The case for bitcoin (or something like it)

I can remember a few years ago that the UK pound was almost at the level of being valued at $2. Two dollars to the pound. Amazing. I brought a lot of American stuff that year. Yesterday, I bought something and it was $1.30 to the pound. Shoot. The dinner for $100 that a few years ago would have cost me £50 was now £72. Ouch!  I’ve seen this a lot over the years in my travels. Australia used to be cheap. It’s now expensive. Europe used to be expensive and then became cheap, but it’s getting more expensive again since we voted to Brexit.

Currency fluctuations are something that batter everyone, based upon the stability of their economies. My South African friends used to get a decent rate to the Rand until President Zuma messed up the country. As for Zimbabwe, well. Zimbabwe now trades mobile minutes as currency along with US dollars, ever since the national currency went into meltdown. Right now, Venezuela looks like it’s doing a Zimbabwe.

Image from Zero Hedge

So what does this mean?

Well, many of us look at dollars, euros, pounds, yen, yuan as being of great value. But they’re not. These currencies are all useless. They’re just fictions. They are made up by governments to be of value and, because we believe in governments, they work. As long as the government works, the currency works. The Zimbabwe Dollar and the Venezuelan Bolivar are only imploding because their governments stopped working effectively. Other countries stopped believing in their governments’ abilities to run the country, and their currencies imploded.

This is what feels very close to home at the moment. Our country voted to #Brexit, and the guys leading the campaign to Leave all left. The left the rest of the people with no plan. With no plan, there is no confidence and with no confidence the currency implodes.

Image from ExchangeRate.org

What happens when money stops working?  We find alternatives to trade. Gold, oil, mobile minutes, comic books, beads, food. Anything that has a value that is stable when currencies are unstable.

In many markets, when currency stops working, people are now also turning to bitcoin. We saw this in Crete when the central bank seized citizens’ savings and others are thinking, like me, that the Brexit vote could be a gift to bitcoin.

It won’t be of course, because bitcoin has too many faults – lack of scalability, cost of processing, trust in structure, challenge of acceptance, understanding of consumers and so on – but it may be the prototype for something far more acceptable in the future. A little bit like the internet before Tim Berners-Lee, bitcoin sits in its own technical basket of geekiness that is waiting for someone, anyone, to break through. Maybe it will be Circle or maybe it will be Ethereum – oh no, the DAO hack  – and I’m pretty sure there will be a breakthrough in the future whereby some cryptocurrency becomes a standardised internet exchange of value.

This is the dystopian vision of Lionel Shriver, author and visionary, in her new book *The Mandibles, 2029-2047.*The book is a fairly depressing vision of the future in which the American Empire is on the skids, US government debt is astronomical, the dollar is in free fall and being battered by a newly-created international reserve currency, the bancor. In response, the US government confiscates all the gold in the country, and American citizens are forbidden to take more than $100 out of the US.

Likely?  Probably not at the moment, looking at what China is doing, but the book intrigued me for the idea of the bancor, the envisaged currency of the future. The bancor is a cryptocurrency based upon a basket of fiat currencies.

As*The New Yorker*describes it, America’s economic collapse is “set in motion by the introduction of the bancor, a new global reserve currency meant to replace the dollar on the international market and backed by a coalition of countries led by Russia’s ruler-for-life, Vladimir Putin. Furious, President Alvarado, America’s first Mexican-born head of state, announces that the U.S. will default on its loans. The Fed goes into overdrive, printing new money to cover its debts. In short order, a greenback is as worthless as a Weimar cigarette rolled with a fifty-billion-mark note. Hard-earned savings go up in smoke. A meagre cabbage costs thirty dollars one week, forty the next, and that’s when there’s still cabbage to buy. So long, superpower nation. Hello, hyperinflation.”

For me, the bancor is bitcoin 4.0. A design upon a design that gradually makes the faults of bitcoin 1.0 to be wrinkled away until we do have a trusted digital currency. Bearing in mind what’s happening in Venezuela and Britain right now, maybe that wouldn’t be such a bad thing.

Chris Skinner is Chair of the European networking forum: the Financial Services Club. He is best known as an independent commentator on Fintech through his blog, and as author of the best selling book Digital Bank and its new sequel ValueWeb.