“Dr. Russ” Hittinger (NetQash)
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A preliminary note to the reader; this piece contains a somewhat in-depth history lesson around the evolution of modern money and economic norms which we believe must be understood as inherently related to current trends and debates around events like Facebook Libra, Bitcoin, and other significant developments in (digital) currency. For the less engaged reader, I’ve denoted the beginning and end of the <History Lesson> should you wish not to absorb this critical context, but rather to simply collect additional perspective on current events from the rest of this piece. If you don’t want to read the history lesson, I encourage you to come hear it in in-person in Denver.
Regarding current arguments about whether cryptocurrency is “real” or not, one recalls the story of Jamie Dimon, CEO of JP Morgan Chase, who, having slandered cryptocurrencies in 2017 and 2018, calling Bitcoin a “fraud” and “just not a real thing,” famously recanted recently, saying not only that “the blockchain is real” but that JPMorgan itself would be launching its own cryptocurrency. In many ways, Dimon’s contradictions reverberate throughout the entire history of money. Thomas Jefferson was a famous opponent of paper currency, claiming that the “evils of this deluge of paper money” stemmed from a lack of “a stable, common measure of value.”* There is no irony lost on the fact that despite his strong insistence that paper money was not “real money,” no one agrees with Jefferson’s opinion about it today, not least Jamie Dimon, who no longer even agrees with his own previous stance that cryptocurrency is not money in relation to paper money. It is in the spirit of such historical ironies and reversals that one must NOT jump to conclusions about the future of cryptocurrency in light of the apparent setbacks recently dealt to Facebook’s proposed digital “stable coin” Libra. The history of money shows that attitudes have continually shifted about what constitutes the value of money, hence the definition of “real money,” and that digital currencies are just a new phase of financial ingenuity for the embodiment of value.
While cryptocurrencies have been around for over a decade and are well on their way to gaining widespread acceptance, the recent (2019) emergence of a crypto project spearheaded by one of the largest tech corporations in the world (Facebook), however, seemed to set off a visceral reaction against digital money and re-ignited debate about whether or not crypto is “real money” at all. Everyone, from industry journalists to US Congressmen to UN Assemblies, has seemed to pile on the bandwagon of criticism against Facebook’s Libra currency, which Facebook proposes will be backed one-to-one by “real assets” such as USD, gold, and securities denominated in national currencies. The tenor of the remarks seems to indicate that financial innovation is a threat to established central banks and governments.
When the project was revealed this summer, for example, Bruno Le Maire, Economy and Finance Minister of France, who previously attempted to discredit Bitcoin, said that Libra was a threat to “the monetary sovereignty of states” and that France would block the “development of Libra on European soil.” Likewise, President Trump, as if channeling Jefferson’s remarks on paper money, tweeted that cryptocurrencies, such as Libra and Bitcoin, as opposed to USD, are “not money”:
"I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air. Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity...Similarly, Facebook Libra’s “virtual currency” will have little standing or dependability. If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National...and International. We have only one real currency in the USA, and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the World, and it will always stay that way. It is called the United States Dollar!" (@realDonaldTrump)
Despite the fact that Zuckerberg rightly pointed out in his October testimony that China and other state actors are innovating digital currencies as a strategy to unseat the hegemony of the USD as global reserve currency, and that digital currency projects developed with strong oversight can strengthen traditional currencies and the US economy through financial innovation, members of congress, like the president, have been overwhelmingly critical. California Rep. Brad Sherman, called Libra a "powerful burglary tool,” and accused Zuckerberg of trying to harm the world’s poor while helping “drug dealers” and “terrorists” … “for whom the dollar is not a good currency.” New York Rep. Nydia Velázquez, referencing Facebook's early motto to move fast and break things, said, "Mr. Zuckerberg, we do not want to break the international monetary system."
Mounting congressional skepticism has also resulted in the promise of more regulation and the announcement of new legislation such as the “Keeping Big Tech Out of Finance Act” and “Stablecoins are Securities Act” which, though they have little chance of passing, would stifle financial innovation and classify cryptocurrencies as securities (despite the fact that current guidance makes a clear difference between a cryptocurrency and a security). Facing this barrage of political and pseudo-technical criticism, the Libra Association suffered the exit of major partners such as PayPal, eBay, Stripe, Visa and Mastercard and the project is delayed, though Facebook insists that Libra will move forward in 2020 (in a separate article leading up to Cryptocom I will explain the status of regulation and the law in the cryptocurrency world which all indicate that digital money is here to stay).
But a look at history shows that such statements about “real money” have changed over time and allows us to understand Libra and other digital currencies’ relationship to that history—AND, why this history suggests to us that local FIs need to have a crypto strategy.
<history_lesson>
Now, a quick history lesson; for if we do not understand our history, we cannot ensure we remain a part of the future (which will of course only be part of history in the end). The oldest definition of money was of course historically linked to precious metals. Metallic money was used as early as Ancient Babylon in 2000 BCE. As Aristotle observed, in the 4th century BCE, metals like iron, bronze, and silver (and other commodities) came into use since necessities were not easy to transport, and people came to use something in transactions and exchanges that was both useful and tradable. These metals were approximated in proportion to exchanges of commodities and their values were measured by weight, then sovereigns stamped their measures on them to validate their quantity, weight, and authenticity. It is for this reason that metallic money has long been thought of as “stable” and “valuable,” though much debasement and mixing of metals, over coining, and fraud has characterized their use throughout history.
Thinking back to Jefferson’s opposition to “paper money,” in American history, the late 18th and early 19th centuries are characterized by an on-again, off-again attempt to establish a central bank for the United States (not definitively accomplished until 1913) that would issue and maintain a national currency not necessarily based on a direct one-to-one metallic reserve. In this battle, Thomas Jefferson fought passionately (a position later taken up again by Andrew Jackson) against Alexander Hamilton and the Federalists in his belief that the issuance of “paper money” by both private and central banks was economically ruinous not merely because of the potential for inflation and government debt foisted upon future generations but for “want of a stable, common measure of value.” For Jefferson, the ideal financial system would involve the government (and banks) only issuing “currency finance”— that is paper money (bills of credit) to pay expenditures that would then be guaranteed to be retired and withdrawn from circulation by a tax levied in the same amount of money at a specific time. Currency finance would thus be a built-in guard-rail against the future debasement and inflation of currency. Jefferson, of course, also believed that paper bills would only otherwise be legitimate if backed at par by a fixed amount of redeemable “specie”- that is metallic gold or silver (in his mind inherently valuable coins). Anything less would be fake money.
But paper currency was an innovation meant to last because it served a burgeoning, industrializing American economy, a fact that necessitated the creation of the Federal Reserve System, America’s public-private central bank, in 1913. The intervening 19th century, however, saw a lot of debate over the plausibility of metallic standards which cemented it. Recurrent and severe economic disturbances in the private bank money supply were occasioned by the inability of banks to convert notes to metals (not to mention clear payments with proper liquidity in the economy) with no guarantees on deposits; the expansion of “green backs” as fiat currency in the financing of the northern cause in Civil War by the Federal Government challenged the notion that metallic backing was necessary at all; and the vehement debate between William Jennings Bryan and William McKinley on the populist issue of “easy money” policy raised questions about whether the gold standard could provide adequate economic liquidity for small businesses, farmers, and industry alike. Bryan advocated for the unlimited coinage of silver at a ratio to gold of 16 to 1 that would allow creation of more metals to back paper money for more banking liquidity (i.e.. to create more paper) in the 1896 Election (McKinley won in favor of gold and the big banks).
In 1913, at the creation of the US federal reserve system, US Dollars were created based on the gold standard, requiring gold to back 40% of dollars, but effectively embracing pure paper fiat currency as a legitimate institutional concept. Then, in 1944, at the end of WWII, the major world economies met in Bretton Woods, New Hampshire, and agreed to keep their currencies fixed (but adjustable in exceptional situations) to the US dollar. The Bretton Woods system effectively replaced the gold standard with the US Dollar as the global reserve currency, with the caveat that US Dollars were pegged to gold ($35/ oz.), convertible by other countries, and that the US maintain gold reserves. Most importantly, the US side in the Bretton Woods deal leveraged global awareness of US industrial and military (and nuclear!) strength post-WW2 to ensure the Dollar would be the authoritative, "real money" of the world for decades to come.
In 1971, however, Richard Nixon ended the Bretton Woods arrangement and the US dollar became a pure “fiat currency” — not linked to any metallic standard (and that can float on the open market), effectively ending the gold standard. While marginal proponents of metallic standards remain, such as former Congressman Ron Paul, the US Economy has continued to dominate as a world powerhouse and the US Dollar has remained the major reserve currency without gold convertibility, largely because of continued US geopolitical and military dominance. Why require metallic backing when US economic, military, and geopolitical hegemony guaranteed faith in the US government’s dollars now and into the far future? Since Nixon’s severing of the Bretton woods system, very few have been willing to argue that fiat US dollars are not “real money,” and only certain strands of Austrian economists have criticized the lack of a gold standard and the world adoption of fractional reserve banking, where not only is a paper currency not backed by metals or tax that would retire it (à la Jefferson), but in which banks are only required to maintain as little as 10% of actual currency in proportion to the deposits held in such currency on paper. Famous Economist Richard Thaler, when asked whether the return to the gold standard for the US Dollar had any purpose, quipped, “Why tie to gold? Why not 1982 Bordeaux?” Indeed, a 2012 survey of leading economists unanimously agreed that returning to the gold standard would have no benefit for the US economy. It is an ironic reversal given the unthinkability of a lack of metallic standard for much of modern western history.
Alas, just as the gold standard now holds little water, though gold is still popular as an embodiment of value, and critics of fiat currencies are mainly critics of debt-backed money creation and not critics of the plausibility of fiat money containing value per se, we are now, with the cryptocurrency revolution, on the cusp of a reversal of the notion that only sovereign fiat currencies are “real money.”
<\history_lesson>
It is in this complex and controversial historical context that we must evaluate the current events surrounding Facebook’s “stable coin”- Libra. We cannot dilute present day discourse by imagining what’s happening now is novel, unexpected, or in any way an unnatural metamorphosis in the global political and economic history of money. If you read Facebook’s white paper, Libra is envisioned as decentralized and low-volatility virtual currency that “empowers billions of people.” Looking to expand access to financial services to the 1.7 billion people globally who lack access to a traditional bank, Libra seeks to be a sufficiently scaled store of value and medium of exchange. To this end, the Libra association promises that it will be based 1) on the security of the blockchain, 2) “backed by a reserve of assets designed to give it intrinsic value,” and 3) governed by the independent Libra association tasked with evolving the ecosystem.
Simply put, Facebook (and the Libra association) is engaging in the typical “playbook” of the history of money: to situate its digital coin as a legitimate store of value and medium of exchange backed by what Jefferson called a “a stable, common measure of value” (fiat currency) at a time when preeminent fiat currencies themselves have no basing in metallic money: “This approach is similar to how other currencies were introduced in the past: to help instill trust in a new currency and gain widespread adoption during its infancy, it was guaranteed that a country’s notes could be traded in for real assets, such as gold. Instead of backing Libra with gold, though, it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks” (Libra Whitepaper).
Facebook’s proposal to have one-to-one backing of Libra coins with “stable”, valuable assets, which could be retired in the future, ironically sounds a great deal like Jefferson’s notion of “currency finance”.
Again the Libra whitepaper: “the size of the reserve is determined by the size of the balances that users are holding in Libra. Hence, unlike some other cryptocurrencies, supply is not restricted by outside factors. This has the important role of allowing the Libra ecosystem to grow or shrink with demand. It also discourages ‘runs on the bank’ since the typical rationale behind a run is that a coin is only fractionally backed, so users want to get their backing out before others do. With a fully backed coin and a competitive ecosystem of exchanges, it will be possible to convert coins back to fiat at a narrow spread above or below their current value, no matter how many coins are in circulation or how many people have already sold their Libra.”
Final Thoughts:
1) The history of FIAT money shows that a successful currency need not be pegged to other assets, currencies, or metals to maintain a stable value, but that various attempts have been made to do such. The true ingredients of value are utility, belief, and trust - i.e. use amongst consumers within an economy of exchange (transaction volume).
2) Others yet are predicting that given the amount of sovereign debt in developed economies and the multiple rounds of quantitative easing regimes undertaken by central banks in the recent past (i.e. creating more fiat currency, with balance sheet liabilities, i.e. sovereign bonds, to cover other toxic liabilities and/or as a form of monetary stimulus), cryptocurrencies, especially those with limited quantities of potential circulation, like Bitcoin, Libra, and many others, could become more stable and valuable than paper fiat currencies in the future. This is especially true given the emerging military, economic, and geopolitical power of developing countries in East and South Asia which has already further undermined the post-WWII American economic (think Bretton Woods) world order. According to a report by Deutsche Bank, "The forces that have held the current fiat system together now look fragile and they could unravel in the 2020s. If so, that will start to lead to a backlash against fiat money and demand for alternative currencies, such as gold or crypto could soar. The demand for alternative currencies will therefore likely be significantly higher by the time 2030 rolls around.”
3) Cryptocurrencies are already and will continue to be successful. The astonishing number of users, transaction networks, corporate stakeholders, utility cases, and innovations in the internet of value powered by cryptocurrencies speaks to their “real” presence as money despite the torrents of prejudicial, historically myopic, and mistaken judgements that they are “fake” productions of internet magic. If financial institutions (community and national) do not have a crypto strategy, the question is not whether or not people will accept digital money as money, but rather, whether or not Facebook will become the bank of choice over smaller, community oriented institutions.
Make no mistake: Facebook and the Libra Association understand the past and the future of money. We must ask ourselves if we want a future of digital money dominated by a few large corporations or by thousands of community and local FIs and their millions of members.
If you aren’t sure how to ensure that your institution stays plugged into the future of money, a great place to start is by attending our CryptoCom event in 2020; where we will be convening key thinkers and institutions interested in the future of money and their role (as financial institutions, merchants, technologists, etc.) in emerging digital economies. The goal of our event will be simple: to catalyze conversation around what “real money” looks like in the future, and how that impacts your local institution and economy. You can get registered here … www.netqash.com/cryptocom. Hopefully with this piece (and previous/in-process publications) we are seeding an awareness of your need to be part of this conversation.
On a personal note, I look forward to discussing the history of money and the futures of cryptocurrency at our upcoming Cryptocom conference in Denver, but for now, digging through the details of the history of money shows that, regardless of what happens with Facebook’s Libra, cryptocurrencies are here to stay along with the shifting definition of money: as a community bank and local FI, rest assured that you definitely need a crypto solution, and that digital currency is money!
*The evils of this deluge of paper money are not to be removed, until our citizens are generally and radically instructed in their cause and consequences, and silence by their authority the interested clamors and sophistry of speculating, shaving, and banking institutions. Till then we must be content to return, quoad hoc [with respect to this], to the savage state, to recur to barter in the exchange of our property, for want of a stable, common measure of value, that now in use being less fixed than the beads and wampum of the Indian, and to deliver up our citizens, their property and their labor, passive victims to the swindling tricks of bankers and mountebankers [ponzi-schemers].
Thomas Jefferson to John Adams, 1819
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"Dr. Russ" Hittinger is a crypto economies and strategy consultant with NetQash. He holds a Ph.D. from Columbia University, where he studied the history of capitalism and political economy.
As an educator, he enjoys working with NetQash and its clients so that they have a strategic edge in enriching local economies and strengthening human flourishing in this era of rapid advancements within capitalism, technology, and corporations.