St. Louis Fed: Not Fedcoin, Fedaccount

Reading this paper by Aleksander Berentsen and Fabian Schar I am reminded of last year’s post by David Andolfatto of the same institution.

The former reasons more on the lines of my comment on the subject:   There is no reason (yes some hurdles) why we cannot all have accounts at the central bank and make payments with “on us” transfers in a single ledger. And state crypto makes no sense.

Maybe it is bad form to say it out loud, but the thing is banks as payment intermediaries will have their business drastically rationalized, no matter where the institutional winds blow.

As a young banker bragging of his economics savvy, I used to say that we banks had the legal monopoly of the payments system, bestowed to us by governments in exchange for help in managing monetary policy.

I still think this was the case and mostly still is, for the time being.  It all began with the rise of central banks and the awareness of the very concept of monetary policy, back in the beginning of the last century.

This is on the brink of changing completely.  Once we are fully bathed in electromagnetic radiation everywhere all the time, our ability to draw on e-funds is just as instantaneous as the greenback in our pocket, without the drawbacks and the limits.  How could any of my former employers compete with this?

For those who are big on monetary policy (like in “I believe there should be one”), the book needs to be rewritten from scratch.

To what extent can private actor be allowed to expand credit with the magic of the multiplier?

How would authorities inflate or deflate the money supply?

The ultimate holder of the monopoly on dollar (and euro, renminbi, etc.) rest by definition on the government.  What is to be seen is whether a few years or decades from now these will be just a unit of account for tax purposes, quaint relics of a time past or pushed altogether into oblivion by private, decentralized alternatives.

Banks will still need to intermediate credit for the foreseeable future, I imagine, and many other useful services will be invented and provided by financial institutions, though maybe on a different scale.


Judas, Manhattan and my great grandfather, or the weight of history

Again, I am not Mike Hearn, so I tease to try and get you to read me through.

Remember the funny shape of one of the thirty pieces of silver that your great great grandfather paid for that flock of sheep back two hundred years ago?  You do not, and it’s probably better that way.  Why, then, is it good that you must know the history of every satoshi down a million blocks ago?  And why would the entire world provide you with storage and display of that trust for free and at your demand whenever you want?  It is neither necessary nor practical.  I would argue that the ability to forget the past and still maintain the present is good, not just necessary.  As things recede into the past, they become foggy and only the most relevant remain in the collective memory.  In fact, we all know how much Judas was paid for betraying Jesus, or what was shelled out for Manhattan or Alaska, but the billions of individual transactions made just a few days ago begin to fade healthily from memory and written records.

If Satoshi’s vision of an intergalactic currency is to be viable, there is no reason why a thousand years from now Darth Vader or Hari Seldon should be able to prove mathematically that I bought a sandwich at Rosario’s two days ago. There is no justification, in my view, to mandate that resources be spent to maintain those records. They could be periodically pruned out from the blockchain, with the appropriate cryptoalgorithms to keep consistency of current unspent outputs.

The prune up should be decentralized and autonomous, of course, but then again, interested parties, say governments, universities or Foundations, might have reasons to keeps parts of history alive and manifest it, either by directly storing them or tendering fees towards its storage.

So another time capsule to Nakamoto-san: “Let the blocks be distributed, not the whole blockchain!”


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Killing Bitcoin

There is an interesting post with an industry  perspective from Daniel Masters on LinkedIn.  Read it here.


My view is no one is going to kill Bitcoin. Not that it cannot be done. It is just that doing it would kill so many other things everyone want alive that it is unthinkable. Another intriguing question is how the technology versus the interests of all actors will shape the path of the financial services industry in the short and long term. Also, unlike things like music players or hair replacement by cloning, where users have little emotional involvement and probably little philosophical stake in how the stuff works, finance (and BTC within it) carry a lot of emotions and public opinion, hence the fascinating interplay.

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Can Bitcoin replace the old Bretton Woods system?

 a Student at HHX on Vejlbycentervej posted the above question on a LinkedIn forum.

I assume, maybe incorrectly, he is a student who needs to write a paper and felt like lendijng a hand.


Here is my response.

Dear Jonathan,

Interesting question.  There is a short answer and a longer one.

The short one is not in the immediate future.  The why will be part of the longer answer.

There is much to be written about the Bretton Woods system, but in simple terms it was a multinational agreement to maintain national currencies of participants at a certain exchange rate among themselves and between themselves and gold.  Countries kept their exchange rates by buying their own currencies (to push up the price) and selling them (to push it down) and, as a last resort, borrowing from the IMF, the World bank and other multilateral agencies and finally liquidating its gold reserves if nothing else worked.

Although it did not perfectly replace the old gold standard from before the two world wars. it provided an anchor for local currencies and it arguably helped fuel the post WWII world trade boom.

So, short answer, Bitcoin cannot be used to stabilize national currency exchange rates right now, because its value is still too volatile.  Even gold these days would be too volatile to act as an anchor for currencies as it did until over forty years ago.

Nevertheless, if Bitcoin continues to expand its user base and it begins to have a more stable relationship not with the USD, which is its main yardstick today, but to the price of goods like bread, gasoline, a residential square foot or an hourly wage, then it might become an anchor that governments will look at in order to stabilise their currency’s value.

They might have to sell their holdings of Bitcoin to push up the price of their currency against it, which would mean preventing local inflation, or they might work hard at convincing world investors and savers that their currency is likely to stay valuable because of their responsible fiscal and monetary policies.

In doing that, though, it might come a day when local currencies will become superfluous, because, after all if they have a set value against Bitcoin, why not use Bitcoin for everything?

Please let me know if this answer helps.



Facebook Stock not so different from Bitcoin?

I just read the NYT article from Rob Cox Facebook Stock not so different from Bitcoin.

It has many useful thought starters, although I do not know exactly what to do with it. Of course a vet sees a diseased organ where a chef sees a juicy dish and PETA sees an abused goose. So Rob Cox sees Bitcoin as a startup company.  He is probably not wrong, from his point of view and the final proof of his correctness will be in the payout of his financial bets.

I want to mull around more on some of his insights and will write on them on a later post.  I would like to point out however to the infectious nature of some disinformation and on how it becomes more insidious as it is digested  and diluted around.  Mr. Cox mentions (without specifics) an article from Technology review by David Yermak (commented by me here), which in turn refers to an NBER paper by the same author.

The extremely questionable statistics have made it now into mainstream journalism and become fact for the general public.