Exploring the idea of money and if blockchain can be better.

What is money?

Do we understand money?

May seem a silly question as we all have some money in our pockets. But what is it's actual intrinsic value? If you're stranded on a desert island, what value does it have then?

That's the thing about money, it's value depends on circumstances and trust. In the circumstances mentioned above, it probably has little value, intrinsic or otherwise. If you're stranded there's no one to exchange the money with to buy a tangible thing like food, or a service like hunting for food. If it's paper money, you might be able to start a fire with it, assuming you have something to produce a flame.

Other than that, on a desert island it's probably not as much use as say a knife. With which you can harvest some food, defend yourself, or cut supplies to build a shelter. It's only after you're rescued and brought back to civilisation that money is both useful and has a value.

Where does that value come from? Is it because money is backed by governments? The problem here is that governments tend to print more money when times are economically harsh. Not actual notes perhaps but digital notes. Is that money?

Anyone ever had foreign currency that has devalued and is only worth half as much as when you got it?

There are two main schools of thought on money. Chartalists and Metalists. Metalists are proponents of tying money to metal (or other concrete 'things' of value) - as in 'The Gold Standard' and using it as a method of exchange.

A much simpler way of thinking about it is 'bartering' - where you 'barter' money for goods or services rather than trying to find something to exchange that would provide you with what you want. After all, you may want the farmer's corn but does he want what you have, say a pair of shoes?.

Chartallists, on the other hand, see money as something that a government decrees it to be. That is, if a government decides that it will only accept acorns as money and enacts this in law, then by definition, acorns are money.
http://www.levyinstitute.org/pubs/wp_792.pdf
https://en.wikipedia.org/wiki/Metallism

One thing they both have in common is that there must be a degree of trust by the people in that money. If not, they begin to buy other, more 'trusted' things, like gold, diamonds, land or indeed other currencies. Thereby taking cash out of circulation. In theory, I guess, if the people distrusted the money enough, they could make it obsolete.

Let's take a quick look at what we call money today. If you have cash, you can walk into a shop and buy something. You hand over the cash and, in return, you get the goods. Quite simple and easy to understand and much more efficient than bartering.

What happens though if you don't have cash on you? Well then usually you reach for your credit or debit card. How does that work though? Your salary is paid into your bank account for those lucky enough to have a bank account (39% of adults globally don't!) https://letstalkpayments.com/39-of-the-worlds-population-does-not-have-a-bank-account/

Hang on though. What constitutes the 'money' that your employer transfers to your bank account? In truth, it's a series of 1s and 0s; in effect simply computer code. You trust it though, even if you don't 'trust banks' in general.

The bank, not the government records that transaction. The bank, not the government, is who you have to trust. To further explain how money moves between banks check out this informative article https://gendal.me/2013/11/24/a-simple-explanation-of-how-money-moves-around-the-banking-system/

Another look at how money moves can be found here. http://www.npr.org/sections/money/2013/10/04/229224964/episode-489-the-invisible-plumbing-of-our-economy

It would seem then that money is already digital as well as cash based. It works because you trust the bank to record the transaction and then allow you to withdraw it or spend it via a debit card.

Trust - A necessary economic component?

It’s imperative that we trust the bank, trust it to record our credits and debits, so that we know our financial situation intimately. But do we need to trust the bank further than that? Yes, we do. Because they are the prime movers in whether the economy grows, stagnates or implodes.

What happens when banks 'misbehave'? Not always deliberately - but because their focus is on making money - not facilitating business? Then we have the subprime disaster that nearly threw the entire world into recession. This then needed the banks who caused the problem to be bailed out. Who paid for that? The taxpayer.

https://en.wikipedia.org/wiki/Subprime_mortgage_crisis
https://www.thebalance.com/mortgage-crisis-overview-315684
https://www.thebalance.com/what-caused-the-subprime-mortgage-crisis-3305696

All of this concentrates power in the hands of the few. Governments allow banks to grow to such a size that they then can't be allowed to fail - so taxpayers money is used to bail them out. What do you think happens when banks believe the idea that the government will bail them out? Do you think it makes them more or less financially responsible?

http://www.businessinsider.com/too-big-to-fail-its-happening-again-2017-1?IR=T
http://theconversation.com/feds-focus-on-too-big-to-fail-wont-save-taxpayers-from-next-bank-bailout-61884
https://www.bankingsupervision.europa.eu/press/interviews/date/2017/html/ssm.in170905.en.html

Remember that the people who run the banks are people. They suffer from the same biases, prejudices and blind spots as the rest of us. If you’re a billionaire who runs a bank and you take risks (risks that admittedly you didn’t really think were risks) then, when problems arise, the government gives you money and lets you continue doing things your way, what incentive do you have to change? Instead, isn’t it more likely that you’ll take bigger risks - secure in the knowledge that you won’t have to bear any costs if you fail?

This article is a ‘must read’ but I warn you it may make you angry when you realise the real cost of the ‘bailout’ how it came about and what’s still going on.
https://www.forbes.com/sites/mikecollins/2015/07/14/the-big-bank-bailout/#744617bc2d83

A scholarly look at the pros and cons of bank bailouts.
https://dash.harvard.edu/bitstream/handle/1/11380185/cj29n1-1.pdf

Using your debit card costs you nothing, right? It's basically the same as cash - or is it? You may think it’s like using cash for you, and don’t really care about anything else. But if there is a cost (and there is) then someone has to pay and that someone is going to be you in the long term, sometimes in the short term too.

The stages a debit card payment goes through, means that there are several separate companies involved - all of whom take a fee (surprise!). Ask yourself, will ALL merchants take that hit? Especially if you’ve spent only £2 or so? Or, will the merchant pass some or all of those fees onto you by hiking the price of the item/s you’re buying?

http://www.theukcardsassociation.org.uk/getting_started/card-payment-cycle.asp
https://www.thebalance.com/debit-or-credit-315293
https://www.merchantmaverick.com/the-true-cost-of-debit-card-transactions/

Your credit card of course works a little differently. In this scenario a bank looks at your financial situation and decides it can allow you a credit line up to a specified amount. In effect, it's saying that they believe you have the ability to pay back any money you use from that credit line. It allows you to repay that credit in monthly installments with interest, or pay off the balance without interest before your statement date.

Is there a further cost to you? Not obviously of course, especially if you pay off your debt every month and so incur no interest charges. But, just as with debit cards, there are multiple actors behind the scenes processing that transaction. All of whom take a fee, so the same question remains, who ultimately pays that fee? You do in the form of increased prices, increased by the merchant to cover the costs of taking a credit card in payment.

https://wallethub.com/edu/credit-card-transaction/25511/

Is there a better way? Looking at the ‘new’ cryptocurrencies.

It’s time to enter the world of cryptocurrencies and blockchain or distributed ledger technologies. Most people have heard of bitcoin, the first real cryptocurrency and one that is steadily gaining recognition and is being used to buy and sell goods and services.

Governments are taking bitcoin as payment which is turn increases the value of the currency. But what’s the difference between ‘digital’ fiat money and digital crypto money? This is a difficult one because the differences can be subtle or overt. Subtle in that blockchain technology is faster than traditional payment processing which doesn’t seem to affect you (but does). Overt in that it takes control away from banks and governments.

http://digitalmoneytimes.com/fiat-currency-vs-digital-currency/
https://en.wikipedia.org/wiki/Distributed_ledger
https://en.wikipedia.org/wiki/IOTA_(technology)
https://en.wikipedia.org/wiki/Consensus_(computer_science)

To try and address this, I’m going to say why it’s important to me and what I see as the main differences.

Digital Fiat Money has the same problems as physical fiat money in that governments and banks control it. Imagine you have a litre bottle half full with milk. You know the nutritional content, which is for our purposes the equivalent of value in money. Your half litre of milk won’t stretch to everyone because there’s not enough. You top the bottle up with water and so now you have a litre of ‘milk’ twice as much as when you started. Now the fluid can stretch to give some to everyone. All well and good except for the fact that each person is only getting half the nutrition (value) that they were before. That’s what happens to fiat money when governments create more of it to try and stimulate the economy.

The banks understand this. So they hoard the money instead of loaning it out to businesses so they can expand and home buyers so they can buy a home. The banks understand that the money has decreased in value (what it will buy on international markets) so they hoard it. It also makes their balance sheets look very good, doesn’t create real wealth but looks good on paper.

Fiat money then, whether digital or physical, is subject to the whims and vagaries of governments and the reckless gambling of the banks.

Cryptocurrencies on the other hand are finite. That is, like gold, there are only so many ‘coins’ and, once all of those ‘coins’ are in circulation, there are no more. Because they’re not under the control of a government or bank they can’t be increased - by a government or bank that has played fast and loose with the economy or other assets.

This decentralisation away from banks and governments is, for me, one of the strengths of cryptocurrencies. It’s the same with the underlying technology of blockchain. Think of the Equifax hacking, where the CEO hid the hacking for around 6 weeks. Yet when he left he got a cool 9 million to see him on his way! Think about that. Nine million after he hid the fact of the hack - when people’s sensitive personal data had been compromised and the hackers had 6 weeks to play with it!

Now imagine a decentralised credit scoring company (and yes there is one launching soon). Because it’s decentralised there’s no one point of entry. That means your information is much safer. Because it’s under your control, it can’t be sold to others for marketing purposes. Because it’s personal to you and follows you wherever you go, moving to a ‘bad’ address wouldn’t affect your credit score.

That to me is the strength of blockchain. Immutable, secure and transparent - all whilst also being private.