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The triumph of fiat

Bitcoin’s bad day marks the end of its challenge to regulated money.

Image of missed target by Jack Moreh on Stockvault

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The first coins in the West were created by Lydian merchants in the fifth century BC, but almost immediately the technology was usurped by kings and turned into a machine for propaganda and seigniorage.

The true adopters of coinage, the fintech of antiquity, were the Greeks. Their word for coinage, nomisma, comes from nomos, or law.

Alexander the Great and then the Roman Empire transformed coinage into tools of the state.

In China, the other (and earlier) inventor of coins, it is likely these evolved from royal practices of gift-giving. The Qin emperor brought competing coins to heel and monopolized issuance. Late Tang Dynasty merchants in faraway Sichuan created the first bank notes – “flying checks”, they were called – but the Yuan Dynasty khans muscled in, turning cash into a means of taxation.

As DigFin editor Jame DiBiasio’s upcoming book, Cowries to Crypto, explains, the history of currency has always been tied to government, even if innovation occurs in the private sphere. Satoshi Nakamoto’s Bitcoin, released in 2009, was in some ways in keeping with this tradition.

But Bitcoin was also created specifically to keep governments out. Let the software determine the rules of exchange, accounting, and value. Cryptocurrency’s most ardent supporters wanted a world of complete freedom from any central bank or government meddling with money.

That dream died this week. Coronavirus fears caused the S&P500 Index to enter bear territory in a mere 16 days, the shortest time this has ever taken. Everything other than Treasuries and cash is tanking, including crypto.

If there was ever a time that Bitcoin and other cryptocurrencies were meant to live up to the expectation of being uncorrelated assets – if there was ever a point when the world NEEDED Bitcoin to do its job – it’s now.

It failed: on Thursday, March 12, Bitcoin lost 26% of its value. In one day.

[Update: Bitcoin has lost 40% of its value in less than 48 hours following President Donald Trump’s decision to close the U.S. to European flights.]

Crypto has always been known to be volatile, but by now, more than 10 years into Bitcoin’s life, as the most liquid currency in cryptoland, such swings can’t be brushed off as teething issues. Talk of Bitcoin serving as a reserve currency has died off since the ICO crash of 2018, but adherents hadn’t changed their minds. Now they have no argument left.

Moreover the entire crypto space has fared poorly in this general crisis. Ethereum experienced a 33% drop this week. This matters because Ethereum boasts the largest developer community in digital assets, outside of China. If projects depend on ether prices, how will they continue?

It’s also a bad day for stablecoins: MakerDAO is reportedly considering an emergency shutdown, according to Coindesk. In the immediate term this would mean automatically triggering yet another selloff of ether. But it also shows that the only reliable currency peg is one with a credible amount of reserves and a market operator such as the Hong Kong Monetary Authority ready to act. Algorithms aren’t enough.

So is this the end for crypto? Was the whole blockchain thing a mistake?

No. First of all, there are plenty of enterprise blockchain/DLT projects that are gaining steam independent of cryptocurrency. Blockchain is about networks, so it’s slow to get going, but the use cases and benefits are clear.

Even within cryptocurrency, there remains the prospect of regulated digital assets and creating a new, far more efficient financial infrastructure. But tokenization must involve income streams. Creating bullshit tokens that do nothing but trade with other bullshit tokens is no longer viable.

Although there is promise of Bitcoin or other tokens serving as an efficient means of payment, these projects may now be running short of time. Investors and potential users will demand benefits now.

Although China continues to push back its launch of a digital renminbi, it seems likely that many governments will experiment more with digital fiat. The experience of ancient coins and paper money shows that successful innovations in currency end up coopted by governments – which is fine, because money is a useful fiction backed by law to perpetuate payments and investments.

Perhaps it’s also worth noting that this story isn’t really about cryptocurrency. Gold has also had a bad week. Gold used to be considered the ultimate safe haven because it doesn’t correlate to the U.S. dollar. But gold is as arbitrary and meaningless a form of currency as Bitcoin. Our societies have taken a long time to wean ourselves off what Keynes dismissed as a “barbarous relic”. This week it looks like we’ve finally kicked the gold habit.

What’s had a good week? Treasury bonds and cash. Fiat money. Maybe fiat is also arbitrary. Its rules are made by governments and its price is influenced by central banks. But fiat is tied to nomos.

Many smart people have legitimate concerns about reckless government spending and unsustainable borrowing. The fiat world has been with us since the 1970s, coinciding with the first electronification of financial markets. It thrives in, and helps spur, a world driven by the financialization of other economic activities. Fiat isn’t “good”. But it’s here. It’s what we choose to believe in.

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The triumph of fiat