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Like it or not, we still trust traditional finance – and fiat money

Frank Troise: crypto-currencies do not challenge the hegemony of the U.S. dollar as the world’s reserve currency.

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By Frank Troise

“…Render therefore unto Caesar the things which are Caesar’s; and unto God the things that are God’s” —Matthew 22:21

Financial luminaries Ray Dalio, Jamie Dimon and Howard Marks have made public comments regarding Bitcoin that have come under significant market criticism. Are they right? Or as established incumbents, are they protecting their base?

I want to discuss here today five variables which traders, prop desks, and hedge funds openly discuss; focusing mainly on the hegemony of the US dollar as a reserve currency.

  1. Why is there Bitcoin volatility/appreciation in the market wherein all other asset classes have seen volatility decline (hence the advent of risk premia)? The answer is simple. There are four primary investors in today’s market: the Federal Reserve, Bank of Japan, European Central Bank, and People’s Bank of China. One could easily argue that Bitcoin’s volatility, and sudden appreciation, are a consequence of a lack of central bank participation.
  2. How do we define money? As Richard Jerram, chief economist at Bank of Singapore, aptly wrote: “Money must have three characteristics: a medium of exchange, a unit of account, and a store of value. At the moment crypto-currencies fulfill none of these roles.
  3. Why do we trust money? Yuval Noah Harari in his book Sapiens defined this well by saying:
    “Money is the most universal and most efficient system of mutual trust ever devised…What created this trust was a very complex and long-term network of political, social, and economic relations. Why do I believe in the gold coin or dollar bill? Because my neighbors believe in them. And my neighbors believe in them because I believe in them. And we all believe in them because our king believes in them and demands them in taxes, and because our priest believes in them and demands them in tithes.”
  4. Will the U.S. and other sovereigns give up their status as a reserve currency? No. Anyone espousing a position against this point is politically and economically naïve. China today is leading this charge as it protects its sovereignty by banning ICOs and crypto exchanges.
  5. What are the penalties for failure? With true money (and by default taxation), the penalties are severe. While the Silk Road was a fascinating crypto-blockchain technology endeavor with a sordid business model, who ultimately paid the price? Only one individual.

The Great Financial Crisis taught us that despite whatever skepticism we may have in the financial system, we trust it; maybe because we have to.

To quote Harari again:

“Take a dollar bill and look at it carefully. You will see that it is simply a colorful piece of paper with the signature of the U.S. Secretary of the Treasury on one side, and the slogan ‘In God We Trust’ on the other. We accept the dollar in payment, because we trust in God and the U.S. Secretary of the Treasury.”

Despite my personal political misgivings today, I trust the financial system (and the U.S. military) with my children’s college savings. Can “bitcoin” provide that?

Frank Troise is head of innovation at Synpulse Singapore. The views expressed here are his own.

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Like it or not, we still trust traditional finance – and fiat money