“You will be using your own money” said Jajaa, a cute Thai coquette promoting the use of Bitcoin Cash, a newer offshoot of Bitcoin.
Jajaa is a well informed and articulate front person at the business end of an effort in Thailand to get retail merchants accepting Bitcoin Cash from their customers as a payment method. I was talking with Jajaa at a Bitcoin Cash Meetup. Jajaa arranges such Meetups regularly in Bangkok. My question was about Prompt Pay, a cashless system for retail payments in Thailand. A customer can simply scan a QR code with their smart phone, and payment for the goods and services the customer is buying will transact in seconds. Millions of Thais adopted the use of Prompt Pay in an astonishingly rapid period, about two years. Prompt Pay’s electronic payment system is now dominating credit and debit card use for retail payments in Thailand by more than a ten to one margin. I was asking Jajaa how Bitcoin Cash could compete with Prompt Pay.
Jajaa’s response reflects a general distrust present within the world of crypto currency enthusiast toward traditional currencies. The formidable power of central banks, especially the US Federal Reserve Bank, over the supply and value of money is at the heart of their distrust.
“Fiat currency is created by central banks. With Bitcoin Cash you can remove your money from their control” was Jajaa’s closing argument.
Prompt Pay is connected to the banking system. When a customer scans a Prompt Pay QR code generated by a retail merchant, cash from the customer’s bank account is electronically transferred to the merchant’s account in an amount embedded in the QR code created at the point of sale. Prompt Pay uses fiat currency.
I find the use of the word “fiat” within the crypto currency orbit amusing. A fiat currency to a crypto-head is any national currency. Dictionary Dot Com defines “fiat” as “a formal authorization or proposition, a decree”. The crypto crowd have successfully imbued the phrase “fiat currency” with a negative connotation. There are a whole lot of negative beliefs about governments and institutions abstracted into the very pejorative phrase “fiat currency” when used at a Bitcoin Cash Meetup.
I have a financially sophisticated friend in Sweden, Erik, who is a total crypto currency skeptic. He likens the recent rise in prices for Bitcoin and other digital coins to the 1637 Dutch tulip mania. Erik points out, I think accurately, that many crypto currency enthusiast are distrustful of governments and institution and tend toward conspiracy beliefs.
“Conspiracy currency” is Erik’s dialectical reply to “fiat currency”.
As for the current price of digital currencies being analogous to a 17th century bubble in the price of forward contracts for tulips, after the tulip bubble crashed, the Dutch still had pretty flowers. With Bitcoin and the like, what will be present after a crash?
A lot, I think.
In 1716, John Law, a Scottish economist and gambler, set up the first central bank for King Louis XV of France, Banque Royal. Law created debt instruments, bonds, backed by collateral. Law’s collateral was a property management scheme “The Mississippi Company”. The bonds sold like crazy. When the French bond holders discovered Mississippi was mostly swampland, pop! went the bubble. Law died penniless, exiled in Italy.
But we still have bonds.
In 1929 the New York Stock Market crashed, the first in a series of bad events causing the Great Depression. A major reason for the negative economic fallout was investors were up to their eyeballs in debt from buying stocks on margin. The market crashed and financiers were jumping out of their office windows.
But we still have margin trading.
In 2008 we experienced a severe, global economic recession triggered by collapsing prices in collateralized debt obligation (CDO) and credit default swaps (CDS). Who TF knew what these things were in 2006? I didn’t. But I had a retail business in 2007, two yoga studios in Massachusetts. Twenty-five percent of my yoga business disappeared in six weeks. I made it a point to learn what CDO’s and CDS’s are. They were at the heart of a global financial collapse. But guess what?
CDO’s and CDS still trade in billions of dollars a day.
Two weeks ago, the price of Bitcoin Cash was hovering just below $1000.00. Jajaa was promising her Twitter followers that she would dye her hair green when the price of Bitcoin Cash reached one thousand dollars. I do not know if the lass dyed her hair green or not. She would look cute with green hair. But as I write this essay on 25 May 21, the price of Bitcoin Cash is $765.00.
I am not predicting a crypto currency crash. A 23% drop in equity is not unusual in the crypto world. It is one of the reasons I do not buy crypto. Like the word fiat, crypto-heads have redefined the word volatility as well. If you hold your position, the price will eventually go back up. And until now, that has been true. In crypto-world the new definition of volatility is if the long term, running price average is on an upward slope, the heart stopping ups and downs along the way do not count.
I am currently on my second reading of “The Currency Cold War: Cash and Cryptography, Hash Rates and Hegemony” by David Birch. Mr Birch is a prolific author and speaker on topics concerning digital currency and digital identity. Strategic Reading says: “David Birch is one of a pretty small group of people who write sense about money and identity — and he is pretty much unique in doing so with wit and lightness of touch”.
I like him because he is witty, speaks with a Brit accent and uses words like envisage. In “ The Currency Cold War” David wrote about the invention of steam engines in Britain in the 17th century followed by a finance bubble. When the railroad finance bubble broke, as financial bubbles tend to do, England still had trains and tracks. When I read this renown thought leader offering an idea the same as my conclusion about my above list of finance bubbles bursting, only to leave a valuable infrastructure that served a purpose, Mr Birch validated my thinking.
Okay, tulips are not infrastructure. However, there are currently lots of political/media hubbub happening in the US around the meaning of infrastructure. Perhaps they will fit tulips in. Either way, the analogy can still be applied. I do not know where digital currencies are going. Nobody does really. I do not think they will replace national currencies. There are powerful opponents to that. Last year Facebook announced the creation of “Libra” a blockchain based coin backed by a basket of currencies to be used on Facebook’s enormous global platform. Facebook already has a giant digital marketplace where Libra could be spent. If anyone could succeed at scaling up a digital coin to compete with national currencies, Facebook could.
Facebook was met with a tsunami of global regulatory push-back that has succeeded in tamping down Facebook’s digital currency plans. While Facebook has not abandoned Libra, it is clearly on a developmental back burner compared to last year. If they do move forward, I think “Facebucks” is a better name. However, I do not think Mr Zuckerberg reads my essays.
The anonymity Ms, Jajaa with the green hair was alluding to in her admonition to me about using my own money is a myth. Until Bitcoin Cash, or any digital coin, achieves what Mark Zuckerberg’s global, eight hundred seventy billion dollar, digital behemoth with two billion people posting selfies could not accomplish: establishing widespread liquidity, crypto coin users need to trade their digi-coins to dreaded fiat currency at some point. Most holders of crypto currency purchased their crypto currency — a notation on a blockchain ledger — through an exchange such as “Coinbase”, a broker. Brokers are regulated and monitored. They require onerous identification procedures as well. If you buy or sell your crypto currency through an exchange, they will write your name down.
“Oh yeah” an evangelical crypto-head might reply. “I can transfer value peer to peer without anyone knowing the transaction ever took place”.
What my fictional blockchain evangelist is referring to are digital wallets, smart phone apps, where a user can transfer large or small amounts of their crypto currency value from one app holder to another with a QR code scan.
I have attended Meetup events for Bitcoin and Bitcoin Cash. I know, and like, a number of people here in Bangkok who are enthusiastic participants in the emerging world of blockchain technology and crypto currency. Many of them are young, energetic entrepreneurs with a desire to be involved in what may be exciting technological developments. A quirk I found present among many of these otherwise intelligent folks is their collective denial about the value of liquidity. A case in point:
Mr Guido is an investor in a handful of small establishments in Bangkok. The New Yorker Cafe is bar near the center of a busy Bangkok entertainment zone. Mr Guido is an enthusiastic promoter of Bitcoin Cash and The New Yorker Cafe accepts payment in the digital currency. When customers pay their bill using the digital currency, they often add a tip for the staff, also denoted in Bitcoin Cash. At the end of the shift, the workers in The New Yorker Cafe transfer their Bitcoin Cash tips to The New Yorker Cafe by way of a digital wallet transfer, peer to peer. The New Yorker gives them the current exchange rate in Thai Baht. Simple, right?
Sure, on a small scale.
The head barmaid at the New Yorker Cafe is a Filipina. The barmaid sends money to her family in The Philippines every month. She uses MoneyGram or Western Union. It is an annoying task to remit money from overseas. MoneyGram requires the barmaid to show up in person with precise details of her own identity and that of the person receiving the money. Once the application and identification process are completed for the sender, MoneyGram sends the money to The Philippines. On the receiving end, there are MoneyGram locations throughout The Philippines. But our barmaid’s parents are a sixty minute ride in Jeepney to get to the closest MoneyGram office. Jeepneys are not very expensive. But they are not free. And they are uncomfortable. I would not want to sit in one for sixty minutes. And the one time I did take a ride in a Jeepney in The rural Philippines, it broke down.
Once her parents arrive at MoneyGram, if their identification, a passport or national ID card, is off by one character, a simple typo anywhere in the process, the transaction is void. To retrieve and resend the money takes another day or two of annoying bureaucratic wrangling for the sender and another two hours in a Jeepney for the parents to get their badly needed cash. And MoneyGram and Western Union are expensive, often costing as much as five percent of the transaction.
Upon learning all of this, Mr Guido uploaded and showed the barmaid how to use a digital wallet. It took less than five minutes. “Get your parents to upload the same, free, wallet and you can sent them Bitcoin Cash in seconds for pennies”.
“Wow, that’s great” replied the barmaid. “How do they turn Bitcoin Cash into Philippine Pesos”?
That lack of liquidity is where Mr Guido’s story branched off from the barmaid’s tale into something about how great it would be if overseas remittances could be done in digital currency.
Currently, trying to convert Bitcoin Cash into local currency in rural Philippines would make the barmaid’s parent’s sixty minute ride in a Jeepney look like a vacation.
There are lots and lots of smart finance people — Master of the Universe types — trying to create blockchain solutions to the barmaid’s problem. The Philippines is just one country where overseas remittances are a big part of national wealth. More the ten percent of The Philippines GDP comes from remittances. Mexico is a big receiver of overseas payments from their native sons and daughters working abroad as well. Big players like MoneyGram and Western Union have exploited these low wage earners for decades, charging them onerous rates and using bureaucratic tactics to take advantage of “the float”, the time the customer’s money is in the banker’s custody. If a bank can sit on a transaction for twenty-four hours, that represents funds available for an overnight loan — commercial paper — paying the bank 2.5%, more than a savings account gets in a year.
Our intrepid Masters and Mistresses of the Universe are up against formidable, intrenched competition. But the forces of creation for cheap, global micro payments are not like Mr Zuckerberg and Facebucks competing directly with central banks. The current players in cross border money transfers are privately held banks and their support systems. They are fair game, sort of; they have an incumbent advantage. However, from my small window into that world, the upstarts trying to break into the realm of international money transfers are serious, experienced people from the world of international banking. And the blockchain infrastructure just may be the platform these pirates will storm the big banks wounded ship from.
Another promising use of digital currency is where traveler’s can avoid FOREX fees. A traveler flying in from London for a week of partying in the New Yorker Cafe can pass the foreign exchange counter at the airport, where he would be overcharged to change his Sterling into Baht. Our Brit party animal can currently find a few nice hotels in Bangkok willing to accept Bitcoin Cash. The New Yorker Cafe will happily provide him a place to play eight-ball with a friendly bar girl in a mini skirt, enjoy a few drinks with an affable crowd and pay for it all, including tips for the girls, all with crypto currency. There is a substantial niche market here. But this market will not be cornered by a blockchain based holder of value until the value is actually held. If our intrepid Brit party boy gets on a plane with one thousand pounds worth of Bitcoin Cash that is worth only seven hundred sixty five pounds when he get off the plane in Bangkok, suddenly the fees at the foreign currency exchange counter do not look so bad. And our Brit will surely not be using a crypto currency on his next trip.
The use of a crypto wallet may indeed help our Brit party boy to conceal the five hundred pounds he spent on drinks and tips from his wife while he was on his Bangkok business trip. But they are not an anonymous transactions. The way blockchain technology works is there exists a public record containing all transaction on the blockchain or ledger. Automated computer systems called miners compete to verify those transactions. The word “fungible” describes something that is anonymous and untraceable. Crypto currency is not fungible, just the opposite actually. A crypto transaction has an immutable public address. Now a peer to peer transaction does not identify the players other than by a code. But if a sophisticated entity wanted to discover who made the transaction, they could employ large scale data analysis, machine learning and pattern recognition carried out by bots. Mobile phone locations are scanned every fifty mili-seconds. While you may have shut that function off on your phone, odds are not everybody who touches a transaction will have done the same. Do not forget there are facial recognition cameras on nearly every busy corner now as well. According to David Birch, whom I quoted above, five miners in China are responsible for the lion’s share of Bitcoin mining. Better hope Xi Jinping is not after you. My point here is if you want an anonymous transaction, your best bet is cash. Cash is fungible.