Crypto currencies and real (fiat) money

The technical term for real or physical money is fiat money. Fiat in this case derives from Latin and means “let it become” or “it will become”: money without intrinsic value that is used as money because of government decree.

Fiat money is physical money (paper money and coins), while so-called representative money is something that represents intent to pay the money such as a check. Fiat money is backed by the government, and representative money can be backed by different things, e.g. by the money in a bank account, like a personal check. Without any backing, both fiat and representative money would be worthless. In fact, every US Dollar in circulation is backed only by “the full faith and credit of the United States”, and has no inherent or intrinsic value whatsoever. Then, there is commodity money that is created from a good, often a precious metal such as gold or silver. Unlike fiat or representative money, commodity money has uses other than as a medium of exchange.

Main differences between fiat currency and crypto currency
Bitcoin, the most popular crypto currency in the world as of March 2017, has a fixed supply of 21 million coins, beyond which no more coins can ever be issued. That gives all bitcoins in circulation some form of value at any time, with the potential to increase in value over time. Until 2140 all 21 million Bitcoins will be mined.

Back in 2010, Florida programmer Laszlo Hanyecz asked someone into accepting the 10,000 Bitcoins he’d ‘mined’ on his computer in exchange for two pizzas from Papa John’s.  He got his two pies for $30 of literally found money. In March, 2017, Laszlo Hanyecz could exchange his 10,000 Bitcoins for $10 million at one of the crypto currency exchanges none of which existed 7 years ago.

Speaking of generating new Bitcoins, there are no institutions ‘printing’ additional funds. The only way to bring additional coins in circulation is through a complex process called ‘mining’. As a reward for bringing new coins in circulation, Bitcoin ‘miners’ receive the privilege of being able to spend these coins first.

Until the last Bitcoin is mined, anyone in the world can participate in the mining process.  There is no approval process to go through, as Bitcoin is so-called public blockchain welcoming people from all over the world to participate. All funds are controlled by the people active in this ecosystem, creating a decentralized system, or blockchain. Bitcoin has no single point-of-failure, making this blockchain network far more secure and completely tamper-proof. Unlike fiat currency, where one institution – a central bank – is responsible for controlling money supply, Bitcoin is consumer driven.  Then, Bitcoin has multiple points of distribution, as the mining process takes place all over the world. In March, 2017, there are more than 6,000 miners, or: nodes, actively creating new Bitcoins. Lastly, Bitcoins are typically held in wallets – as fiat money is. But a Bitcoin wallet is a digital wallet, represented by an app on a mobile phone or another kind of computer.

Bitcoin is not the only crypto currency. As of March, 2017, there are 755 different crypto currencies with a total merket capitalisation of roughly $25 billion. However, there are only 9 currencies with a market cap above $100 million, with Bitcoin ($16 billion) and Ether ($4.5 billion) being the only ones with a market cap in the billions.

List of Top 10 Crypto Currencies Market Cap (March 2017)


Blockchain and Digital Tokens

Blockchain and digital tokens deliberately waste storage, which is cheap, to create something new that is valuable: virtual continuity. Continuity is a universal property of the physical world. If I pass an object behind my back, we can be reasonably sure that what reappears in my left hand is what disappeared from my right.

Continuity permits identity of both things and people; it permits property because a continuously identified thing can be owned by a continuously identifiable person. It therefore permits transactions—transfers of property. It permits trust. Continuity is not sufficient for property and contracts (you also need law), but it is necessary.

And the blockchain guarantees inheritance: the digital token used to perform transactions in the later transaction Y is the only “child” of transaction X. The coin cannot be spent twice – the double-spend problem has been solved.  This virtual continuity enables

  • digital identity
  • ownership
  • transactions, and
  • trust, and
  • contracts and markets,

among parties with no prior relationship and without intermediaries.

Virtual continuity leads to one final symmetry. Recent technology waves—notably the Internet of Things, the proliferation of smart mobile devices, and augmented reality—directly endow physical objects with information and intelligence: they make the real virtual. The technologies of token and blockchain, conversely, endow data with continuity: they make the virtual real. When the real and the virtual converge, it is as if our world and our map of the world become the same thing.

This article by  Philip Evans outlines how the economics of transaction costs and trust could be reshaped by tokens and blockchains and by the stacked architecture on which they are built.
Featured image by BCG

Bitcoin: A Primer for Policymakers

This plain language guide by Jerry Brito and Andrea Castillo describes how the digital currency works and addresses many of the common misconceptions about it. In this primer, the authors describe how the digital currency works and address many of the common misconceptions about it. They also analyze current laws and regulations that may already cover digital currencies and warn against preemptively placing regulatory restrictions on Bitcoin that could stifle the new technology before it has a chance to evolve.

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How lawmakers can protect digital currency consumers without harming innovation

In their March 2017 report State Digital Currency Principles and Framework, Peter van Valkenburgh and Jerry Brito offer model language for a sui generis statute or implementing regulation to States that have begun to look at how digital currencies, such as Bitcoin, and the businesses that utilize them to provide consumer products, interact with money transmission and consumer protection policy.

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