at-currencies.
  12. Greene, Stephen. “Emergency Banking Act of 1933.” Federal Reserve History,www.federalreservehistory.org/essays/emergency_banking_act_of_1933.
  13. “What Is Quantitative Easing?” BBC News, BBC, 4 Aug. 2016, www.bbc.com/news/business15198789.
  14. Canellis, David. “Here’s Why Satoshi Nakamoto Set Bitcoin’s Supply Limit to 21 Million.” Hard Fork | The Next Web, 9 July 2019, thenextweb.com/hardfork/2019/07/08/heres-why-satoshinakamotoset-bitcoin-supply-limit-to-21-million/
  15. Nakamoto, Satoshi. “Problems with Fiat Currency & How We Are Moving to Digital Currencies.” Nakamoto News Network, 13 Jan. 2020, nakamotonews.network/at-currencydigital/.
  16. Ibid.
  17. Chun, Rene. “Big in Venezuela: Bitcoin Mining.” The Atlantic, Atlantic Media Company, 8 Aug. 2017, www.theatlantic.com/magazine/archive/2017/09/big-in-venezuela/534177/.
  18. “The Anti-Poor Effects of Large Exchange Rate Devaluations. “The Anti-Poor Effects of Large Exchange Rate Devaluations | VOX, CEPR Policy Portal, voxeu.org/article/anti-poor-effectslarge-exchange-rate-devaluations.
  19. LibertyTree.libertytree.ca/quotes/Voltaire.Quote.2BC6.
  20. Romeo, Claudio (2015), “Activists in Brixton created their currency and printed over half a million notes to keep money away from global chain stores.” Business Insider.
  21. Ibid.
  22. Woodru, Graham, and Cic. “The Brixton Pound — Money That Sticks to Brixton — B£.” Brixton Pound, brixtonpound.org/.
  23. Ibid.
  24. Ibid.
  25. Romeo, Claudio (2015), “Activists in Brixton created their currency and printed over half a million notes to keep money away from global chain stores.” Business Insider.
  26. Ibid.
  27. Economist (2017). “Sub-national currencies struggle to survive.” Economist
  28. Wong, Joon Ian (2014). “Local London Currency Brixton Pound Thrives in Bitcoin’s Shadow.”
  29. Coin Desk
  30. John, C. (n.d.). The Social Currency: Why We Ought to Rethink Money.
  31. Hoffmann, T. (Director). (n.d.). Cryptopia — Bitcoin, Blockchains and the Future of the Internet [Video file].

Author - The Social Currency (Blockchain/FinTech) | CEO virtualdeveloper.com, LLC a Microsoft Managed Partner. Blockchain | Azure Cloud | Records Management .

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