Blockchain And Cryptocurrency Success: Updating Our Monetary System

in #leofinance2 months ago

Many miss what blockchain and cryptocurrency are doing. The reason for this is they do not truly understand how the monetary system works. It is something many think they understand, based upon what they were taught in Economics class or what they hear on the financial media.

The reality is that we are dealing with something completely different. For example, many talk about the idea of a cashless monetary system like it is something novel. The reality is we were dealing with this for more than 100 years.

A lot of this stuff is rather mundane and boring. After all, who wants to read through reams of FOMC meeting minutes to figure out what the Fed knows and, more importantly, does not know? Nevertheless, by pulling back the curtain we see a total understanding of what is taking place.

Before going any further, do you know what our monetary system is? Have you ever thought about it?

The answers we get would be varied. The reality is few ever ponder what the monetary system truly is. For that reason we will delve into it, thus showing how blockchain and cryptocurrency are the next iteration.

Our monetary system is nothing more than the combination of accounting and communications. When those view the discuss through this lens, we can see how this all tied together.

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Accounting

Certainly this is not a very exciting topic to many. However, it is vital to grasp the role this plays in our monetary system.

In the past we discussed things such as the Repo market. While this is mysterious to many, it is really just an accounting system. Nothing is ever physically exchanged. In fact, the market doesn't even contain currency. Instead, it uses other forms of money that the banking system created.

Even your checking account is nothing more than accounting. What we are dealing with is balance sheet banking.

For example, when you write a check, to say the landlord, the money is moved from your account to that individual's. This is sensible and something most are aware of. However, this is not settled yet since the banks need to adjust their reserve requirements. Since one bank now has more on deposit while the other less, the reserves have to be worked out.

Naturally, there is more than just one transaction and banks settle on a net basis. That means the transfers are all totaled up and only the difference paid. Of course, these entities do not use legal tender to settle. There are no armored trucks full of cash moving USD from Bank of America to Well Fargo. Instead, they simply move reserves, another accounting based asset.

When we delve into the wholesale banking (Eurodollar) system, we see the same thing, but on steroids. In this arena there is no cash. It is all money that is used by the banking system for lending, collateralizing, remittance, and cross-border payments. In fact, the USD is only present as a unit of account. Eurodollars, these days, contain very few dollars.

It is all ledger based, i.e. accounting.

Communications

Have you ever wondered why, when the US and its allies decides to sanction a country, it threatens to kick them off the SWIFT network? Why would this matter if SWIFT is not a settlement system?

The reason this is the case is because SWIFT is a messaging system. It is nothing no different than KIK or Telegram. Here is where we see the communication aspect comes into play.

It is rather simple really. How does one know where things are on the ledger (accounting) if there are no messages detailing what is moving where? It is why communications is key.

Over the last century, different communication networks were built out, providing the different aspects of the monetary system with ways to interact. This provides both domestic and international banking with what it needs. When understanding this, it is easy to see why the international system lags the US domestic banking system. The latter has a more advanced communication system than the former. Globally, some countries still lag behind.

The monetary system in the US is undergoing a major change right now. There are major upgrades taking place with Fedwire which will be completed in 2023. One of the benefits from this is that it will offer instant settlements.

A major upgrade is possible due to the advancements in computer networks. This is another key piece to our modern monetary systems.

Blockchain And Cryptocurrency

What is blockchain? Basically, it is distributed ledger technology. Hence, we see the complete monetary system in this single technology.

Blockchain is a ledger. It primarily handles the accounting of transactions. When money is moved from one wallet to the next, the system performs the task and notes the move in an immutable ledger. With cryptocurrency, the transaction is settled once the blockchain is fully validated.

With permissionless blockchains, the money is not USD, EURO, or some other form of fiat currency. Instead, a cryptocurrency(s) are tied to the system which is the medium of exchange and carries the store of value. For example, on Hive, there are HBD and HIVE. When one sends HBD to another, that is what is moved. The blockchain doesn't handle USD or EURO. Instead, people have the choice to exchange HIVE or HBD.

This is only going to enhance the massive economic potential of cryptocurrency. We are going to see growth like we never saw before. This is a topic we will cover in a future article.

We are dealing with something so powerful that even the Bank of International Settlements (BIS) is looking at it.

The difference is a blockchain system that is controlled by the international banking system versus ones that are not.

By being constructed online, blockchain is a computer network. Here is where we see how it is accounting and communications rolled into one.

Or, another way of looking at it, is that we are dealing with a version of our existing monetary system that is not controlled by banks.

Why Cryptocurrency Will Succeed

There is a reason why cryptocurrency will succeed. It stems from a problem with the existing monetary system.

If you asked 100 people what the issue is with how things are, nobody would get this right. It is not something you see discussed. However, it is one of the major downfalls with the wholesale banking system.

Money is created by the commercial banks. This is true whether we are dealing with currency like the USD, EURO or YEN. It is not central banks or governments that create those currencies. Rather, money expands when banks lend.

On the international scale, the Eurodollar system sees money created by global financial institutions. These mostly can be categorized as "derivatives". The key point to understand is money at both levels is generated by for profit institutions.

This is a problem because banks not only create the money, they are perform intermediation. In other words, they are responsible for bringing the borrowers and lenders together.

The challenge here is that intermediation, i.e. where the money ultimately is directed, will occur not only where it is most profitable but when. Instead of providing money when and where it is needed, the barometer is based upon profitability. It is why banks slow down lending when money is most needed.

Blockchain and cryptocurrency solves this. Since anyone can create money, the choice of where it goes is unlimited. No longer is it relevant for one to have the creditworthiness to get the money. Blockchains do not care. They simply follow whatever the code says.

This means that cryptocurrency projects can be created to fund whatever is desired. Profit is not the main input but, rather, network effects. If enough people are onboard, the money will have utility. Of course, without that, the project will die a death due to lack of interest.

The blockchain creates the money and people decide where to distribute it.

Simply, blockchain and cryptocurrency are a better system. It removes one of the major obstacles to the existing Eurodollar system. By having money creation and mediation separated, we have a monetary system that can direct resources to where they are needed. This is something the banking system does not indulge in.

We also have one other facet that will advances things a great deal further. This, too, will be the subject of a future article and that is based around property rights.

As we can see, the move to blockchain is not that much of a leap considering how the existing monetary system is really operates. Also, cryptocurrency simply alters who is in control of said system.

In the end, we are re-creating the reserveless, private bank money system by eliminating the banks. Here we substitute blockchain, cryptocurrency, and communities.

Hopefully we are starting to see how this all comes together.


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It does look ridiculous to see traditional market players looking at crypto same as a traditional economy.

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This is something that, all of us, is so lacking, although I cannot say. that without them, I'm less happy in the Hive)

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They are not going to give up easily.

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This is definitely a case where the human element is the key limiting factor versus the technology. It also feels like that human piece is going to take longer to adapt than tech would in other circumstances.

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Without a doubt that is how it works. Technological capabilities always outpace human embracing of it.

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Perhaps it all starts with a simple request from the son of a bank tycoon to give him a little Hive for his birthday)

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This means that cryptocurrency projects can be created to fund whatever is desired.

This is the advantages the blockchain delivers to ensure progress is guaranteed

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Yes we should see that ability as long as there are people who join in. It all comes down to the network effect, no matter what we are discussion.

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Before going any further, do you know what our monetary system is? Have you ever thought about it?

A measure to keep most people in control, and the upper 10% in luxury. As long as most people go to work for the minimum wage (or even for less than that), it is good for the so called elite.

That isnt understanding the monetary system. It is much larger than that. You are only looking at a small sliver of the entire spectrum.

This is not so much the elitist who are doing it as such. It is rather the plumbing that is in place and how exclusive it is.

That is what needs understanding and changing.

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This topic is a good one but it's not for financial and economical illiterates.

I can already see how the bankers, having read the epilogue of your post, decided to be proactive and submitted their resignations to the personnel departments of their banks). I don’t know when what you said will happen, but it looks very much like the near future.
In fact, all the Hive needs for this is to be in the right place at the right time and, like a burdock thorn, cling to the pant of the right person with a stranglehold).

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I agree that Hive is in the right place. We have some things that are still required but we are inching closer.

As for those at the banks, they are still stuck in the status quo. Many will end up losing their jobs as bank tellers are now finding out.

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Anyone who once lost a job cannot be happy that someone will lose it, but in my case, I had a blog in Hive, which in three years of unemployment gave me a positive result, they should think about their blog in advance in Hive).

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I agree. Hive is a wonderful alternative to a job. I lost mine about 3 years ago and havent looked back since. Fortunately, I had some savings to draw upon so I didnt have to tap into my crypto.

That allowed me to build it. Hopefully we see a bull in the next year so I dont have to tap too deeply.

In the meantime, I keep filling my bags.

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I'm waiting for him this year, lol, that's not going to work) in a year this bull can become tough and bad in taste)

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The bull can be elusive at times unfortunately.

We will have to see when the bear gets tired and wants to go to sleep.

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After all, we understand that a bull is a well-fed bear, and apparently, he has already eaten his big belly)

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If it is true, the economy has some points, what we must understand first before trying to change an entire system, we must teach new users the advantage of using it to safeguard our money.

That is true.

However, it is also important for the developers to understand and to create applications that can provide the abilities to do what is needed to replace what we already see out there.

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You mentioned property rights earlier on my post and here in your post, I am looking forward to reading about your post on it, always a thing or two to learn form you.

Blockchain has it all when we look at ledger and communication, so getting rid of the intermediation is what am keen on.

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Well there will still be intermediation, it just wont be the banks, ie money creators, who are doing it. That will be a massive shift.

A lot of good things happening. I am looking forward to the property rights post.

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Blockchain can be used for control, and out the privacy and fungibility of cash. CBDC will be a game changer from the control aspect.

Outside of XMR and few others, the transparency of many of the predominant blockchains can backfire at some point if decentralized blockchains continues to disrupt the status quo, especially in the era of chain analysis, KYC, and AI.

That might be true. However, data is data, whether it is financial (as in crypto) or medical records. As blockchains become more useful in other areas, a true decentralized storage system, users are going to demand some type of privacy.

Litecoin is in the process of implementing MimbleWimble. I expect to see more of it in the future.

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Blockchains are second iteration of banks with no intermediaries. Network effects are important for it to thrive because the more people use it the more valuable it becomes. No middlemen and fast transactions, that's the beauty!

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Yes and as we bore deeper into the monetary and financial system, we see how Blockchain is the ideal "plumbing" for what is already in place.

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I wonder if the Fed upgrade will do anything. I do think that the instant settlement will make things a lot easier but will the banks really provide instant settlements? I don't think they will because they like to charge extra for people to send money faster.

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They will be required to. Do not forget, the banks operate under the Fed system. They can, of course, opt out of Fedwire but then they run the risk of losing customers who do business elsewhere.

It is like commission on stock trades. Wall Street firms raked in a ton of cash for decades. Now they give the service away.

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