The genie is out of the bottle for decentralized digital assets. Bitcoin, or something like it, will change money forever, reshape the global financial system and in the process very likely reorganize global geopolitics.
The crypto-economic game first outlined in “A Peer to Peer Electronic Cash System,” has so far led to a peak of over $300 billion in value (now sitting at just over $100 billion) being aggregated and secured by a disparate group of individuals acting completely in their independent self-interests.
It’s worth pausing for a moment to think about what this means: for the first time in the at least 5,000-year history of money, a currency issued by transparent, immutable and independently verified code is organically competing on a global scale against both the fiat issued currencies of states and the traditional stores of value like gold and silver. In the age of globalization, people are free to compare Bitcoin and permissionless game-theoretic puzzles like it, to the alternatives — massively deflationary currencies by decree or cumbersome physical commodities — and they are rationally choosing the former.
The rise of cryptocurrencies, digital assets, digital gold — whatever you want to call them — has been extremely volatile and will remain volatile for at least the next decade. But in a free market, sound money like Bitcoin will, over the long term, be the preferred choice as a store of value for people simply looking to avoid the inexorable dilution of their cash (should they be foolish enough to hold a significant amount of it even in the “best” global reserve currencies like the USD). And when the upside of hoarding this new form of value has been sufficiently reduced, people will finally stop speculating and the volatility will be curbed. At that point, not only will it, at last, be safe to spend, but it will have proliferated to the point that spending will be extremely easy.
It might take a decade: possibly more, possibly less. There will be reluctant participants, some of whom will use threats of force to resist the change. Bitcoin itself may be destroyed or usurped. But make no mistake, in a free market of currencies, free-thinking rational individuals will inevitably choose decentralized money with deterministic rules and, precisely because of its decentralized nature, it will be impossible to stop them. The genie is out of the bottle.
The real question now is: how will this reshape the world? What does the first global decentralized monetary system look like?
Less Government Power and Control
The Bretton Woods system, where the dollar’s status as a primary reserve currency has afforded the United States abundant geopolitical leverage, will be disrupted by the emergence of a decentralized cryptocurrency as a functioning measure of value globally. When trust in money is guaranteed by a decentralized protocol instead of financial institutions, the capacity of states to exert control by pressuring those financial institutions (or in fact by overtly controlling them) is reduced or eliminated. And since such protocols are impossible for individual states to sanction, states, in general, lose the capacity to leverage the power gained by controlling the money supply.
Leveraging of economic power has been a key component of the West’s grand strategy since the Second World War. It follows that losing the ability to leverage such power will likely reshape global politics. As Klaus Schwab, founder and executive chairman of the World Economic Forum, argued in his 2016 essay, “The Fourth Industrial Revolution,” the ability of governments to nimbly adapt to new technologies that redistribute and decentralize power will ultimately determine their survival.
There will increasingly be governments who take proactive measures with the first movers likely to be those who stand the most to gain by adapting. Evidence of this can already be seen in the favorable regulatory frameworks introduced by peripheral states like Malta and Lichtenstein, who stand to benefit from a reorganization of global finance. There are also “black-sheep” countries who can leverage the new monetary system to neutralize the traditional efforts used to ostracize them. Early evidence of this is seen in the example of Russia. Threatened with sanctions such as removal from the SWIFT international settlement system (often referred to as the “nuclear option” of monetary sanctions) Russia, and other countries who don’t “play by the rules”, may turn to crypto as an alternative for international settlement. At a 2017 meeting of the International Standards Organization, the head of Russia’s delegation — who previously worked for the FSB (the intelligence agency that is the successor to the KGB) — told the group, “The internet belongs to the Americans — but blockchain will belong to us,” as reported by the New York Times.
The point is, there already are and will increasingly be governments who use the new sound money to their advantage. Such rational moves will serve to strengthen the stature and value of decentralized money in the long-term; the more it’s already used, the more it will be used.
The permutations of a disruption in the status quo world order brought on by a decentralized monetary system make it, realistically, too complex to predict winners and losers with any level of certainty. What is certain is that while a global disruption of power dynamics will have winners and losers, it will be a net positive for the world’s citizens. If you’re worried that authoritarian regimes like Russia will gain power, resulting in increased oppression and suffering — remember that the knife cuts both ways. While the current challengers to the status quo of USD hegemony will rationally adopt the new decentralized money out of self-interest, the long-term result will be net positive for human freedom. The reason is that by adopting the new decentralized money, even though countries like Russia may increase their power in the short-term by for example thwarting US sanctions, in the long-term they are supporting a currency that ultimately diminishes their ability to be, well, authoritative.
Remember, centralized control over money gives states incredible power. The ability of a government to unilaterally freeze the accounts of dissidents, for example, has long been a mechanism of control. One startling recent example of this is the Saudi Arabian case of 11 princes, four ministers and dozens of former ministers and well-known businessmen being taken into custody with over $30 billion of their assets frozen in what is widely seen as reigning King Salman clearing the way for his son’s accession to the throne. If only they had held more of their assets in crypto.
Also, consider that as the centrally controlled printing of money has been the primary means of financing modern warfare, the decreased ability to do so will result in a gradual decrease in global militarization.
Democratized Access to Capital
The reduction in the power of governments to wage war on their citizens and against each other, and the resulting geopolitical disruption are perhaps the most obvious benefits of the decentralized future of money but democratized access to capital and efficiency improvements are also significant.
Cryptocurrency ecosystems can create globally decentralized economic networks that pool capital and disaggregate risk at a scale that has only been achievable by governments in the past. In a world where asset ledgers run on their own chains that can be viewed by anybody (and transacted with by anyone), businesses would be endowed with the capacity to securitize, for example, a fleet of self-driving, battery-powered delivery trucks by selling ownership in the individual trucks that service particular neighborhoods, rather than by pooling the trucks and creating a single bond from the aggregate cash-flows arising from them (as is the only viable way to apply capital to such a business under the current financial system). This would enable people to invest locally, for example, in the last-mile delivery infrastructure that they use on a daily basis, while unlocking untapped capital.
Less Financial Waste
The above is an example of a fully-automatic financial product that can interact with suppliers and retail investors with zero supervision from a centralized authority, but which is readily and automatically auditable on request. This brings us to another huge advantage of the decentralization of money: a reduction in the wasted resources currently allocated to financial middlemen. The decentralized future of money enhanced with smart contract functionality is fully automatic so, once the contracts are written, there’s no need to employ an army of highly-paid gatekeepers to rubber stamp them.
While access to financial products will be democratized by the decentralization of the monetary system, the deflationary nature inherent to hard money may actually make it less necessary for people to seek out such financial products. Remember, under the status quo even in the “best” currencies like USD, you’re losing about 2% a year to inflation, so while currently people are incentivized to seek out financial vehicles to improve upon that, when money stops being inflationary, the pressure to spend it is reduced. As more and more people feel comfortable holding a greater portion of their wealth in the new money, there will be less incentive to frantically allocate previously negative-growth cash holdings.
More Rational Investments
The results of this will be wide-reaching. For one, people will be more inclined to invest rationally. Rather than wishfully allocating capital to anything that is (you hope) better than negative 2% growth, people will choose longer-term, value-added financial products. The reduced pressure may even help ward off unscrupulous financial accounting and the get-rich-quick mentality that led to the last financial crisis.
Next, there will be renormalization of artificially inflated asset classes like real estate, which is currently used as a dumping ground for the wealthy, much to the detriment of the middle class in the most desirable neighborhoods of the world’s best cities. The normalization of real-estate values should result in a renaissance of inner city-life and improved quality of life for the middle class.
The end of inflation brought on by decentralized currency will also benefit the poor by leveling the playing field. Only people who possess abundant cash have the luxury of investing it to avoid inflationary losses. They also tend to have the means to access the professional investment services that will provide them with the best returns. However, those who possess only cash (ie. the poor and lower middle class) generally don’t have the surplus in cash and/or access to the professional resources needed to appropriately allocate it to high performing assets. This means they are disproportionately subjected to the inflationary losses of centralized fiat currencies. The end of inflation, therefore, will mean that those with the least money aren’t punished for having the resources to sit at the financial poker table.
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