Vaticoin, faith and the ultimate authority

It’s been an interesting week exploring the future of money, the monetary system and in particular privately issued currencies.

Today I thought I’d delve into the mailbag and share a few thoughts from your fellow readers. Remember, you can always get in touch with me via nick@southbankresearch.com.

Let’s start with a controversial one:

I agree with your correspondent that Bitcoin is not real. Very good for money laundering and for criminals. Once regulated by the authorities, crypto currencies will become worthless.

The only safe haven nowadays is gold.

I own bitcoin. Does that make me a money launderer or a criminal?

What about the millions of people out there who hold cryptocurrencies but don’t launder money, deal drugs or evade taxes? I’m at a loss as to how you explain them.

I never quite understand this counterargument. Mostly because it’s patently nonsense. There are plenty of counter-arguments against bitcoin. But the old “only criminals use it” line just doesn’t stack up. 

I’m sure some people use bitcoin to launder money and evade taxes. But plenty of people use the banking system to do so too. Does that mean the only purpose of the banking system becomes money laundering?

Here’s an alternative narrative for bitcoin. It’s a signal. A signal that the world needs a method of moving capital across borders that isn’t policed by the existing guardians of the financial system.

That’s bitcoin’s real USP. It can’t be meddled with like gold. But it is much more portable.

Why would the market send that signal? Maybe because one of the logical consequences of 2008 is that in the not-too-distant future we’re going to see another widespread financial crisis – which calls into question the solvency not of banks but of whole countries – during which genuine capital controls are imposed.

You could argue bitcoin is the ready-made solution to that problem. Maybe it’s a problem most people don’t realise they have yet. Unless you live in China. Or Venezuela.

Which is all a way of saying dismiss cryptocurrencies if you want. But do it from a position of knowledge. Learn more. Then decide. Don’t swallow a counter-narrative that leaves out 99% of the facts. For a good insider’s guide to cryptocurrencies, follow this link now.

Back into the mailbag:

Hi Nick,

I’ve just finished reading your email on Libra.

I have 2 major problems with bitcoin:

  1. There is no backer or authority behind it therefore it only survives because of those who have faith in it. Unlike gold where there is a physical asset behind it. If faith in bitcoin is damaged then bitcoin could be damaged beyond repair.
  2. I know you see decentralisation as an advantage of bitcoin – but I don’t. Having been involved in the design of databases for about 40 years my view is that distributed databases are a nightmare to manage – they throw up too many data integrity issues. So I favour a centralised system.

That would mean, for example, that if I were to lose the media where my bitcoin is stored I would still have my money available as the records are stored on the central system.

From what you write Libra could remove these 2 issues, so for me it’s worth looking into further.

Thanks for writing in. You raise two interesting points.

On the first, I don’t quite agree. There is no backer or authority behind gold. Or silver. Or diamonds. Or land. It’s true of many things.

I don’t think something requires an authority behind it to grant it value. In fact the opposite. Truly valuable things require no authority behind them whatsoever.

A fiat currency – such as the pound – requires authority to give it value. That authority also results in a utility. A business cannot refuse pounds sterling as a means of payment. That’s authority backed up by legal force (backed up by the fact the state has a monopoly on violence) leading to utility.

You’re correct that a loss of faith could lead to the collapse in value of bitcoin. Again this is true of many things. The fact that gold is “real” makes no difference. What makes the difference with gold is a ten-millennium track record of people not losing faith. In fact, we have thousands of years of data to prove that as a rule, people always value gold.

We have roughly ten years of data on bitcoin. On that front I take your point. There could be a total loss of faith. But the signs so far suggest increasing, not decreasing, numbers of people have faith in it.

(Oh, and we also have plenty of data – again stretching back millennia – that unbacked paper currencies issued by feckless governments ultimately leads to a loss of faith in that currency. Smiley face.)

On to your second point. I won’t challenge you on the technical side of managing decentralised databases. That’s because you clearly know more than I do.

The only counter point I’d make is this: a centralised ledger puts an enormous amount of power in the individual with ultimate authority over that database.

In the existing system it’s someone like Mark Carney. He can tip the scales of the economy on a whim, by arbitrarily creating new currency and giving it to whomever he chooses. My belief is we should not grant any individual this power. The potential for corruption or (however well intentioned) human error is too great.

I trust decentralisation for that reason. It grants no god-like power to any single person. This is the intellectual basis for my position. It’s non-technical. But I hope it makes sense. As always, right of reply to nick@southbankresearch.com.

Another note – my favourite of the week by far – to share with you:

Hi Nick, I felt sure you were going to mention the Vatican when you mentioned citadels.

On a visit a few years ago I did a quick calculation based on the queue length x the cost of entry. After having wondered if anyone survives a world recession I began to think that the Vatican may be the only resilient city left standing, or is it a country, I can’t quite remember.

My gut told me this is where the money still is. Reading your letter I am now wondering if the Vatican is onto crypto currency too. If they’re not I’m sure they are not too far away. They must have a pile of gold and priceless worldly goods I’m sure so why would they not have their own crypto – Vaticoin perhaps!

Vaticoin! Yes!

Perhaps. Perhaps. I know that resident crypto insider Sam Volkering has recommended a small blockchain company that “tokenises” art on to a blockchain. Though I presume this is to make it easier to sell. And you’d have to be straight about where the art itself came from…

That’s a rabbit hole we can’t venture down today. A Vatican-created currency would raise eyebrows, I’m sure. I can’t see it. Or rather, I can’t see the Church soliciting or accepting donations in a new electronic only currency. What a sight to see that would be. I still vote for the basket passed around after communion. 

Of course, the Church is unlikely to turn donations in gold down…

A final delve into the mailbag:

My understanding is that Facebook propose to create Libra based upon a basket of currencies which, presumably, Facebook will select for the purpose.

So far as I know, they have given no indication of which fiat currencies they propose to base Libra on.

Wouldn’t it have been better for the proposed currency if the basket of currencies used was exactly the same basket and in the same proportions as make up the SDR and openly declared to be such?

Surely this would have created a stronger crypto-currency.

Perhaps. Though I doubt many non-Jim-Rickards fans know all that much of special drawing rights (SDRs).

My (limited) understanding of them is that they’re issued by the International Monetary Fund (IMF) and used as a high level monetary system between global central banks.

The IMF has a relatively clean balance sheet, meaning in a sovereign debt crisis SDRs could be used to bail out entire countries, effectively moving the bad debt to the IMF where it can safely be written off via some new monetary wheeze.

My guess would be that Facebook wouldn’t want too close a connection to the SDR system, given that would create a massive political risk. It also connects Libra to a “currency” issued by an organisation that may have to take the bullet for the next crash.

Much better to keep things open and flexible. Private currency. Private rules. Private decision making. Facebook: the only thing that isn’t private is your data.

Have a great weekend,

Nick O’Connor
Publisher, Exponential Investor

Category: Cryptocurrency

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