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Blockchain Breakfast Summer Series, Part 2: Who Runs The Cash?

August 1, 2019   |   By Lacey Shrum

Last week, I sat down with one of my favorite people in crypto, Fred Constanesco. Fred is an attorney, entrepreneur, and bitcoin enthusiast. Fred and I talked all things money. Below is a recap.

History of Money

The concept of money has a colorful history. Human civilizations moved from keeping ledgers in cave writings to eventually trading rocks and stones, then seashells, then precious metals, like gold. As societies change over time, so does the way we interact with markets. As technology progresses, items like shells or pebbles which were difficult to extract (and, therefore, valuable) may flood the market, devaluing the currency. Gold is the most popular form of money throughout history and has remained popular because it is solid, easily malleable, and has maintained a release rate of around 1%-2% per year throughout history.

The Fed

Fiat currency is government issued currency. The US dollar is the most powerful fiat currency in the world. The Federal Reserve Bank manages this currency with different toggles (printing more money, adjusting interest rates, etc.)  The “Fed” had a dramatic and controversial birth. The concept was drawn up by a handful of bankers on a secret retreat (on “Jekyll Island” no less) and was passed through Congress in late December 1913, when many had gone home for the holiday.

The Gold Standard

The “Gold Standard” is the idea that your currency is backed up by gold. The US effectively abandoned the gold standard in 1933 (started printing more money than it had gold behind it), and completely severed the link between the dollar and gold in 1971. Fred talked a bit about how this contributed to extending the life cycle of wars. When most nations were on a gold standard their spending, including that on wars, was limited. When the cash ran out, the war was forced to end. Today, the government is able to print more currency if needed, which Fred argues has extended the wars of our time (Vietnam, Gulf War, War on Terrorism).

In the 1970s, Nixon introduced the idea of fractional reserve banking, which is a banking system in which only a fraction of bank deposits are backed by actual cash on hand and are available for withdrawal. This allows the bank to free up capital and make loans and allows us to obtain a mortgage and earn a wee bit interest on our cash balance at the bank.

“Silly Internet Money”

Bitcoin is just that, with a finite supply, where the ledger of money is controlled by all the users in the network. Bitcoin’s roots are in the Cypherpunk Manifesto, where a group of developers called for the protection of privacy. They define privacy as “the power to selectively reveal oneself to the world.” The argument is that we should be able to choose what we reveal over the internet. The same way we can buy a magazine with cash in person without revealing certain data about ourselves (like our name, credit card number, etc.), unless we choose to.

Bitcoin also offers full transparency; we know with absolute certainty how much is available, will be released, and will ever be available. No other traditional asset offers this feature, including the dollar. It also offers privacy and self-sovereign ownership. One does not require a bank, an intermediary, or a custodian to hold their bitcoin; the owner can hold access to their bitcoin in their pocket, in their head, or wherever they like. This is similar to cash or gold, but unlike cash or gold it is not measured by its physical presence. A digital wallet can contain one satoshi (the smallest denomination of a bitcoin) or one million bitcoin, and will not be any heavier, bigger, or burdensome to move.

Lightning Fast

One of the biggest, and most legitimate criticisms of bitcoin is its processing speed – blocks are only written every 10 minutes. Lightning Labs allows transfers “above” (layer-2 protocol) the bitcoin network, done instantaneously that can be settled on the bitcoin blockchain.

Surveillance Capitalism

Other countries are much more efficient at payment systems, with the transfer of money becoming instant versus the “slow” 10-15 seconds of Visa (triple that if your chip doesn’t work!). Combining big data with a state issued or controlled crypto currency brings up a lot of privacy concerns. China has recently implemented a “social credit system” which gives citizens and businesses an economic and social reputation. Yes, like in Black Mirror.

Short the Banks

Because of the self-sovereign aspects of bitcoin, banks are naturally threatened. And the banking world is not getting easier, as there are huge issues with keeping data secure. See Capital One.

Lastly, here are Fred’s quick blockchain takes:
  • Best Blockchain Use Case: Money
  • Worst Blockchain Use Case: Everything Else
  • 10-Year Prediction: We are going to regret a lot of things, like freely giving our digital identities to the internet.

Join us next week for, Lawyers, Regulators & The Private Sector: Is Blockchain the Secret to a Healthy Relationship? with Cole Davis. See you then.

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Posted in Blockchain
Lacey Shrum
Lacey is an associate attorney at Vela Wood where she serves businesses that use blockchain technology and cryptocurrencies, helping clients identify and mitigate particular risks arising out of this new technology – including blockchain strategy and use cases, capital raises and security issuances through alternative forms, code-as-a-legal-contract drafting, and ethics. For a primer on the why’s of blockchain, always start with the OG whitepaper.