Written by Dr. Kyle Wong, President of Association of Blockchain Development
According to historian, the Mesopotamian shekel – the first known form of currency – emerged nearly 5,000 years ago. The earliest known mints date to 650 and 600 B.C. in Asia Minor, where the elites of Lydia and Ionia used stamped silver and gold coins to pay armies. So, currencies in the form of coins and bills have been around for more than 5000 years. It certainly brought along prosperity to modern civilization and is infinitely better than barter system. But I also believe it is becoming obsolete, and it is time to develop an alternative. After all, the nature and functions of currency really haven’t evolved that much.
Firstly, while we talk about global economy, fiat currencies: USD, Euro, Yen are still local. There is a cost to do FX exchange as we all well know when we visit overseas. Nowadays e-commerce giants like Amazon and Taobao operate all over the world connecting buyers and sellers. But the currency the customer pays is seldom the currency the producer receives. It means there are many currency exchange transactions hidden in a simple purchase. It creates friction and costs. Imagine a currency that is truly globalized and everything is priced in that currency - it means that all those FX transactions will be eliminated, benefitting producers and consumers.
Secondly, central banks may be actively destroying your wealth. Modern central banks have a much shorter history than currency. The story of central banking goes back at least to the seventeenth century, to the founding of the first institution recognized as a central bank, the Swedish Riksbank. Established in 1668 as a joint stock bank, it was chartered to lend the government funds and to act as a clearing house for commerce. A few decades later (1694), the most famous central bank of the era, the Bank of England, was founded also as a joint stock company to purchase government debt (Bordo, 2007). Central banks are created to serve the governments, not the citizens. In fact, the earliest responsibility of the central banks is to help finance the war efforts. To keep the government financially afloat, central banks often choose to print money. This debases the currency.
Data from the Fed shows that a broad measure of the stock of dollars, known as M2, rose from $15.34 trillion at the start of the 2020 to $18.72 trillion in September 2020. The increase of $3.38 trillion equates to 18 per cent of the total supply of dollars. It means almost one in five dollars was created in 2020. No wonder it creates concerns for inflation and asset bubble! Money as a means to store value is in serious doubt by the action of the central banks. Of course, every central bank is doing the same thing. If you are holding money, rest assured that the central bankers are doing everything they can do destroy the value of that asset. In fact, the reason that Bitcoin goes up so much is that, unlike fiat currency, its supply is limited to 21 million coins. So, which asset would you rather hold?
Thirdly, the major conduits in the fiat economy are banks. According to the statistics from world bank, 1.7 billion adults in the world are unbanked (World Bank, 2017). It means they do not have bank accounts. One reason is that banks often require a minimum amount to open an account, for the poor this requirement is often too high. Without access to banking service, the poor cannot move up the economic stairs.
Fourthly, the services and operations from banks are not keeping pace with the digital economics. In many parts of the world bank transfer is still slow and expensive. Not to mention while e-commerce operates 7/24, the banks don’t. Also banking operations are still very manual and prone to errors. Part of the reason is the old legacy system the banks are using. Just in February this year, Citibank, which was acting as Revlon's loan agent, was meant to send about $8 million in interest payments to the cosmetic company's lenders. Instead, Citibank accidentally wired almost 100 times that amount, including $175 million to a hedge fund. In all, Citi accidentally sent $900 million to Revlon's lenders (Maruf, 2021).
Lastly the current banking system is being abused and even weaponized. I have many friends whose bank accounts are closed without any reason provided by the banks. Bank accounts are often closed because the account holders engage in legitimate crypto transactions. The compliance rules are ad hoc and hard to predict. One day you are a good customer and the next day you need to close the account. The US is using its dominance in the SWIFT system to push forward its political agenda. Not to be outdone, China may well use its digital yuan to pursue national policy. Many countries are talking about CBDC, it also means that all the wallets will be under the surveillance and control of the governments.
I believe there is a need for an alternative to the fiat currency. There is a strong case for tokens which are secure, global, decentralized and innovative. Fortunately, many crypto investors share my vision and is building a more efficient and fairer economic system based on transparency and trust.
References:
Bordo, Micheal. “A Brief History of Central Banks.” (2007). Federal Reserve Bank of Cleveland - Newsroom & Events Publication. https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/economic-commentary-archives/2007-economic-commentaries/ec-20071201-a-brief-history-of-central-banks.aspx#:~:text=The%20story%20of%20central%20banking,a%20clearing%20house%20for%20commerce.
Maruf, Ramishah. “Citibank Can't Get Back $500 Million It Wired by Mistake, Judge Rules.” CNN. Cable News Network, February 17, 2021. https://edition.cnn.com/2021/02/16/business/citibank-revlon-lawsuit-ruling/index.html.
“The Unbanked.” The unbanked | Global Findex. Accessed April 12, 2021. https://globalfindex.worldbank.org/chapters/unbanked.
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