Many miss what blockchain and cryptocurrency are doing. The reason for this is they do not truly understand how the monetary system works. It is something many think they understand, based upon what they were taught in Economics class or what they hear on the financial media.
The reality is that we are dealing with something completely different. For example, many talk about the idea of a cashless monetary system like it is something novel. The reality is we were dealing with this for more than 100 years.
A lot of this stuff is rather mundane and boring. After all, who wants to read through reams of FOMC meeting minutes to figure out what the Fed knows and, more importantly, does not know? Nevertheless, by pulling back the curtain we see a total understanding of what is taking place.
Before going any further, do you know what our monetary system is? Have you ever thought about it?
The answers we get would be varied. The reality is few ever ponder what the monetary system truly is. For that reason we will delve into it, thus showing how blockchain and cryptocurrency are the next iteration.
Our monetary system is nothing more than the combination of accounting and communications. When those view the discuss through this lens, we can see how this all tied together.
Accounting
Certainly this is not a very exciting topic to many. However, it is vital to grasp the role this plays in our monetary system.
In the past we discussed things such as the Repo market. While this is mysterious to many, it is really just an accounting system. Nothing is ever physically exchanged. In fact, the market doesn't even contain currency. Instead, it uses other forms of money that the banking system created.
Even your checking account is nothing more than accounting. What we are dealing with is balance sheet banking.
For example, when you write a check, to say the landlord, the money is moved from your account to that individual's. This is sensible and something most are aware of. However, this is not settled yet since the banks need to adjust their reserve requirements. Since one bank now has more on deposit while the other less, the reserves have to be worked out.
Naturally, there is more than just one transaction and banks settle on a net basis. That means the transfers are all totaled up and only the difference paid. Of course, these entities do not use legal tender to settle. There are no armored trucks full of cash moving USD from Bank of America to Well Fargo. Instead, they simply move reserves, another accounting based asset.
When we delve into the wholesale banking (Eurodollar) system, we see the same thing, but on steroids. In this arena there is no cash. It is all money that is used by the banking system for lending, collateralizing, remittance, and cross-border payments. In fact, the USD is only present as a unit of account. Eurodollars, these days, contain very few dollars.
It is all ledger based, i.e. accounting.
Communications
Have you ever wondered why, when the US and its allies decides to sanction a country, it threatens to kick them off the SWIFT network? Why would this matter if SWIFT is not a settlement system?
The reason this is the case is because SWIFT is a messaging system. It is nothing no different than KIK or Telegram. Here is where we see the communication aspect comes into play.
It is rather simple really. How does one know where things are on the ledger (accounting) if there are no messages detailing what is moving where? It is why communications is key.
Over the last century, different communication networks were built out, providing the different aspects of the monetary system with ways to interact. This provides both domestic and international banking with what it needs. When understanding this, it is easy to see why the international system lags the US domestic banking system. The latter has a more advanced communication system than the former. Globally, some countries still lag behind.
The monetary system in the US is undergoing a major change right now. There are major upgrades taking place with Fedwire which will be completed in 2023. One of the benefits from this is that it will offer instant settlements.
A major upgrade is possible due to the advancements in computer networks. This is another key piece to our modern monetary systems.
Blockchain And Cryptocurrency
What is blockchain? Basically, it is distributed ledger technology. Hence, we see the complete monetary system in this single technology.
Blockchain is a ledger. It primarily handles the accounting of transactions. When money is moved from one wallet to the next, the system performs the task and notes the move in an immutable ledger. With cryptocurrency, the transaction is settled once the blockchain is fully validated.
With permissionless blockchains, the money is not USD, EURO, or some other form of fiat currency. Instead, a cryptocurrency(s) are tied to the system which is the medium of exchange and carries the store of value. For example, on Hive, there are HBD and HIVE. When one sends HBD to another, that is what is moved. The blockchain doesn't handle USD or EURO. Instead, people have the choice to exchange HIVE or HBD.
This is only going to enhance the massive economic potential of cryptocurrency. We are going to see growth like we never saw before. This is a topic we will cover in a future article.
We are dealing with something so powerful that even the Bank of International Settlements (BIS) is looking at it.
The difference is a blockchain system that is controlled by the international banking system versus ones that are not.
By being constructed online, blockchain is a computer network. Here is where we see how it is accounting and communications rolled into one.
Or, another way of looking at it, is that we are dealing with a version of our existing monetary system that is not controlled by banks.
Why Cryptocurrency Will Succeed
There is a reason why cryptocurrency will succeed. It stems from a problem with the existing monetary system.
If you asked 100 people what the issue is with how things are, nobody would get this right. It is not something you see discussed. However, it is one of the major downfalls with the wholesale banking system.
Money is created by the commercial banks. This is true whether we are dealing with currency like the USD, EURO or YEN. It is not central banks or governments that create those currencies. Rather, money expands when banks lend.
On the international scale, the Eurodollar system sees money created by global financial institutions. These mostly can be categorized as "derivatives". The key point to understand is money at both levels is generated by for profit institutions.
This is a problem because banks not only create the money, they are perform intermediation. In other words, they are responsible for bringing the borrowers and lenders together.
The challenge here is that intermediation, i.e. where the money ultimately is directed, will occur not only where it is most profitable but when. Instead of providing money when and where it is needed, the barometer is based upon profitability. It is why banks slow down lending when money is most needed.
Blockchain and cryptocurrency solves this. Since anyone can create money, the choice of where it goes is unlimited. No longer is it relevant for one to have the creditworthiness to get the money. Blockchains do not care. They simply follow whatever the code says.
This means that cryptocurrency projects can be created to fund whatever is desired. Profit is not the main input but, rather, network effects. If enough people are onboard, the money will have utility. Of course, without that, the project will die a death due to lack of interest.
The blockchain creates the money and people decide where to distribute it.
Simply, blockchain and cryptocurrency are a better system. It removes one of the major obstacles to the existing Eurodollar system. By having money creation and mediation separated, we have a monetary system that can direct resources to where they are needed. This is something the banking system does not indulge in.
We also have one other facet that will advances things a great deal further. This, too, will be the subject of a future article and that is based around property rights.
As we can see, the move to blockchain is not that much of a leap considering how the existing monetary system is really operates. Also, cryptocurrency simply alters who is in control of said system.
In the end, we are re-creating the reserveless, private bank money system by eliminating the banks. Here we substitute blockchain, cryptocurrency, and communities.
Hopefully we are starting to see how this all comes together.
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