Central Bank Digital Currencies (CBDC's) - Pro and Con

This is a topic we have covered here for several years. First we had a variety of private sector forays into the world of creating cryptocurrencies with most of the early attention focused on Bitcoin and the related blockchain technology that came along with it. Over time all kinds of new currencies arose and the private sector dived head first into tying to figure out ways to utilize blockchain technology. This whole process has been going on now for some time and thus far we have not seen any of this lead to something that leads to broad public adoption of an alternative cryptocurrency to seriously challenge the existing national fiat currencies. Even a huge private sector initiative from Facebook (Libra) discovered that there are many regulatory challenges involved with trying to do something that the central banks prefer left in their domain.

It would not be accurate however to say that central banks have ignored all this furor. All around the world central banks started up studies and test pilot programs to see if they should look into both issuing their own version of a "digital currency" and also blockchain technology as well. This process has been very slow to unfold and at this time there are still no major western central banks expected to issue a central bank digital currency (CBDC) in the near future; although China may be closer than some others to giving it a try. We have covered all this here and have informed readers not to expect this kind of change to show up any time soon in any of the major western central banks. 

There are many reasons why this is the case. Some are technological, others are political, and still others are just the tendency towards stasis that exists in our present monetary system. The public at large has not demanded this kind of major change and a large segment of the public likely would distrust it for one reason or another. So there is still no reason to think we will see this kind of change coming soon, especially at the Federal Reserve in the US. 

In this article, we will feature two articles that look at this whole topic from a "pro and con" perspective. Central banks do have interest in exploring this further and do list some "pros" they can see for either "wholesale CBDC's" (bank to bank) or "retail CBDC's" (includes the general public having accounts at the central bank). But even the central banks continue to bring up some "cons" they say would have to be overcome. Of course central bank critics see lots of "cons" and not that many "pros". Here we will provide links to two articles so that readers can explore this topic in depth if they want to.

First, we have this new Digital Monetary Institute journal from the OMFIF that talks about the status of China's efforts to test the use of a new digital form of their currency and also how Asia in general has a number of projects underway. The OMFIF is generally pro central bank in its outlook. Here is an excerpt from the Introduction section (I added underline):

"Central bank digital currency activity is accelerating in Asia, where a range of digital payments and financial infrastructure projects is moving from desktop study to beta test implementation. This edition of the DMI Journal takes the region as its inspiration with accounts of digital projects from both private and public sectors, stretching from China to Manila via Bangkok and Singapore. We also highlight a pair of projects from Europe.

Much attention is fixed on the People’s Bank of China’s test in four cities of its retail CBDC, a digital fiat currency distributed on the mobile phone platforms of two leading social messaging services. This adds much greater functionality to both private sector offerings, as well as potentially displacing cash for the majority of retail transactions. The PBoC is at pains to stress that its Digital Currency Electronic Payment is not designed as a substitute for cash. The digital cash circulating is fully collateralised, and the authorities have partial view over users and transactions. While the precise features of this model may not be attractive to other central banks, the experiment will be studied with great interest worldwide. Katie-Ann Wilson’s article explores these and other issues in greater detail."

Next we have this recent in depth article by Alasdair Macleod appearing on the Goldmoney web site. In this article the author looks at this topic from the perspective of a central bank critic. He first lists a number of reasons why central bank digital currencies might appeal to various central banks. He lists some of the same "pros" that the central banks themselves mention in their studies. Then he offers a review of this list of potential advantages from the point of view that they will not end up working out to be in the public interest if implemented. Finally, he concludes with this comment:

"The further benefit for central banks is it will increase their power as an organ of the state at the expense of commercial banks, potentially becoming more important than the state itself. However, the current economic situation is deteriorating more quickly than a working CBDC can be introduced, so the whole exercise is likely to be too late to have any relevance to monetary policy in the foreseeable future."

The very last sentence (I underlined above) is an interesting observation and does fit in with what we have observed here as well. We have documented how slow this process is moving and also explained the various roadblocks and challenges central banks would have to overcome to try and implement this in the real world. Central banks prefer to reduce risk as much as possible and a change like this can carry a number of risks that most central banks may prefer not to take. For one thing, there is no major detectable demand from most of the public for this kind of change right now. Commercial banks may not like it either. Also, everyone from Bitcoin to Facebook is attempting to offer the public alternatives to central bank managed currencies, but none of these have gained widespread public adoption thus far.

Meanwhile, all over the planet, governments and central banks are flooding the world with more money in an effort to stave off a deep recession and/or depression. The COVID-19 pandemic has encouraged (forced?) central banks to ramp up these efforts. However, many observers point out that problems were already present in the current system before the pandemic. The unusual ongoing activity in the repo market by the US Fed started long before the pandemic arrived (we reported it here last fall). Some would argue the pandemic is just speeding up a process already in progress that threatens the stability of our present monetary system. Some cynics feel that that whichever side wins the upcoming US election will only impact the speed at which the present system becomes unsustainable. In this recent video discussion we featured here on the blog, even former Fed Chairwoman Janet Yellen stated that at some point the US debt to GDP ratio will become unsustainable. Interestingly, neither political party in the US is talking about this issue at all.

Are the central banks in a race against time to make any changes like this before the whole question becomes a moot point because major currencies have been too debased? Above we have provided links to a lot of in depth material in these two articles. Readers can review them and come to their own conclusions. Here, we will continue to monitor events and report what actually happens, which is what matters most.
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Added notes: One reader I view as well versed in monetary issues sent me this comment after reading a preview of the article above:

"In the end, notes, bills, currencies, credit of all kinds - of whatever denomination - have to prove a store of value to serve as money, and thus in their issuance, related to some measure in the real economy for people to trust it, have confidence in it."

Also, here is an example of an earlier article we did here on this topic featuring some comments from an expert (Robert Bell of KlickEx) who has helped us out here over the years on this topic. Robert is recognized around the world as an expert on payments systems technology as used by central banks. He told me years ago that central banks are very slow to make significant technology changes and also explained the specific challenges associated with trying to use blockchain. In fact, here is what he told me in the article linked just above in October 2019:

"As far as real systemic change... There's nothing on the cards for the monetary system. The digital services spoken of (in the Bloomberg article) will not change anything fundamental, and the IMF and BIS are even further behind where most central banks are. The central banks will implement real time slowly, and banks will reduce cross border prices slowly. 

Swift and their GPI project is already doing this work, but banks are taking a long time to reduce prices, that's all. Open Banking, is speeding things up a bit, but not much."  - Robert Bell

Bloomberg - Americans Stick with Credit Cards

Over the last decade all kinds of new efforts to get people to change the way they pay for things have arisen. We have covered many of them here. But this article appearing in Bloomberg notes that, at least in the US, the use of plain old credit cards still wins out. Below are some excerpts and then an added comment.

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"Will anything ever pry old-fashioned credit cards out of Americans’ hands?

Even as the rest of the world embraces the idea of paying for stuff with their smartphones, the U.S. is clinging to its cash and plastic -- so much so that even the nation’s biggest bank is struggling to persuade people to switch. Starting early next year, JPMorgan Chase & Co. customers will no longer be able to use the Chase Pay app to pay with their smartphones when shopping in stores, the bank said Wednesday (8-21-19)."

. . . . 

"In the U.S., digital-wallet transactions represent only 5% of the $2.6 trillion market for in-person purchases and 20% online, while cards accounted for 80% of spending at physical stores and 70% online."

. . . . 

"The U.S. market has been slower to develop partly because merchants have been slow to accept such payments and consumers haven’t found new options convenient enough to give up paying with cards that offer lucrative rewards."

Please click here to read the full article in Bloomberg

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My added comment: The last paragraph quoted above makes a significant point in my view. It's why I use credit cards for most payments and why most everyone I know does as well. Other payment options simply are not competitive in offering sufficient rewards to get people to change engrained behavior (both merchants and end users). I talked about this a bit in this previous blog article that compared using credit cards to using Bitcoin or other similar kinds of payment options.

Comparing Bitcoin/Cryptos to Credit Cards for Making Payments

Over the last decade we have seen the rise of Bitcoin and other cryptocurrencies. There are probably many reasons why this has happened, but one big reason seems to be a reaction to the 2008 financial crisis where the integrity of the existing financial system and the US dollar came into question. 

In this article, we will make a comparison between using a standard credit card for making routine payments and using Bitcoin or other similar cryptocurrencies that hope to attract users away from the existing payment alternatives like credit cards. Below I have listed the features of two credit cards people use to make routine payments and further below I will compare some of those features to using Bitcoin or another similar cryptocurrency instead. After that are some added comments.

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For many people, credit cards are a very convenient way to make routine payments for purchases while at the same time taking advantage of incentives offered by the cards to use them. I'll list two examples below. After that we will compare some of the features offered by these two credit cards to using Bitcoin or a cryptocurrency instead.

Chase Freedom Card

- no annual fee

- 0% Intro APR for 15 months from account opening on purchases

- 3% cash back on all purchases in your first year up to $20,000 spent. After that, earn 1.5% cash back on all purchases

- Cash Back rewards do not expire as long as your account is open
- free unlimited access to your credit score 

- Zero Liability Protection means you won't be held responsible for unauthorized charges made with your card

- Purchase Protection covers your new purchases for 120 days against damage or theft up to $500 per claim

-  Extended Warranty extends the time period of the U.S. manufacturer’s warranty by an additional year ,on eligible warranties of three years or less.

Capital One QuickSilver Card

- no annual fee 

- 0% Intro APR for 15 months on purchases

- Earn unlimited 1.5% cash back on every purchase, every day

- Earn a one-time $150 cash bonus once you spend $500 on purchases within 3 months from account opening

This card also comes with limited liability protection and no foreign purchase transaction fees along with other features. My daughter used this card during her semester abroad in her senior year in college and the no foreign transaction fee was very helpful in that situation.

Please note the extensive incentives these card issuers offer to attract the use of their card for purchase payments. They charge no fee to maintain your account, they offer the flexibility to pay off purchases made over the first 15 months at 0% interest, and they actually pay the user cash back on purchases that can certainly add up to a substantial amount over time. (if the cards are used to pay normal monthly expenses as an example)

Users who continue to pay off the full balance of the card monthly after the initial 15 month 0% rate period can continue to accrue cash back while paying no interest and having the convenience of being able to pay everyday payments with the cards which are widely accepted where most people live and spend money on a daily basis.

What about using Bitcoin and Cryptos for routine payments?

In comparing the use of Bitcoin or similar cryptos for regular payments, the first thing to note is that they are not nearly as widely accepted for payments by merchants. While there are merchants (more often online merchants) who accept them for payments, they are a small fraction of the merchants who accept regular credit cards in most locations. In my local area as an example, every gas station, grocery store, restaurant, Walmart, Target, major retail outlet, etc. accepts credit cards for payment. As far as I know, not a single one of these accepts Bitcoin for payment in our local area. So that is one major hurdle for trying to use cryptos for routine payments.

Next, we need to ask: What happens if someone hacks into your wallet and steals your cryptos? As far as I know, you are probably out of luck. In comparison, if someone steals your credit card and uses it improperly, your liability is limited to either a very small amount or in many cases nothing at all. This issues was raised this past week in the Congressional hearings held about Project Libra from Facebook (see the unanswered questions segment of this TechCrunch article)

Extended Warranties and Purchase Protection? Many credit cards offer these features at no cost on all or most purchases. Cryptos don't offer anything like that as far as I know unless some individual merchants who accept them for payment offer it. 

Finally, what incentives does Bitcoin or other cryptos offer to attract users? Here, we might say that the prospect of appreciation of the Bitcoin or crypto held in the wallet may attract some users. Using the US as an example, if you use a credit card you are simply using them as a method of payment to spend US dollars. So there is no balance on hand to appreciate in value and you will not see any gains from the currency itself (US dollars in this example). The cash back offer is what you can expect to receive from cards that offer that incentive (usually 1-3% of purchase amounts on various card offers).

But the prospect for appreciation of Bitcoin or a similar crypto is really more a reason why people buy and hold these cryptocurrencies rather than a compelling reason to use them make routine payments. Of course significant price volatility in anything involves downside risks as well as potential upside gains. Over its life span, Bitcoin holders have experienced significant volatility up and down in the price of the coins. For credit cards, there is little or no downside risk and limited gains for cards that offer cash back or points incentives.

Summary

I believe the comparison above is one explanation for why Bitcoin and other cryptocurrencies have not achieved broad adoption by the general public for making routine payments. They don't compete well for most people in terms of offering incentives to use them for routine payments. That does not mean they have no role to play. Even though they have not achieved broad public adoption, the number of wallet holders continues to steadily increase over time as does the overall market cap of the cryptocurrency space. For people who want an alternative place to hold funds outside the normal banking system for any reason, they may help fill that demand in the marketplace. For those who see them as an investment vehicle for speculation, they may fill that demand in the marketplace. At the current level and pace of adoption they won't significantly impact the overall global monetary system, but they can find a healthy niche of users who feel they meet their personal needs. It will be interesting to see if the Facebook Project Libra gets off the ground and what incentives if any it may offer users to attract them to use the Libra.

Perhaps one way to look at this is that payment alternatives like credit cards offer some strong advantages for use in just making normal monthly purchases and payments. Things like cryptos and precious metals may offer some alternative long term store of value advantages for a portion of the funds people hold as savings. The same person might well use all three of these as part of their overall personal financial planning. So there is plenty of room in the marketplace for a variety of alternatives for different uses and demands. 

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Added note: For full disclosure, the links I provided above (and below) for the two credit cards mentioned will take you to a page that explains the features offered by those cards. They also offer me an incentive referral fee for the first five people that decide they want to apply for the card and are accepted. So, if you have any interest in having either credit card, feel free to use the link provided above. I'll get a referral fee and you will get a card with a lot of nice features and incentives if you apply and are accepted. These kinds of credit cards work particularly well for people who simply use them to pay normal monthly expenses and then pay off the account balance each month. If you are inclined to build up debt on credit cards and do not pay off the balance, be advised these cards carry very high interest rates after the initial 0% incentive rate period expires. Personally, I prefer not to use credit cards that way.

Chase Freedom Card

Capital One QuickSilver Card

Added note on the precious metals markets:

We are clearly seeing higher than normal moves up in the precious metals and related mining stocks over the last few weeks. Precious metals investor Eric Sprott provides on update on how he views this move in this recent interview. More articles related to this are upcoming in the next couple of weeks.

BIS General Manager - Bitcoin is "a bubble, a ponzi scheme, and an environmental disaster"

The new General Manager of the Bank for International Settlements decided to take on the topic of Bitcoin and cryptocurrencies in general in this recent speech. He made it pretty clear where he stands. He describes Bitcoin as "a bubble, a ponzi scheme, and an environmental disaster". Below are some excerpts.

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Authorities should be prepared to act on cryptocurrencies: Carstens

"Authorities must be prepared to act against the invasive spread of cryptocurrencies to protect consumers and investors, Bank for International Settlements (BIS) General Manager Agustín Carstens said.

In a lecture "Money in the digital age: what role for central banks?", Mr Carstens said that for money to keep its value, it must be backed by accountable institutions which enjoy public trust. Here, central banks are key.

"The meteoric rise of cryptocurrencies should not make us forget the important role central banks play as stewards of public trust," Mr Carstens said in the lecture in Frankfurt, organised by Sustainable Architecture for Finance in Europe (SAFE), the Center for Financial Studies and the Deutsche Bundesbank. "Private digital tokens masquerading as currencies must not subvert this trust."

New technologies hold great promise, for example in making payment systems more efficient. But new currencies are not required for that promise to be realised. Authorities have a duty to make sure technological advances are not used to legitimise the profits from illegal activities, and to educate and protect investors and consumers, Mr Carstens said. They must also ensure cryptocurrencies do not become entrenched and pose a risk to financial stability.

"Novel technology is not the same as better technology or better economics," Mr Carstens said.

"That is clearly the case with Bitcoin: while perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster."

Large price swings, high transaction costs and a lack of consumer and investor protection make cryptocurrencies unsafe and unsuited to fill money's role as a shared means of payment, store of value and unit of account, he said.

Central banks and financial authorities should pay particular attention to the ties linking cryptocurrencies to real currencies, and ensure they do not become parasites on the institutional infrastructure of the wider financial system. To ensure a level playing field for all participants in financial markets, access to legitimate banking and payment services should be limited to those exchanges and products that meet accepted high standards, Mr Carstens said.

"This means 'same risk, same regulation'. And no exceptions allowed," he said."

Please click here to read the full text of the speech

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Added note: The US tries to move forward with cryptocurrency regulation

Dr. Lawrence White - How a Bitcoin System is Like and Unlike a Gold Standard

A thank you to a blog reader who pointed me to this recent article by Dr. Lawrence White of George Mason University. He offers a comparison of Bitcoin and Gold for those who may be interested in this kind of analysis. 

As he points out in the introduction, many people are making a comparison between gold and Bitcoin in one way or another. So he delves into that comparison and offers his view on how they are similar and how they are different. Below are a couple of excerpts.

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Dr. Lawrence White

Many commentators have compared Bitcoin to gold as an investment asset. “Can Bitcoin Be Gold 2.0?,” asks a portfolio analyst. “Bitcoin is increasingly set to replace gold as a hedge against uncertainty,” suggests a Cointelegraph reporter.

Economists, by contrast, are more interested in considering how a monetary system based on Bitcoin compares to a gold-standard monetary system. In a noteworthy journal article published in 2015, George Selgin characterized Bitcoin as a “synthetic commodity money.” Monetary historian Warren Weber in 2016 released an interesting Bank of Canada working paper entitled “A Bitcoin Standard: Lessons from the Gold Standard,” which analyzes a hypothetical international Bitcoin-based monetary system on the supposition that “the Bitcoin standard would closely resemble the gold standard” of the pre-WWI era. More recently, University of Chicago economist John Cochrane in a blog post has characterized Bitcoin as “an electronic version of gold.”

In what important respects are the Bitcoin system and a gold standard similar? In what other important respects are they different?"  . . . . .  read here for his answers

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My added comments: I always try to point out that Dr. Lawrence (Larry) White are not related in any way that I know of even though we share the same name. Dr. White has a PhD in Economics from UCLA and is a highly respected contributor to economic thought.

Nomi Prins Offers Her Outlook for 2018

Nomi Prins has issued her outlook for 2018. She sees some potential triggers for systemic instability out there to keep an eye on. For the most part, her analysis is in line with what we have been reporting here on a variety of the issues she talks about. Below are a few excerpts.

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"In last year’s roadmap, I forecast that 2017 would end with gold prices up and the dollar index down, both of which happened.  I underestimated the number of Fed hikes by one hike, but globally, average short term rates have remained around zero. That will be a core pattern throughout 2018.

Central banks may tweak a few rates here and there, announce some tapering due to “economic growth”, or deflect attention to fiscal policy, but the entire financial and capital markets system rests on the strategies, co-dependencies and cheap money policies of central banks.  The bond markets will feel the heat of any tightening shift or fears of one, while the stock market will continue to rush ahead on the reality of cheap money supply until debt problems tug at the equity markets and take them down."   ..... read more here

. . . . .

Here are her thoughts on cryptocurrencies and central banks

8)  Cryptomania Grips More Tightly

As for Bitcoin, despite its predisposition to being a Ponzi scheme, it should rise (and sustain its high degree of volatility) through 2018 for a few reasons. First, many funds have been green lighted to get involved in the second half of 2018 and ETF’s are on the horizon, albeit with a plethora of surrounding problems and regulatory hesitations. Second, futures exchange activity will broaden the market. Third, establishment banks like Goldman Sachs have announced plans to set up crypto-trading desks and promoted the possibility of bitcoin becoming a legitimate global currency.

There will be growth of the number and diversity of exchanges beyond Coinbase in the manner of PayPal which is already a player in that space, as well as for Coinbase itself. Expect the start of many payment exchanges that can process both regular currencies and cryptocurrency transactions ala the dot com bubble, rendering the idea of crypto-independence more and more fuzzy.

Conversations amongst the financial elite at G7 gatherings and other similar forums will encapsulate more crypto focus. Central banks will ultimately create or utilize some elements of crypto currencies for themselves, and adopt ways to regulate the market, as will regulatory agencies that will focus more on crypto than regular banking activities (both need that monitoring to protect people.)  Meanwhile, there will be more buying of cheaper crypto currencies (or assets as I consider them) like Litecoin and Ripple. The fight between those that believe in crypto’s decentralized nature will hit a wall of resistance from banks and central banks, but that fight might take years.   . . . .  read full article here

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Added notes: Wall Street on Parade reviews her new book (Collusion) in this article. In this new interview with Greg Hunter, she says investors should look at silver in 2018. Interestingly, Jim Rickards also touted silver recently in this article.

Bitcoin? BlockChain? Hyperledger? Hashgraph?

I have noted here previously that trying to cover all the moving parts in terms of things that might impact the global monetary system has become much more complicated than I ever imagined when I started this blog. This post is going to be part tongue in cheek (for some comic relief) and part serious in trying to be educational. 

By now a majority of people you know have probably at least heard of Bitcoin because the the enormous move up in its price per coin in 2017. That has vaulted Bitcoin (and to a lesser extent blockchain ledger technology) into more mainstream media reports so that now both mainstream and alternative media cover it a lot.

But most people don't have much depth of understanding because the technologies behind all this are somewhat complex and require a lot of determined effort to learn in very much detail. One economist I hear from now and then whose views I value greatly sent me this video which I will use for the humorous part of this discussion. I suspect a lot of people can relate to it.

But seriously, all these terms can get confusing very quickly. First we have Bitcoin which is separate from the blockchain technology it runs on. But wait, all blockchain is not alike either. So, we have to figure how the different kinds of blockchain work. But wait, now we are being told in the very latest "next big thing" conversation that blockchain (all versions of it) are already obsolete because we have now have Hashgraph that will take care of everything that Bitcoin and blockchain cannot.

Let's take a breath. Is there some place where we can learn about Bitcoin, Blockchain, and Hashgraph basics that is at least possible to understand? Perhaps. Mike Maloney recently released this video on YouTube that tries to do that. It does have some good animations that can be helpful to try and understand these complex technologies.

In this video, Mike walks you through his 3 year long quest to try and understand all this. How he first thought Bitcoin/Blockchain would change the world, but then later learned of some problems they faced. Now he believes that Hashgraph might be what changes the world and explains why in the last half of this video presentation. He points out in this video that things are changing so quickly the Hashgraph technology emerged while he was in the process of making the video.

So where is all this going? I don't know and I believe we are at a point in time where no one knows where all this is going. I would encourage readers to learn as much as possible because I don't think anyone knows for sure where all this is going. 

When you dig into all this in any bit of detail and follow a variety of media sources that cover this, it becomes clear that the world is in a state of flux at this time. This new Fintech has disrupted existing paradigms and started the world on a discussion of new ideas. But there is no indication I can find that any kind of global consensus that would lead to any one new currency or technology emerging as dominant over the system we have now. I base that conclusion on the hundreds of news articles and discussions like the one in this video I try to follow and from input from people I trust as experts on these issues from around the world. One leading expert in global payment systems recently told me, "I don't think the monetary system is going to change a lot."

My conclusion at this time is that no one knows for sure how all this will turn out

First, we have to see if we get some kind of major new crisis that destabilizes the current monetary system. Without that, I believe any changes we get will be slow and incremental. If we do get a crisis, who knows who most people will believe or trust if the current system they have relied on doesn't work any more and they suffer significant personal financial loss in the process? It is clear that millions of people are already looking into a variety of alternatives (precious metals, Bitcoin, other cryptos, blockchain, hashgraph, etc).

Who they trust will be more important than what technology may or may not emerge or what kind of currency is proposed. That is the one thing I feel I have learned working on all this. The most critical thing a currency and monetary system must have is the trust of the end users. I have no idea who people are going to trust in the future, especially if a huge crisis does unfold. I suspect that whoever gets blamed for that crisis will not have much trust with the public and I don't know who they might blame for such a thing. 

Honestly, I just hope we don't have to find out. Right now, I don't think anything is really ready to step in quickly to replace our current monetary system on a global scale. Chaos seems more probable as different alternatives compete for public trust. Then again, perhaps the reality is that "the monetary system isn't going to change a lot".

Scientific American - Beyond Bitcoin - How Technology Could Fix our Broken Financial System

Here is an interesting new article appearing in Scientific American. It is written by a couple of MIT related experts (Alexander Lipton & Alex Pentland). If you have been reading this blog for any length of time, this article will probably be of interest. It is a deep dive into what has caused Bitcoin to rise to prominence and then offers a proposal on how to improve on it in the future in an effort to shore up the financial system. 

When I see articles like this, it amazes me how many of the issues we have discussed on this blog are being looked at by various serious experts. This article covers a lot ground similar to what we have talked about here for some time. Below are a couple of excerpts from the article to give you a feel for the tone. 

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"Bitcoin's promises are grand. Its proponents—mostly techno-savvy idealists and libertarians but also some criminal types—expect it to become a global currency that eventually supplants national currencies, which, in their minds, can be easily manipulated. Some enthusiasts even believe that Bitcoin is the digital version of gold, perhaps forgetting that gold gains stability both from its physical attributes and from billions of stakeholders and that in the digital world, good technologies are routinely overtaken by better ones."

. . . . .

"As the first successful decentralized digital currency, though, Bitcoin is an impressive breakthrough. The underlying technology and the philosophy of an unregulated, peer-to-peer financial system are innovative, and Bitcoin poses practical solutions to big problems. Of course, it's only one application of blockchain-based distributed ledgers. Blockchain, after all, is a technology, not a singular ideology: it should not be conflated with the driving philosophy behind Bitcoin or with the motivations of any of its current and future applications. Just as it has the potential to solve some of the existing problems of our financial system, it can be used to entrench them instead. And when you consider that a key element of power is the control of money—both existing money and future money creation—we can already peek into the Pandora's Box of moral hazards that this technology has opened.

Take the central banks of the major reserve currencies such as the U.S. Federal Reserve and the Bank of England. Trust is often associated with size—the bigger, the more trustworthy—but these players have proved such thinking to be a grave mistake. They have repeatedly chosen to make the “little guys” poorer by diluting their financial obligations through inflation, suppressing interest rates and other policies. Recently they have been testing negative interest rates and contemplating ways to get rid of cash."

. . . . 

"With that possibility in mind, our lab at the Massachusetts Institute of Technology is working on creating a digital currency suitable for large-scale transactional purposes. Called Tradecoin, it will be indelibly logged on a blockchain and anchored at all times to a basket of real-world assets such as crops, energy or minerals. Doing so will help stabilize its value and make it easier for the public to trust it. The core idea is that a broadly useful currency needs both human trust and efficient trade systems."

. . . .

"It is exciting that for the first time ever, there is the possibility of worldwide digital currencies that are largely immune to selfish policies of the rich central banks that control much of the money. Indeed, a flurry of new alternatives is likely to emerge, and a few might ultimately rise to compete with the biggest reserve currencies."   . . . .

Please click here to find the full article on Scientific American

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My added comments: My understanding of this proposal (TradeCoin) is that it would be intended to operate outside the current central bank and banking system. The authors seem to agree with many of the criticisms of those who say these institutions have failed in their mission to the public (they call them selfish and openly criticize their policies). They suggest this is why people are seeking alternatives like Bitcoin, but they don't see Bitcoin or central bank digital currencies as the answer. They go even further to suggest that a new globally usable peer to peer currency (TradeCoin) is needed to restore public trust and a sense of fairness. They say it needs to be asset backed as well to gain public trust.

We can add this as yet another attempt to offer an alternative to the present monetary and financial system. This is a serious article written by MIT related experts.

What this seems to suggest to me is that a lot of people are uneasy with the present monetary and financial system and think it needs to be reformed or replaced. That seems to be where the agreement ends. After that, there seem to be almost endless proposals now on what those reforms should be or in some cases what a completely new system should look like.

The reaction I have seen from experts I trust to this Scientific American article is varied. The consensus seems to be that while something like this might be yet another alternative people could consider, the advantages of legal tender currencies issued by central banks are not likely to be easily overcome by any kind of privately issued currency or token. Only time is going to tell us how all this will shake out.

I cannot possibly even venture a guess as to where all this is heading. Despite covering this now for around four years and seeing lots of potential reforms and replacements discussed, there does not appear to be any kind of consensus forming for actually changing things and the present system just continues to soldier on far longer than many people thought possible. We need to hope we don't have another major global financial crisis because it sure does not look like any kind of replacement system is anywhere close to being agreed upon or ready to actually implement by the existing financial and banking institutions. 

Bitcoin exists outside the current banking system, but is unable to handle the huge volumes required for daily transactions even if people did want to turn to that option. As things stand today, it is not a viable option for a global payments system needing to handle millions of transactions per hour and the electric power requirements to do that are off the charts.

Technology to try and make Bitcoin (and gold for that matter) more easily used in transactions is in its infancy at this time and not widely understood by the public or widely available yet. I continue to believe that without some kind of major new financial crisis, most people will probably continue to maintain trust in the existing system of national currencies issued by central banks with the US dollar remaining as the global reserve currency for now. Changes to that paradigm will likely unfold gradually absent a crisis to speed things up. (we discussed this recently in this article)

All we can do here is try to stay informed and report what is actually happening as best we can. One thing I am sure of. What actually happens is what matters to regular people trying to make personal financial decisions. Trying to figure out what that will be is another thing altogether.

Bitcoin Followup - Bloomberg Article on Bitcoin "Whales"

In our earlier article on Bitcoin, we noted that trying to cover it is somewhat complicated and that there are a number of factors to consider in trying to analyze it objectively. 

In this Bloomberg article, they point out yet another one. According to the article it seems that 40% of the Bitcoins in existence may be owned by around 1,000 users. Is that good or bad? We'll leave it up to readers to decide for themselves. Below are a couple of excepts from the Bloomberg article.

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"About 40 percent of bitcoin is held by perhaps 1,000 users; at current prices, each may want to sell about half of his or her holdings, says Aaron Brown, former managing director and head of financial markets research at AQR Capital Management. (Brown is a contributor to the Bloomberg Prophets online column.) What’s more, the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market."

. . . . .

“I believe that it’s common sense that these whales that own so much bitcoin and bitcoin cash, they don’t want to destroy either one,” says Sebastian Kinsman, who lives in Prague and trades coins. But as prices go through the roof, that calculation might change. 

                       Please click here to read the full article on Bloomberg

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Added notes: If you want an easy place to track the price of Bitcoin alongside other things like gold, oil, and the Dow, I have a page setup on the blog to do that here. I added a quote for Stellar Lumens to the page because Stellar was part of the partnership between IBM and KlickEx that we covered here earlier this year. Stellar Lumens have also had a significant increase in price since that news was announced.

In our previous article on Bitcoin we noted that one obstacle to Bitcoin becoming more commonly used in regular commerce are the extra steps involved in acquiring it and trying to spend it easily. Most everyone who wishes to become involved with Bitcoin will do so by joining a coin exchange first (one of extra steps involved). Coinbase is one of the largest of these types of exchanges. Recently, they alerted their customers that due to increased volume, transactions to buy and sell may be delayed. Here is the information recently put out by Coinbase on this. Here is an article on Yahoo Finance that talks about this issue.

One last note. Readers may find this 25 minute audio interview with Keith Neumeyer of interest. He is the CEO of a major silver mining company and talks a bit about Bitcoin in relation to gold and silver. 

Is There a Path for Bitcoin to Go Mainstream?

Trying to cover Bitcoin is a bit like trying to cover gold in some respects. People that are really into the topic tend to get pretty emotional about it at times. Here, we just try to provide the most accurate information we can without any kind of agenda attached to the information.

In the case of Bitcoin, we have people who are enthusiastic supporters and others who are enthusiastic detractors. When they debate the future of Bitcoin, they can get quite passionate (see links below on the electricity consumption debate). In this article we will examine whether Bitcoin has realistic path for mainstream adoption as an alternative payment system to the existing legal tender currency based payment system.

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First, lets examine where things stand today. Currently, Bitcoin is still in the "early adoption" phase of its life cycle. It has seen strong growth in both its price per coin and also in the number of people who own it, especially in the last couple of years (this chart shows the upwward trend in blockchain wallet users which of course indicates a strong increase in Bitcoin and other cryptocurrencies). The price per Bitcoin has seen explosive growth higher as well with some normal market corrections along the way. 

While this growth trend is impressive, Bitcoin is still far from a payment system that is in use in the mainstream of daily commerce. I believe some reasons for that are:

- it's new and somewhat confusing to many people who are familiar with existing payment systems like debit cards, credit cards, checks, cash, etc. that already meet most people's needs adequately

- it has been somewhat awkward to obtain Bitcoin and also to spend it easily for most people. You have go through extra steps that most people don't see any need for

- the blockchain ledger system that Bitcoin runs on has scalability issues that have not yet been resolved to allow for the huge volumes of transactions per minute a real payment system must be able to support if hundreds of millions of people are going to use it daily

- most merchants don't accept Bitcoin for payment even though some do and there is some incremental growth in those that do over time.

- Bitcoin is not legal tender and there is no official institution that stands behind it. While many Bitcoin proponents like it just because it operates outside the official banking system, for now most people are not comforted by that fact and still trust the banking system they have always used and are familiar with.

I am sure there others, but these are a few of the main reasons why Bitcoin is not widely used for daily commerce. If Bitcoin someday managed to attract 150 million users, that would still only be 2% of the global population. In contrast 95%+ of the global population uses various legal tender currencies all over the world every day. For that matter, I could probably estimate that 20-25% of the global population (1.5 to 2 billion people) probably owns some gold. Gold is another form of money to some people historically and many more people globally are familiar with gold being used that way than Bitcoin.

Given the above information, is there a path for Bitcoin to Go Mainstream? I believe the answer to this question depends upon the answers to some other questions.

- Will we see the existing banking and monetary system fail at some point in the future? If not, why would most people search for alternatives to what they use now and like just fine?

- If the present system does fail, what alternatives will emerge to challenge the present system which is based on legal tender fiat currencies? History suggests gold (and silver) will be a contender. Bitcoin is in the process right now of trying to gain acceptance as another viable alternative.

- If Bitcoin can emerge as a mainstream option, will there be an "easy to use" system in place for people to acquire it and spend it as they are used to doing now with legal tender currencies?

- Can Bitcoin resolve the problem the blockchain has in handling large volumes of transactions? 

I cannot answer all the above questions because I don't know what choices people will make under the different assumptions presented. However, in regards to the last question, we should watch to what happens with DragonCard Visa. It will launch in the UK and will offer people a much easier way to utilize Bitcoin (and other cryptocurrencies) more like regular money. Engadget.com has this to say about DragonCard Visa:

"With Bitcoin trading at all time high, investors are working out whether it's best to sit on their stockpile or make the most of it while they can. For those wishing to utilise their investment, opportunities can be limited, with only a small number of big companies currently supporting cryptocurrency transactions. London Block Exchange (LBX) wants to change that. It's launching a new Visa debit card that will let users spend their Bitcoin (and other digital currencies) anywhere across the UK."

This concept is very similar in the way it will work to Glint (which we covered here) which seeks to make gold easier to hold and spend like regular money. Making anything easier to use and understand is important to encouraging it use in everyday mainstream commerce.

Both Glint and DragonCard try to solve the problem by simply allowing the users of their MasterCard or Visa to pay for things anywhere those cards are accepted just like they use their debit card or credit card now. This is a very important step forward towards more mainstream adoption. 

Both of these new payment options do charge a fee (.5% of each transaction) to do the behind the scenes real time conversion into the local legal tender fiat currency at the point of sale (the merchant gets paid in his local currency). Goldmoney offers its users the ability to buy gold or bitcoin and also offers a prepaid card that can be funded by selling gold or bitcoin held in your account for a 1% fee.

So it will be interesting to see if the fees inhibit wide scale use for payments or not. Like anything, the bigger the volume of transactions, the more likely that the fees can go lower and thereby encourage even more use. The newly offered products (Glint and DragonCard) that automatically convert to fiat currency at the point of sale are only available in the UK for now (still in startup mode) so they will need to prove they can cross over the threshold of adoption for wide scale use in daily commerce. 

Under the present circumstances, legal tender currencies have a built in advantage over competitors of any kind (gold or Bitcoin) because they are universally accepted for payment and supported by official institutions that most people trust.

What we need to watch over time is to see if these alternative payment systems can overcome the advantages of legal tender currencies and especially if something happens to shake public trust in the existing system. 

My own guess is that absent a new major crisis that undermines the existing system, things will just rock along without a major sea change in the way people pay for things. Alternatives like gold and Bitcoin can gain some market share based on new technology that makes them easier to use for most people. But that process likely happens gradually over an extended period of time. 

In the crisis scenario that truly undermines public confidence in the present system, all bets are off. Both gold and Bitcoin are poised to benefit dramatically under that scenario. Now they both have ways to make it easier for the general public to own them and spend them in ways they are familiar with. That could lead to a realistic path for more mainstream adoption for either or both of these alternatives.
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Added notes:

For those interested in views on Bitcoin coming from alternative media sources, you may wish to listen to this discussion about the potential for Bitcoin vs. Gold in the future:

In the Youtube discussion just above, included is a debate on how much electricity is required to keep Bitcoin operating and if that will become a major obstacle for Bitcoin in the future. Both sides can throw out a lot of data in an effort to try and support their view. Below are links to just 3 articles that will give you an example of this debate:

Bitcoin on track to consume the entire electricity supply by 2020

(Bitcoin electricity consumption data cited in the article linked just above)

Opposing view article suggesting the Bitcoin electricity usage claims are "sensationalized"

When I see all this my head tends to explode and I have to ask:

How is the average person supposed to have any idea what the correct information is on all this? It boggles my mind to think that we have come to a point where in order to try and stay on top of all the changing technology that MIGHT impact our monetary system (or might not), now you must somehow become an expert in the dynamics of energy consumption. 

The only thoughts I can offer on Bitcoin (not blockchain, but Bitcoin) at this time are:

- we cannot dismiss it completely as a factor for major impact in the future no matter how many obstacles it has to overcome. People did that with Donald Trump and look how that turned out. People have proclaimed Bitcoin would die several times now and have been proven wrong so far. Bitcoin wallet holders increased substantially in 2017.

- in my view, the thing to watch carefully with Bitcoin is whether or not it can achieve a critical point of mass adoption by enough people to be viewed as a true alternative to the existing currency system. Will something like DragonCard Visa be what makes that possible?

- if Bitcoin cannot become a viable alternative payments system, can it still become a viable alternative for storing wealth long term (more like people have viewed gold)? Does a younger generation see Bitcoin as their new version of gold?

- will Bitcoin end up like a Ponzi scheme as many detractors predict? Will the "early adopters have a chance to profit, but the "late arrivers" be left holding the bag? 

One thing I know. Bitcoin is like gold in this regard. There are people for and against it that are very passionate and vocal in their views on it one way or the other. More and more people are paying attention to it and there is no end to the number of people trying to predict its future. Central banks prefer to ignore it, but are finding that harder to do as more people are attracted to look into it due to its huge price rise.

What all these people are really trying to do is predict how people will behave and what choices they will make in the future. Here, I just simply don't try to do that. I believe Jim Rickards complexity theory is valid and that trying to make these kinds of predictions involves too many complexities including how the "herd" may react to a crisis. I do think that anyone trying to make their own personal decisions is best served by having the most accurate information possible as input and that what actually happens is what matters. That is what I try to focus on here as best I can. I will admit I never imagined it would get this complicated when I started this blog.