In times of rapid change, experience could be your worst enemy — J Paul Getty
Who controls the issuance of money controls the government! — Nathan Meyer Rothschild
The year 2018 signals a new chapter in the evolution of cryptographic currencies (cryptos for short). Cryptocurrencies, particularly Bitcoin and Ethereum, are now beyond being called ‘experiments’. Ripple (XRP) has already exceeded Ethereum, (ETH) in market value. Ripple’s market value stands at $132 billion eclipsing Ethereum’s market value which stands at $96 billion behind Bitcoin which is a staggering $257 billion in market value.
Mainstream stock exchanges are now offering futures contracts on Bitcoin. Other currencies such as Ripple, Monero, Zcash are now out of the veil of obscurity. They are now traded by housewives who chat nonchalantly about the future of cryptos. Each crypto has its own unique proposition e.g. Ether is a token for internet 2.0, Monero and Zcash provided added privacy and Ripple is a token of a completely new payment system. These tokens are now transcending national boundaries with important geopolitical ramifications.
Cryptos are creating a new paradigm where money has become more abstract. The introduction of new cryptos including Central Bank Cryptos can cause schisms with existing monetary systems and nations — a phenomenon very similar to ‘Plate Tectonics’ that studies colliding continental plates redefining the map of the world.
Therefore, I call the changes in global monetary dynamics ‘Crypto Tectonics’. This article studies the rise of newer virtual currencies, their unique selling proposition and economic value. Finally, it studies their impact on the global political and economic landscape.
The Concept of Money Is In a Flux
The Bretton Woods agreement, during World War II linked the value of money to gold i.e. to a scarce commodity with important, practical use cases.
On August 15,1971, the US moved away from pegging currency to gold.
In the twentieth century, the world entered a new phase where money got increasingly delinked from something tangible to a trust in government and ultimately in god.
Today, the concept of money is in a state of even greater flux. It is a question of two faiths i.e. fiat currency (faith in god) and crypto currency (faith in mathematical algorithms)
As per Wikipedia:
Plate tectonics (from the Late Latin tectonicus, from the Greek: τεκτονικός “pertaining to building”) is a scientific theory describing the large-scale motion of seven large plates and the movements of a larger number of smaller plates of the Earth’s lithosphere, since tectonic processes began on Earth between 3 and 3.5 billion years ago.
The model builds on the concept of continental drift, an idea developed during the first decades of the 20th century. The geoscientific community accepted plate-tectonic theory after seafloor spreading was validated in the late 1950s and early 1960s.
Geopolitics is defined as politics, especially international relations, as influenced by geographical factors. As per the Merriam Webster dictionary, geopolitics is a study of the influence of such factors as geography, economics, and demography on the politics and especially the foreign policy of a state.
The New York Times reported on January 3, 2018 the following:
“Russian and Venezuelan officials are hoping virtual currencies can help their countries make an end run around American sanctions.Both governments, with ambitions to create state-sponsored cryptocurrencies, are looking to take advantage of the promise that Bitcoin introduced to the world financial system: a new kind of money and financial infrastructure, outside the control of any central authority, particularly the United States.”
This story has many profound implications but it really means that nations may chose to utilize cryptocurrencies to create an alternate, international monetary system outside and at odds with the current one.
This, in turn, would imply a new economic order and a greater abstraction of money and its inherent value.
Global Monetary Policies
Let us go back to the basics.
Most countries and central banks balance interest rates and inflation. Some central banks such as the Federal Reserve explicitly target inflation while others target interest rates.
Lets say a country is not growing. The central bank would lower interest rates which will allow people to borrow cheaply which will spur demand and in turn will result in inflation assuming the supply does not outstrip demand rapidly.
The falling interest rates will have a dampening effect on the value of the country’s currency and exports will become cheaper and imports dearer.
For countries relying on imports such as oil and petroleum, it would mean an adverse trade balance and rising inflation at home which in turn will increase interest rates to induce savers to put money into banks. This, in turn, will result into higher inflation and slow growth.
The above example is very simplistic and can be explained graphically as the Fisher effect below:
In macro-economics, the Mundell-Fleming trilemma or simply the trilemma, explains the constraints under which countries have to set their monetary policies. As per Investopedia, a country cannot achieve the free flow of capital, a fixed exchange rate and independent monetary policy simultaneously. By pursuing any two of these options, it necessarily closes off the third.
Now, imagine a world where cryptos blur or destroy existing macro-economic frameworks. Many argue that macro-economics is not a science. However, that is a separate debate altogether.
The question is: what rules and frameworks will cryptos create if any?. If money is not tied to any underlying economic value but rather a symbol of faith in cryptography, the entire global geopolitical landscape which is driven in a large part by money will be a giant experiment in an unknown frontier.
What is Crypto Tectonics?
As Blockchains advance further into the mainstream, players such as Ripple are attempting to create a truly global Blockchain based Real Time Gross Settlement (RTGS), remittance and payment network. The difference between Ripple and existing global money transfer networks (such as SWIFT, VISA, MasterCard) and domestic networks (such as CHIPS, RTGS and NEFT) is speed, cost and support of different currencies. Ripple supports fiat currency, cryptos, commodity or any other unit of value such as frequent flier miles or mobile minutes. In other words, it is creating the Internet of Value where each symbol of value can be transferred globally fast and at a fraction of a cost. Value is also recorded immutably in the Blockchain ledger.
Therefore, Blockchains and Cryptos are blurring national boundaries and creating an earth that existed before plate tectonics started creating continents.
If more online entities (which in the future could be everyone) start accepting cryptocurrencies, it is not hard to imagine what lines will be blurred and obliterated.
How Many Crypto Currencies Are There?
Today, there are roughly 1,390 cryptocurrencies in existence. As per Coinmarketcap, the total market capitalization of all cryptos is $757,269,113,035 i.e. $ 757 Billion. It would mean almost 4% of US GDP and more than the GDP of many small nations. In other words, money of such magnitude can destabilize smaller countries or create a new nation of it’s own which is why I labeled this article “Crypto Tectonics”
That is very closely approaching $1 Trillion. In and of itself, cryptos now are more valuable than the most valuable company in the world Apple which has a market capitalization of $ 752 Billion (source: statista). To obtain a relative perspective of the size of cryptos compared to other assets, look at the infographic below.
The key differences between the major cryptos are contained in the Bitcoin wiki. All of them use “Proof of Work” algorithms to record transactions on the Blockchain except Dash. The next evolution would be to move to a more efficient Proof of Stake algorithm.
Panacea, Greed or Rebellion
Speculators are pouring insane amounts of money into cryptos. Many say that when housewives start talking about a phenomenon at kitty parties, it is a tell tale sign of a bubble especially when very few people understand the intrinsic value of tokens that many think have no value at all. All these tokens today represent an idea of the future. If you buy into a particular crypto-currency/token’s idea of the future, you may be more inclined towards investing in it.
The best way to think about cryptos/coins/tokens is that they represent a share of the company or platform you are funding with your money. The real life analog is Venture Capital investment in a new company with a bold new idea if that platform/company is seeking an Initial Coin Offering (ICO). However, if you purchase a coin say Ether over an exchange cum digital wallet called Coinbase, you are buying it over a private exchange much like buying a share at the NYSE or NASDAQ. You become invested in that company just like an equity share holder would do but you would not have any voting rights. You will also not receive any dividend but will be compensated by growth in the price of the particular crypto. The Securities And Exchange Commission (SEC) classifies these tokens as ‘assets’ for the purposes of tax and otherwise also. The gain on sale of these tokens is taxed as capital gains.
You will also be willing to invest because you don’t want to lose out on a rally that would pocket you millions without any economic activity to boot. Thirdly, a spectrum of critics and anarchists would willingly pour money if they feel that cryptos are the panacea to global economic failure including the 2008 financial crisis.
Every force capable of transforming human lives can be turned around into an agent of devastation. That is the duality inherent in technology too. Technologies such as the Blockchain and virtual currencies bring radical improvement but can also severely exacerbate inequity. The past has been a testament to Blockchain’s potential. The future, on the other hand, is hostage to the collective economic choices made by us. Nobody doubts digitization is a good thing for the most part. However, very few people understand the price to be paid for change. There always is a price to pay as there are no free lunches.
Cryptocurrencies will create schisms, upend economies and change the global economic landscape much like plate tectonics changed the global geographic landscape. As we think of a new economic order and by extension a new map of global finance and politics, the disruptive power of cryptos should be kept in mind. Unequivocally, a dialog to harness their potential then becomes the need of the hour.