The Crypto-Currency Endgame

  • Ed Ludbrook, Entrepreneur and Contributor at Finfuture

  • 26.12.2017 12:30 pm
  • undisclosed

When crypto-currencies really become widely used, what could it mean for central banks, mobile telecoms companies and reserve currencies?

Nobody knows how many people hold accounts with bitcoin and other crypto-currencies. However, the total is almost certainly no more than several tens of millions, or about 1% of the global population at most.

These are tiny numbers when you consider what are the advantages of crypto-currencies. Crypto-currencies provide low cost transfers across international borders. They are stored in e-wallets that effectively turn your mobile phone or computer into a bank. These advantages apply everywhere, but are greatest in places where people are poor and/or unbanked.

Further, crypto-currencies provide security because of the blockchain technology that underpins all of them. Perhaps most importantly, crypto-currencies provide transparency in relation to the creation of money: in relation to each crypto-currency, the monetary policy is very clear and easy to understand.

The fundamental point missed by most financial people is that crypto-currency is that digital innovation that disrupts the current world financial order as it dis-intermediates the current banking system. A system evolving at a snails pace that reflects their control over change to protect massive profits. How is it that it still takes days to send money internationally when the money travels at the speed of light?

If you believe the scenario that crypto-currency will flip the financial applecart at a pace no banker is likely to respond to then the question is what is the likely new digital world order? 

Towards a world without central banks?

If a crypto-currencies don’t need central banks to be created, why do you need central banks?

All conventional currencies are issued by central banks that are controlled by governments. The central banks influence on interest rates, the price of money and they control the quantity of basic money, which is usually defined in terms of physical cash and bank deposits of varying kinds. In reality, most of the money created is by banks through the fractional reserve banking system. 

Over recent years, major central banks have of course sought to keep interest rates near (or below) 0% and have aggressively boosted money supply through quantitative easing (QE), the digital equivalent of printing money. If one benchmarks the major global currencies against the global standard for currency, gold, these money printing machines have caused a staggering 75% drop in purchasing power since 2000.

In some countries, central banks and governments are moving towards issuing their own sovereign crypto-currencies. They recognize that the advantages of crypto-currencies are undeniable. In the event that their populations make a large-scale move from conventional towards crypto-currencies, the governments want to maintain some kind of control over monetary policy.

In the world of conventional currencies, it is usually possible for central banks to exert control over interest rates – the price of money – through their operations in financial markets. As a general rule, it is easier to influence the price of money in financial markets that are large and liquid than in markets that are under-developed or illiquid. 

The fixed nature of a crypto-currency Blockchain is obviously a major issue for governments who always want to increase money supply to support growth or deliver on excessive promises that can only be paid for by debt and money printing. 

Just as the supply of Bitcoin increases as more coin is mined as payment to those ‘miners’ who verify transactions, one assumes that a new type of ‘expandable’ yet secure form of Blockchain will be developed for the sovereign currencies. Whichever Fintech company that develops it will become the De La Rue of the 21st century currency world. 

The opinion that crypto-currencies will replace soveign currencies in the future is simply ridiculous as crypto-currencies are simply bits and bites. What gives them value is demand and users are naturally based in national groups. They define an economy and thus the most efficient currencies will be soverign. We have seen the disjointed nature of a supa-national currency, like the euro, when imposed different economies. 

Even with the near daily announcement of another country launching its own crypto-currency, the general consensus is that the roll out of crypto-based sovereign currencies will slow and steady. Given the typical speed of digital implementation, this seems the sort of pipe-dream those in responsible positions facing digital revolutions promote. 

Overall, two conclusions can be drawn. The first is that central banks will be around for a while yet as the smartest currency is still a sovereign currency. The only difference is that it will be digital, demonetized, based on a form of blockchain cryptography. It is also partly because most central banks perform important functions beyond and above issuing currency. 

The second is that the days of fractional banking will probably die with crypto-currency technology. Given the tidalwave of money created over the past decade, this is not a bad result yet how the system will develop will perplex bankers in the coming years.  

Towards a world where mobile telecoms companies become banks?

If e-wallets turn mobile phones into bank accounts, then they could turn mobile telecoms companies into bankers. This is something that the Office of the Comptroller of the Currency (OCC – a part of the U.S. Department of the Treasury) has foreseen. In early December last year, the OCC announced that it would move ahead with considering applications from FinTech companies that are looking to become special purpose national banks.

The FinTech companies that are evaluated for special purpose national charters are assessed on a number of criteria. Those criteria include: a reasonable chance of commercial success; appropriate risk management; effective consumer protection; and strong capital and liquidity.

Of course, it could be that some of the largest mobile telecoms companies that decide to become banks are not in the United States. The scale of many of the mobile telecoms companies in Latin America, for example, means that they have considerable influence vis-à-vis the governments with whom they would be dealing in the event that they wanted to become financial institutions without going through the trouble of applying for a banking licence. 

Operating as a FinTech, rather than as a conventional bank, a large mobile telecoms company would likely be free of the regulations, and legacy systems, that would normally burden banks. Conceivably, such a company could operate across an entire geographic region, and not just in one national market. 

In that case, the mobile telecoms company would need a number of centers across the region in question. These centers would validate every transaction that is undertaken on the blockchain that supports the e-wallets and crypto-currency that the mobile telecoms company is developing. Although the blockchain would, by itself, provide the security that is needed, perceptions of security could be improved further if each of the centers were overseen by an independent committee. Each committee would include highly respected retired officials (or central bankers) from outside the country in question.

Where one of the leading regional mobile telecoms companies in emerging markets decided to reinvent itself as a FinTech (i.e. virtually as a bank), it is reasonable to expect that take-up of its crypto-currency and e-wallets would be very quick. This is partly because of the marketing/distribution reach of the mobile telecoms company. It is also because of the security of the blockchain and the general benefits that are provided by a crypto-currency.

It would only take one ‘big boy’ telco to embrace this new opportunity and there would be a tidalwave of new tele-banking players across the world. Suddenly, the established banking world is not faced by tiny Fintech evangelists, rather by massive consumer players who have the capital, customer base, support systems and trust levels to tear the legacy banking system apart. 

Remember that the digital money revolution in Africa and now East Asia, led by m-pesa, is based on mobile phones and was born out of people wanting to buy/sell mobile minutes. Those minutes effectively became like a new currency controlled by the telecoms companies. 

The only thing holding back the telecoms from taking on the banking world is a large credible crypto-currency which Bitcoin has neither the size or speed to fulfil. A new sovereign crypto does not work if a company wants to expand across boarders. It creates the opportunity for a new global reserve crypto-currency. Will telecoms companies also create their own crypto-currency?

Towards a new reserve currency?

These changes would be hugely disruptive for traditional banks, currency exchangers and providers of remittance services. These changes would also advance the cause of demonetization – the removal of conventional notes and coin. 

Major beneficiaries of demonetization include central banks, which are generally tasked with the design, printing and distribution of physical currency. Even if the growth of a new crypto-currency resulted in a 10% reduction in the amount of physical currency required, the benefits for the central bank(s) involved should be considerable.

Provided that the telecoms company in question worked carefully to ensure that the value of the coins minted expanded broadly in line with the nominal GDP of the underlying economy, the crypto-currency could be used for trade. Globally, trade in goods and services amounted to around US$20 trillion in 2015. Even if only 3% of world trade was denominated in the new crypto-currency rather than, say, the U.S. dollar, trade related demand for the new crypto-currency would rise to around US$600 billion.

The rise in usage of a new crypto-currency for trade settlement would be a necessary, but not sufficient, requirement for the new crypto-currency to emerge as a true reserve currency – being one that is held by central banks in foreign currency reserves.

Nevertheless, there remains the theoretical possibility that, over a period of years, a crypto-currency could emerge as a major reserve currency. This would be consistent with dedollarization – the general reduction in time of the importance of the U.S. dollar.

Managed properly, dedollarization would be far from disastrous. Successive UK governments skillfully managed the end of the use of sterling as a reserve currency from the end of World War II to the 1970s. The governments did this by allowing inflation in the UK to remain higher than in the UK’s trading partners. This contributed to occasional currency crises, as the relatively high inflation (and other issues) contributed to the overvaluation of sterling from time to time. However, this approach reduced the real value of the debt that had been accumulated by the UK government over two World Wars. The adoption of a similar policy by the U.S. government would almost certainly accelerate the process of dedollarization. However, it would also reduce the U.S. government’s massive debt burden.

The last point to note on a new global reserve crypt-currency is that digital currencies are like social media. They are based on connections. So whilst there may be 100, 1,000 or 100,000 crypto-currencies created by non-governments, eventually there will be only one. Just like there is now only one Facebook. 

History is littered with the flawed projections of industry experts which normally lead to flawed strategic decisions, ruined companies and executives. Business schools thrive on the stories of Nokia, MySpace and AOL. So often we should be reminded of the story of the ‘Emperors New Clothes’ when predicting the future to remind us that the most likely future outcome was staring us in the face from the start. 

The crypto-currency genie is out of the bottle and never going back. It is that disruptive technology that will transform the global finance world because the people want and need it. 

By focusing on the individual customer, it seems clear to me that the ‘Future Currency World Order’ will see all countries sovereign crypto-currency and there will be one independent global reserve crypto-currency. If there are 198 countries in the world, there will be 199 crypto-currencies. 

This article began with the observation that, at present, very few people are actually using crypto-currencies. The crypto-currency endgame – the situation where one or more crypto-currencies have had the greatest impact on the global economy – will be characterized by crypto-currencies being used by most people worldwide. Before the endgame, crypto-currencies will have profoundly changed conventional thinking about central banking, financial institutions, the financing of trade and reserve currencies.

Ed Ludbrook is an entrepreneur, company executive, strategic leadership coach and author who has sold over 2 million books/audios in 20 languages. As a futurist he has written on many new industries and is currently active in crypto-currency and its related opportunities.


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