There is a lot of FUD out there regarding cryptocurrency. Is this going to be something that succeeds or will governments be able to shut it down.
Repeatedly we discuss how wholesale banking evolved and what the monetary system actually is. We do this so people understand all the nuances of what takes place along with how misleading what they were taught really is.
At best, most are ignorant to how the system operates. This includes politicians, economists, and people from the central banks. The group that is lying are the bankers. People like Jamie Dimon know exactly how it fits together. After all, he heads up one of the entities that is heavily involved.
People make a big deal about cryptocurrency being cashless. Since when did cash play an instrumental part of what is taking place? Early in the 1900s, the most common form of payment, in terms of value, was checks. This shows us how vital the ledger was to the entire monetary system.
Of course, cryptocurrency is built upon distributed ledger technology. This means it is simply an advancement of what is already in place.
Here are a few numbers:
Official FX Reserves: $12 trillion
Cross Border Bank Liabilities: $32 trillion
International Debt Securities: $23 trillion
OTC FX Forwards And Swaps: $98 trillion
Right there is $165 trillion and do you know how much cash is involved? The answer is zero. Keep in mind the daily volume of global foreign exchange transactions is $6.6 trillion and there is no cash involved.
So the idea we are dealing with a system that includes a lot of cash has long left the station.
Another accusation comes from the belief that governments are the ones who have control over money. They do not.
Here are a few numbers from the Federal Reserve.
1914:
Vault Cash: $730 million
Loan Reserves (non-physical): $266 million
Deposit Liabilities: $8.3 billion
1929:
Vault Cash: $433 million
Loan Reserves (non-physical): $2.4 billion
Deposit Liabilities: $35.9 billion
As we can see, the amount of private bank money expanded greatly during these 15 years. Of course, today, this in in the trillions. Yet people somehow believe money is not in the hands of the private sector.
This is what led Alan Greenspan, then Chair of the Federal Reserve, to make this statement in the June 2000 FOMC Meeting:
The problem is that we cannot extract from our statistical database what is true
money conceptually, either in the transactions mode or the store-of-value mode. One of the reasons, obviously, is that the proliferation of products has been so extraordinary that the true underlying mix of money in our money and near money data is continuously changing. As a consequence, while of necessity it must be the case at the end of the day that inflation has to be a monetary phenomenon, a decision to base policy on measures of money presupposes that we can locate money. And that has become an increasingly dubious proposition.
More than two decades ago, the Chair of the Fed basically admitted the Fed has no idea what money was or where to find it. This was due to the "proliferation of products". Certainly he was not talking about the offering on Amazon.
The reality he was talking about the banking system and all the different forms of private bank money that existed out there. Since that time, it only grew, albeit at a serious reduced rate since the Great Financial Crisis.
Cryptocurrency is providing the same capabilities, only without the banks.
When one understands how the true banking system works, it is easy to see where cryptocurrency can fit in. The reality is that tens of trillions in loans occur daily in the Repo market, without any cash involved. It is important to keep in mind that most of this operates outside the scope of any central bank or government.
This is not part of the Federal Reserve system. Yet it is by far the largest source of funding globally. As we can see from above, it involved more than $100 trillion dollars.
Cryptocurrency is not only a threat at the branch level, which is what most people associate with banking. This certainly is under attack and will not likely survive. However, the capabilities of cryptocurrency go much deeper.
The true threat comes from the fact that blockchain and cryptocurrency can completely alter the plumbing of the entire financial system. This is something that few are discussing. When we look at the Repo market, international debt, and FX transactions, this can all be altered by using this technology. Since the primary component of banking these days is the balance sheet (ledger), we can see how blockchain has the ability to disrupt this totally.
It is also important to mention that, with these numbers, the number of reserves included is zero. To the international banking system, reserves mean nothing. They have no ability to collateralize thus being worthless in this realm.
Central banks operate in a system based upon reserves. That is what they print. However, cryptocurrency is looking to recreate the existing reserveless, private bank money system, only minus the banks.
Remember this the next time you come across an article like this:
Do you think Nirmala Sitharaman really understands this system. According to Wikipedia, she is an Indian economist turned politician.
Let me ask, what anything that we cover regarding this subject taught to you by the Economics professors you had in school? Not likely.
The reason why almost all Economists bash cryptocurrency is because it does not fit into their models. It is also why they are dealing with outdated theories they all learned in the 1970s yet were developed between the 1930s-1950s. They simply cannot account for the shift in banking and the impact it has.
Of course, we would be remiss if we didn't mention the politicians. In the United States, what is the more common background of those in Congress? It seems the overwhelming went to law school. In other words, we have a bunch of lawyers. Do you really think they have any understanding about what bilateral Repo agreements are? Is there a chance in hell that Elizabeth Warren has any idea about this system?
The answer is self explanatory.
This is why it is senseless to buy into the FUD spread about cryptocurrency. Those who are doing it really are ignorant to how the monetary system truly operates. For this reason, their opinions have no merit whatsoever.
Jamie Dimon, and his ilk, are another story. When he speaks out, we can be assured it is from a position of knowledge. Thus, his bashing of cryptocurrency likely stems from the fact he understands the threat. If millions of people are able to create "money" in the same way the banking industry does, what need is there for them.
After all, bankers are nothing more than glorified bookkeepers anyway.
Do not buy into the cryptocurrency FUD. Instead, understand the system we are dealing with and how this is simply the next evolution in the monetary process.
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