Crypto vs. Fiat: The Battle Is On

– February 19, 2018 Reading Time: 4 minutes

You might be living in a time in which you will experience the end of central banking and perhaps even fiat currency, and their replacement by a completely new system.

Venezuela is a paradigmatic case. The official currency is the Bolivar, and it is in a permanent state of 4-digit hyperinflation. The government did this by printing endless money to try to make socialism work. The only result was to throw the entire country into poverty, chaos, and ruin. It is really difficult to create such a calamity in a once-prosperous and once-peaceful country but a regime that swears to implement socialism can actually achieve that. It’s the only thing that socialism has ever achieved.

But my concern here is the destruction of the money. I’m thrilled to have received a first-hand report from my new friends at MonkeyCoin in Venezuela. They are on the leading edge of providing people in highly troubled economies a way to make, manage, and transport value, using cryptocurrency as the means. Without it, Venezuelans would have few hopes for surviving the incredible mess the government has made.

Two years ago, Bitcoin began really to catch on in the country but in 2017, Bitcoin’s popularity bumped into a serious scaling problem that made it too expensive and too slow for hand-to-hand use. As a result, the country has become a major hub for alternatives. The most popular is Smartcoin but there are many competitors. The crypto community is thriving as never before.

All these currencies are actively acquired and traded as an alternative to government fiat, in exactly the way that Satoshi’s White Paper originally envisioned it would happen. Crypto is money without counterparty risk because the payment system – final payment, not trust relationships – is embedded within the protocol of the money itself. Everyone can have access. Sending and receiving is cheap and fast. You don’t need intermediation.

Keep in mind that addressing the problem of financial and banking crisis was a major reason for the invention of Bitcoin in the first place. While big bankers and ruling-class big shots in the United States called cryptos names like frauds and ponzis, regular people in Venezuela (and many other parts of the world) are using cryptocurrency as a way of protecting themselves from despotism and destitution.

What’s fascinating is how the process has unfolded. Hard and soft forks aren’t just for cryptos. There has been a hard fork in the way the government’s fiat currency is traded. Digital versions of the Bolivar trade at a far lower rate than the hard version. If you have paper Bolivars, you can trade them at 3 to 1 for digital Bolivars, using the digital versions to pay bills, taxes, and so on. There is a thriving business involved in arbitraging between the two forks.

How is the government responding? It is pretty much bailing from the main currency and plotting to issue its own cryptocurrency called the Petro. It is structured as an authentic crypto, same as Bitcoin, but backed by oil, gas, gold, and diamond reserves. The presale of the token begins very soon, and it will trade on the usual crypto exchanges. The hope of the government is that this crypto will bypass the conventional banking channels and be censorship-resistant same as other tokens in this space.

There is some incredible irony here: a socialist government using a mega-capitalist, high-tech tool to save its economy from sanctions and its own bad economic policy. Will it work? My guess is that it will work for some people, namely the government and its connected interests. Everyone else in the country will continue to migrate savings and hand-to-hand trades away from fiat currency and toward this new form of hard money. But this won’t be the Petro. It will be SmartCash, Bitcoin Cash, Dash, Monero, and so on. The Petro will be for official business.

This is the future of Venezuela but what about the other hundreds of currencies and central banks? They could go the same way but perhaps with less drama. This is nothing to regret.

F.A. Hayek spent a lifetime working for reform of the government’s monetary system. At some point, he realized that reform needs to be more fundamental. In a 1984 interview, he presented the unvarnished truth. “I don’t believe we shall ever have a good money again before we take the thing out of the hands of government,” he said. Not reform, not a new system by and for government, but a completely market-based system.

These days, government seems to be doing its best to make this happen. This is because, at long last, at the same time central banking is failing as a model, we finally have a technology that can break up the government’s monopoly on money. It takes many forms and it is still highly experimental but it is beating what government is providing. People now have options. Currency competition is actually working, and it is driving government provision of money into the ground.

The point of government monetary institutions is to exercise monopoly power. There is to be one national or regional currency, one legal tender. All money-based trades flow through the banking system, which provides final clearing for all transactions. The central bank is the regular and primary guarantor of the system. From there, experts conduct “monetary policy.”

This system depends on being the sole provider of these services. Crypto and blockchain clearing do not need to actually displace the government’s system. It only needs to become a viable competitor. Then the cartel is smashed and the monopoly is ended. This realization is precisely why so many voices associated with official institutions are warning about what’s coming. They warn but they do not know what to do about it.

Here is why the Venezuela case is instructive. The end of the government money monopoly will result in some highly strange goings on: currency competition, forks in the fiat, a loss of the power over monetary policy, a possible abandonment of fiat in favor of a government-backed crypto, the end of monetary policy as a tool of politicians, a migration of many institutions from government money to private money, and the gradual depreciation and obsolescence of old-style monies to new forms.

The fiat money system has been fragile for a very long time. Indeed, it has been held together with tape and gum since its inception. The difference between our times and times past is that we now have an alternative, one uniquely suited to the digital age. We now have a way out, a path toward our eventual monetary emancipation.