Bitcoin & Cryptocurrencies

[TheGooner]

In my opinion a major central bank stablecoin that offered USD or EUR would be a big thing.

Firstly, it would reduce the risk of private company default to almost zero, and secondly it would signal an acceptance of the idea of crypto-tokens by the mainstream finance groups instead of all the headlines about fraud, scams and crooks - thus it would be a major step towards mass adoption.

Even smaller currencies would be a bonus. I have a significant amount of local currency that I have to keep in local banks - and like all banks they are at some risk of default and/or recapitalisation using account holders funds (account holder insurance only covers the first small amount) - so I would much rather hold 90% of my local currency in a stablecoin token issued by the local reserve bank.

So central bank issued stablecoins could easily solve the problem of reputation and risk and it's use would be a huge step towards general acceptance and adoption of crypto by the general public in my opinion.

[Sherlock]

That would indeed be a big thing, but what you describe will not happen. It is just impossible. Economic collapse would be immediate.

Central bank is creating the money through 2 channels:
1. They issue the "hard" fiat currency, the monetary base.
2. They regulate the commercial banks through minimal reserves and so on, so the commercial banks then create the money with limits imposed by central bank.

So what you describe is absolutely crazy, but thanks for that, because that is what people think the central bank stablecoin can be. It can not be, because if it happens, then it is the end of central banks, monetary policy and thus economic policy as a whole. Central bank will not do that as for example armies will not start planting potatoes in barracks.

If there are stablecoins used for fiat currency, it will be just the monetary base. Something like the underlying asset that will be exchanged by commercial banks. Maybe something like is SDR.

Army will not get rid of weapons and central banks will not give up on monetary policy. If they wanted to do this suicide they could already come with discarding the commercial banks and printing the money directly (or leaving the money supply stable).

There are also other factors, why this can not work. But I will stick just to the primary one. The decision how you as the end user pay and how the money is stored is quite irrelevant here. When it is about central bank, then it is about monetary policy. And when it is about monetary policy, it really is about future of this world. Imagine 2008/9 crisis: without QE we might already have 3rd world war.

Blockchain based fiat currency as you imagine it has extremely limited options for monetary policy.

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Something will happen indeed, but 1st must come the collapse and big wars. Then and only then, out of desperation, people will come with some new projects like after past disasters. If there will be a change, then most likely people will not trust central banks who will bring the next disaster and I would bet on truly decentralised currency like is bitcoin being the underlying asset. Until then we are destined to stick with fiat as it is. Just we will see cosmetic changes where the fiat will be even more electronic money and paper money will be discarded.

[Sherlock]

Ok I can not hold from the second reason:
Imagine the system, where central bank is having the ledger somewhere. Where? Be it POW or POS, it will be all computers from central bank against other computers of central bank. Why should stupid system like that exist? Why should the central banks miners or stakers compete against the same central bank? The essence of blockchain is the competiton.

Central bank can well having all the transactions stored in one database (with backups). But that is exactly what is happening now with the monetary base. Same argument that was used against XRP or IOTA for example. But XRP/IOTA can in theory decentralize. Central bank is central bank.

I think the main problem is that we all are forced to have opinions on everything. The only use of blockchain for central bank currency is if they peg the normal fiat currency to the BTC or some other leading crypto exactly as it used to be pegged to gold. But even that is not gonna happen soon.

[TheGooner]

I read your response but I struggle to understand the diatribe.

You acknowledge ripple use of ledger / blockchain and then say there are problems for a central bank to do the same.
You make some points about limiting monetary policy ... but these are irrelevant if the stablecoin is only a tiny fraction of the total money supply.

Stablecoin (whatever currency) is ONLY trying to be stable against it's local fiat currency - backed by a 1-1 ratio - not against anything else. And it does not have to be an entire currency supply only a small segment of it.

--------------------------

I guess every person has their own opinions, their own world view. For me - I see countries becoming less significant - and certainly national currencies becoming rapidly outdated. The EU may succeed, or it may fail - but economic unions with common currency for trade is in our future (as long as civilisation does not collapse).

I see an end game where we are all using electronic "credits" ... whether that's an IMF token, BTC, XRP or some sort of crypto hybrid.
So how do we get there? How do we start? At the beginning - with localised tokens.

(Scenario)

A smart enlightened government (probably a small business focused one like Singapore) which has grown from 20 billion in circulation in 2008 to 45 billion in 2017 could easily announce an "issue" of 1 billion TSGD backed by a promise to redeem on 1-1 basis.

It could then be used electronically by any and all businesses in Singapore that prefer to do crypto-currency transactions rather than bank transactions. This does NOT renounce their monetary policy of inflation or put any restrictions. Within five years I expect the usage would be increased 10-fold. It would succeed.

I see clear use cases for consumers.
1/ easy access to pay online for "unbanked people"
2/ removal of bank failure risk from deposits.

For the government the bonuses are :
1/ less cash economy - more people will use tokens.
2/ tech aware environment encourages crypto companies to set up shop locally

What a local token does is provide banking for the unbanked in the form of a crypto-wallet, and massive expose the ease of use of crypto-tokens to the mass public, removing the mystique, and the learning curve ... so that the people can get familiar with the technology.

Remember your first exposure to a smart-phone or new operating system? Slightly nervous, slightly confusing and a little bit scary? YOu feel a bit foolish for not knowing immediately how it works? This helps to overcome a technological and banking barrier with an item that most people can aspire to own - a smartphone.

Having commonly used stable coins in local currency for tech based firms as an option apart from banks is a good likely sign of mass adoption. It removes barriers and paves the way for better crypto in the future.

I may be wrong - it's just one mans opinion.

[Sherlock]

Gooner, my rant against opinions is general, but believe me you are one of very few people online, who can really ask valid questions, come with ideas and I generally enjoy the debate, because for me it is quite interesting how you think. I wrote it here few years ago and it is still valid. Even this post of yours showed interesting things. For me it is really surprising to see the background of thinking of other people and you are the one who is gifted to reveal it.

You make some points about limiting monetary policy ... but these are irrelevant if the stablecoin is only a tiny fraction of the total money supply.

Stablecoin (whatever currency) is ONLY trying to be stable against it's local fiat currency - backed by a 1-1 ratio - not against anything else. And it does not have to be an entire currency supply only a small segment of it.

Here comes a question if you are talking about central bank stablecoin or private stablecoin (like tether).

1. If just a small part of fiat should be issued by a central bank in a form of blockchain, then why should central bank do it? Just as promo? It is costly to do such things, it is better to buy some ads right? Also such a blockchain would be a monetary base, so again: why should central bank distribute monetary base to citizens? CB wants to give MB to commercial banks to have leverage for monetary policy. We see that there is less and less paper money for people. Paper money is the monetary base. Central banks do not want people to hold this, even in small amounts. Not only because of moneylaundering, but because (I think mainly), then people have more power.

So it is not probable that central bank will release this "blockchain". Even if they wanted, they can as I repeat, issue MB-electronic-money. They can say, this is electronic money, we will never touch it, people can have direct access to our servers and they can avoid commercial banks. Thos emoney are in our database. If you think about it, some crippled blockchain mined/minted by CB is exactly the same. Because they can always make 51% attack, it does not matter if it is database or blockchain. It is like bitcoin when it was mined just by Satoshi. The blockchain is as good as database if there is just one miner. I hope you get it now.

2. If the small fraction of fiat is backed by anyone else than central bank, then you have the counterparty risk always. It is always significant. This money is never as safe as fiat.

to be continued..

[Sherlock]

Just remarks for the second part: I admit I do not understand how such an economy should work and why should this system exist.

Why should central bank issue the money directly and not through commercial banks. In other words we see only failing economies like Zimbabwe to issue money directly by printing. Normal capitalism uses the commercial banks fractional banking pillow. Enlightened government will not do crazy steps like trying to kill the commercial banks even slowly. I really do not believe in that, especially not in good economies.

ALso if they wanted to do it why wait for blockchain? They can issue those direct-electronic money even until now. People might have accounts at central bank, they could have had passwords instead of private keys. It is not happening for a reason. Central banks do not want those experiments, they do not want to reduce monetary policy just for priniting money and they do not want to kill whole credit system in economy.

The advantages:
I see clear use cases for consumers.

1/ easy access to pay online for "unbanked people"

Unbanked people are unbanked for a reason. Because usually system wants them out. Because the system wants them out that does not mean that the system will suddenly want them in. I live in a 3rd world country. Still unbanked people here. They are either stupid enough, or they really do not need the banks. They are not customers for any kind of blockchains.

2/ removal of bank failure risk from deposits.

The risk exist for a reason. Capitalism works because there are risks. That is the purpose. If there is no risk for clients of the banks, someone always bears the risks. It is then the state, central bank and in fact this system would be heading to huge systemic failure. If fails a bank, it is a disaster for clients. If fails a central bank, it is an endgame for economy for generations.

For the government the bonuses are :

1/ less cash economy - more people will use tokens.

Yes, but at the same time people will use monetary base tokens. It is not something that government wants (see above).

2/ tech aware environment encourages crypto companies to set up shop locally

Ok. I can imagine better ways how to attract tech companies than to jeopardize the economy.

And we absolutely do not discuss things like AML. CB now outsources the political request to fight against the dirty money to private commercial banks. They do it, because central bank is not capable to do it. For profit organizations do it better. If central bank starts with b2c and c2c transactions, they have to start acting like Skrill recently. Or they have to give up on AML.

I repeat: The centralbank-stablecoin and centralbank-coin are exactly the same thing (none of them exist). Just in this case completely irrelevant technical background is different. Frontend for users would be the same. Ledger would not be public indeed (banking secrecy). Central bank can print the money in both cases. We can assume the central bank can say, there will be just this amount of tokens. But as well central bank can say we will prinut just this amount of money. And we know that they can and will always print more. If they are the only miners, they will print the money just by changing the code. It is really the same.

For me is crazy that even you do not see it immediately. 99%+ people are stupidier than you. So interesting times ahead.

[TheGooner]

Why should central bank distribute monetary base to citizens?

Assuming that the central bank is a reserve bank like the one here in NZ (wholly owned by the Government of NZ) then I can see that issuing a stablecoin could actually be all the things I list above - AND a cheap source of funding for the government.

Currently the government has to issue NZD bonds at between 2-3% to cover it's operational shortfall, but the process is arcane, longwinded, and restricted to institutions that bid 10s or 100s of millions or more. Open this up via blockchain and I imagine that the demand would be such that they could effectively issue NZD stablecoins at cost and 0-1% interest to businesses and tech investors.

It also provides the general population with a place to escape the risk of banks that have significant property-related risk with much of their loans to people as mortgages in highly leveraged domestic property. A drop of 10-15% could wipe out all equity and send banks to the wall - thus providing a haircut to bank depositors by appropriating funds.

The stablecoin provides a zero cost / low risk alternative for government and local populace alike.

I guess that I don't see a central bank based stablecoin as being much different from government issued bonds and bills. It's a different technology, it's certainly more liquid, but in the end it will be the same thing as the government issues a security for payment of hard cash. This one is far more liquid and costs governments no interest .

Again - I am looking to a future where blockchain / ledger / token facilities are standard - and attempting to rework back to understand how might it start. This is how I see it.

Note : It might even pay interest at the OCR (Official Cash Rate) if the token was a ERC-20 / ERC-1462 token with Know-your-Customer facilities ...
( I see that TenX has broken new ground issuing these for "rewards" )

[Sherlock]

This is really not how things work. What you describe is some wholly new experimental macroeconomics. I am 99% confident it would not work, but that is not the issue. The issue is that central bank needs commercial banks. The whole banking system is part of the economy. It will not be ever changed like this. It is possible to innovate smartphone or computers to smartphones. But it is not possible to get rid of the banks. Especially not at the current state, where everything depends on credit via mortgages.

The system you propose would probably immediately slash prices of real estate. Giant crisis would come, all banks would bankrupt. What would remain (if something) is just a socialist economy with one state bank that is providing money. I lived in such a system. My father even worked at the bank (as window cleaner : )... definitely not a progress of humanity.

[TheGooner]

The issuance of part of government debt in stablecoins does NOT affect commercial banks or take any part of their business.

It takes an existing function of sovereign debt issues (in ranges from 1 month to 5 years) and makes it available to the masses. It's the same thing made simpler, easier, and far more useful as the debt can be easily traded between participants - instead of the protected financial situation that exists today.

[Sherlock]

Indeed it would affect the commercial banks in case it will be significant. If the stablecoins were non-significant, then it does not affect anything, but why making something not significant or not successful?

So your proposal is that people (who generally are rather minus net-worth individuals) take the fiat money that are already defacto a debt and buy with those state issued money those state issued blockchain money. As I am saying above, this is a new kind of economics. Decision makers will never approve such a system (and any other revolutionary changes). And after this system breaks up nobody will want fiat based money.

[Cardy007]

That's interesting.. so if I understand correctly, stablecoins are backed by a real currency (e.g: GUSD and PAX which backed by the United Stats Dollar) in a similar way as the real currency USD is backed by gold?

Your having a laugh right Ocreditor? USD hasnt been backed by Gold since 1970s

[Sherlock]

USD was never backed by gold, if you imagine backing by gold that for 1 USD worth of gold is somewhere stored gold worth of 1 USD. This never happened. Not before 1970, not before 1944, not before 1913. It is really crazy. Nobody has a clue even about history and how things work or worked.

There is much smaller difference between fiat and gold standard than nostalgic people think.

Gold standard is defined that anybody who comes to the bank with paper money must get gold 1:1. That is however not the same thing as 1:1 backing. Simply even the great golden standard counted with the fact that most people will never exchange the paper money for gold. The problems occurred when people started to demand the gold indeed.

[TheGooner]

USD was never backed by gold, if you imagine backing by gold that for 1 USD worth of gold is somewhere stored gold worth of 1 USD. This never happened. Not before 1970, not before 1944, not before 1913. It is really crazy. Nobody has a clue even about history and how things work or worked.

The gold standard was in place in the US from 1834 thru to 1933 - fixing a price for the USD of $20.37 USD per OZ.
The US Government promised to repay paper US currency at the rate. But of course they hoped that this promise was never tested in volume.

Many European countries also had a gold standard - indeed many had functioning gold coins (sovereigns, francs, guilder) within their currency that helped to hold the paper notes to a gold value - but the start of World War I put a halt to that.

At the end of WWI there was a run on the sterling, and conversion was suspended indefinitely (the UK could not honour the gold standard promise). There was a short return in the 1920s but the rate was set too high and could not be maintained.

The wikipedia site has a good primer on what and why.
https://en.wikipedia.org/wiki/Gold_standard

[Sherlock]

I described it in this thread. Maybe it is too boring, but sadly it is the history. Gold standard with fractional banking started in Venice centuries ago, when the goldsmiths realized they do not have to return all the money.

But whole world was not that progressive. In the middle ages indeed most people still paid with gold or gold coins. But even there the official state frauds happened. It was called seigniorage and it meant that the face value of the golden/silver coins was higher than the market value of metal of that coin. It was a manipulation on the monetary base, not above it like fractional banking.

Be it seigniorage or more effective fractional banking, it is always exploiting the money from economics. It was always necessary to finance wars or to gain advantage. This is the main argument today why harder currency is impossible. States that play more fair have disadvantage against other states who play the tricks with currencies. Because such states who do not push their currency to the limits have less resources.

[ocreditor]

Your having a laugh right Ocreditor? USD hasnt been backed by Gold since 1970s

Lol a good laugh is always good right

[AussiePunter]

Just wanted to say that I'm impressed with Sherlock's knowledge here, as soon as I read your thoughts about XRP I knew that you know what you're talking about.

Forgive me because I'm not near your level of understanding when it comes to economics, especially when talking about macro economics, but correct me if I'm wrong, please because I would love to be wrong!

The fact the world right now requires infinite economic growth in order to sustain itself... before I finish that sentence, is that statement I just made correct?