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Author Topic: End of central banking & cryptocurrencies taking over sovereign currencies  (Read 73 times)
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June 23, 2018, 05:59:02 PM

A few thoughts to inspire debate and discussion on the end of conventional central banking (it is a surprisingly recent historical phenomenon anyway) and cryptocurrencies taking over sovereign currencies (because many countries had given up their sovereign currency already anyway) - all constructive thoughts and ideas welcome in this effort of building the crypto monetary system and economy together.

Sovereign nations already without sovereign currency

In this emerging context of stateless and institution-less cryptocurrencies, it is interesting and relevant to also consider the relation, or the lien, between money and sovereign issuers. Money has traditionally been a key symbol of sovereignty, but e.g. in the European Union nearly 20 nations have given up their monetary sovereignty and independence in exchange for a theoretically value-adding but in reality very poorly designed experiment called the euro, which has so far, as a proven fact, destroyed trillions of euros worth of wealth in Europe by e.g. stalling growth and forcing individual countries into a single format that do not fit their economic and financial characteristics at all (its exchange rate is either too high or too low for its member countries, weakening various exporting, importing, and local goods and services industries in ways that do not match their characteristics and levels of efficiency, productivity and competitiveness, causing permanent loss of value-added in economic output plus its further negative trickle effects caused by multipliers, with this downside of trillions of lost wealth vastly outweighing its benefits); additionally, the euro has massively distorted the market for government debt, enabling ‘weak’ economies to borrow excessively and eventually create an excessive burden of public debt, an euro debt overhang, when the stronger components or members of the euro lowered the euro rates, and induced everyone into the addiction of debt through excessively low rates rather than to let the markets determine the appropriate rates for each individual economy matching their individual characteristics of economic performance). With the current framework, it is impossible to make the euro work how it should, and the answer definitely is not more centralization and concentration of power, but less of that. Natural market-driven balancing mechanisms must be allowed to work, or the end result will be a complete implosion. Maybe that is a good thing, because it will remove something that never worked and something that is not natural among currencies that reflect the characteristics of their underlying economic activities and are not forced to be ‘cast into a single mold’. Cryptocurrencies that are only in their early phases of value formation and are initially boosted by the novelty factor, everyone wanting to have a piece of the new thing, will be valued in a freely fluctuating market, where the market is free to value the growing economic activity and value related to/underlying any particular cryptocurrency, not that some mutually unfit economies had been forced into being the components of a single currency.

Compared to the euro, which is all about concentration of power, cryptocurrencies are all about decentralization of power, and distributing it among their users.

At the same time, the euro is a prime example of independent, sovereign nations (19 of them) having given up sovereignty in terms of their own currency, and that of the disruption of the lien between money and sovereign power – the same that is the case with cryptocurrencies that have no lien neither to any sovereign issuer nor to any other institution. Instead of continuing to use the euro, any of those independent nations could ultimately exit the euro, use their sovereign powers and equally choose to have any other currency to be declared their national currency that is not necessarily even issued by their national central bank, because it is not issued by their national central bank today either. This makes it very interesting: a nation could eventually choose to legislate that a cryptocurrency, or a number of cryptocurrencies are recognized as the national currency or equivalents to it, proving the fact that there does not need to be any lien between any sovereign state or supranational institution and the currency recognized to be the officially recognized one.

Role of central banks more ambiguous and much less vital vis-à-vis money and monetary affairs than many think

Equally, the relation between money and central banks that often are the issuers of sovereign currencies needs to be observed. Here, it should not be forgotten that the idea of central banks is fairly recent, which proves that having a central bank is by no means necessary for a modern financial system to function within a national economy, or an economic region consisting of several economies, or countries, like the so-called Eurozone. For example, the famous United States Federal Reserve System (the Fed) was only founded in December 1913, barely 100 years ago. Somehow, the US economy grew into the most powerful economy of the world without any central bank at all, but largely with a system, where money was issued by a number of banks, where banknotes were essentially instruments of credit (IOUs) issued by such banks. This is the same principle as for sovereign-issued fiat money with a ‘promise to pay’, to honor the banknote with the nominal amount of money printed on it, which in many cases was initially tied to a country’s gold reserves, but in recent times to nothing at all, just being a promise made by a central authority. And, so many times, as history proves, central authorities have failed that promise to pay, demonstrated by numerous cases of default of government debt and hyperinflation, which both eradicate the credibility of any such promise to pay.

At the same time, in some countries such as Hong Kong, private commercial banks still today issue the sovereign currency i.e. printing the Hong Kong dollar banknotes, such as the Hong Kong and Shanghai Banking Corporation (HSBC). Thus there is no need for a central bank to even issue ‘sovereign currency’.

These and many other historical examples make the role of central banks much more ambiguous and much less vital in managing monetary policy and related affairs than many think. The lien between a central bank and monetary policy, including that of the issuance of the money, does not need to exist in order for money to fulfil its functions of unit of account, store of value and means of payment. Ultimately, there may not be need for anyone to ‘manage’ the monetary policy at all.

It is also worth noting that if a central bank, like ECB, were to issue a true cryptocurrency, let’s call it ‘crypto-euro’ or ‘eurocoin’, it would at the same time wipe out all banks it so much wants to control, and also itself: by definition, a true cryptocurrency is recorded as entries in a distributed ledger, not in separate closed bookkeeping systems of banks, and it does not have an issuer. So an ‘eurocoin’ to replace the euro would lead to both the disappearance of both the Eurozone banks and the ECB itself, because the funds would be accessed through the end users digital wallets, being stored in the distributed ledger, not a central ledger controlled by any bank or central bank. And, the best thing here is that the world would be much better off to get rid of the ECB’s incompetent, power-hungry tyranny and obsession to grab power, when the euros would be stored in the blockchain, issued by no one and controlled by no one, with a fixed supply to guarantee value. This would lead to the creation and development of a whole new financial ecosystem, where independent actors could offer products and services running on the eurocoin, e.g. extend credit on the blockchain, not through traditional financial intermediaries. This would represent the true decentralisation of power and disappearance of central control and tyranny – something that will inevitably take place in the future anyway, when it is recognised that central banking has lost its meaning, when money goes into the blockchain and the banks start disappearing accordingly. However, the same development can take place with or without any ‘eurocoin’ or similar.

Interestingly, the recent emergence of cryptocurrencies into everyday attention of the general public, the media, business people and policymakers has brought forward many valid examples of the same phenomenon: neither a sovereign nation nor a central bank is needed to create new forms of currency that are appreciated as such. Recently, in January 2018, the total value of cryptocurrencies in circulation hovered around USD 800 billion, which corresponds to the money supply (M1) of a mid-sized industrialized country like Spain (out of the total global money supply that is around USD 60 trillion). That is also the scale of a large European or US bank in terms of its balance sheet. It is a bit of a same thing in terms of scale, if a large bank had issued the banknotes of a country. Now, the market value of cryptocurrencies surpasses the GDPs of many countries, their money supplies, and the balance sheets of many banks. The market value of all cryptocurrencies has also been comparable to the market value of the largest publicly listed companies in the world such as Apple. And this is obviously the beginning: the value of total fiat money is around USD 60 trillion, and it is unavoidable that various cryptocurrencies and tokens reflecting underlying economic activities will converge towards that value in the long run...

The future will be on the side of those developing the crypto monetary system and economy - one cannot fight against the windmills...

How well do cryptocurrencies fulfil the required functions of money, and how will we expect the 'Darwinian evolution' of monetary affairs advance? Here are a few thoughts on those issues too:

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