Bitcoin and the contemporary state financial system (with Emily Parker, Michael Sonnenshein and Lado Okhotnikov opinions)
They say inflation is under control
A report published by the US Department of Labor on April 12, 2023 showed a moderate increase in consumer prices in the US. The index has advanced by 0.1%.
Over the 12 months up to March the consumer price index has risen by 5.0% which is the smallest year-over-year gain since May 2021. In February the CPI rose by 6.0% on a year-over-year basis.
The cost of gasoline has fallen but high housing rent rates continue to put pressure on inflation growth. Although remained high the rental prices have been rising at the slowest pace over a year.
Food prices have not changed on average. However it has become easier for families to buy food.
Service price inflation has shown signs of slowing down. Services have remained unchanged after 0.1% rise in the previous month.
Prices for basic commodities have risen by 0.2% after they had remained unchanged in February.
Prices for clothing and new cars have risen but those for used cars and trucks have continued to decline.
Currently the inflation growth has slowed down according to the report. President Joe Biden said “hard-working Americans have been given a longer respite.” Inflation for all the indicators remains more than double the FRS’ 2% target.
“Inflation is still too hot for the FRS”, said Sarah House, senior economist at Wells Fargo in Charlotte, North Carolina. “However, there are predictive signs pointing to a further slowdown in inflation in the coming months.”
Link between cryptocurrency and inflation
Inflation is the Achilles’ heel of modern fiat settlement systems. Let’s evaluate how big of a problem inflation is for digital financial instruments.
Since US President Richard Nixon effectively ended on August 15, 1971 the Bretton Woods agreement of 1944 the dollar has lost its reliance on gold. But it has not ceased to be the main world currency. The dollar has become a security which validity and purchasing power are regulated by FRS directives and also by banks through fractional reserve banking.
The Jamaican monetary system created by the Agreement of the countries – members of the International Monetary Fund (IMF) – signed in 1976 in Kingston (Jamaica) officially demonetized gold. Currencies lost their gold content. Gold has become a usual commodity. Central banks were able to sell and buy gold at the market price. This was the beginning of the end of traditional (fiat) money.
Cryptocurrency was created as digital money with the properties of gold. And it continues to provide its own properties: limited emission size and halving. Can bitcoin be called digital gold and used as a means of accumulating and protecting assets from inflation?
Not at the moment. There are several reasons for it:
- First of all, this is the volatility of the bitcoin rate.
- Low penetration of the coin into the economy as a payment means.
- High level of speculative behavior of market participants.
We can generalize and say that bitcoin has not yet matured. And it will be possible to talk about bitcoin as digital gold closer to the issue end. Also after quantum computers become widespread like silicon ones are now.
And yet buyers are increasingly using cryptocurrencies as a means of payment. Because it is convenient – the transfer speed and the commission size please users. More and more online stores and even simple street outlets accept payment in cryptocurrency. In addition bitcoin turns into fiat currency and vice versa with extraordinary ease.
Inflation means rising prices. Rising prices reduce demand and slow down the economy. Of course inflation affects bitcoin in this sense – buyers spend less including cryptocurrencies. But inflation in a particular state does not affect the bitcoin purchasing power. In this sense bitcoin wins inflation.
The state impact on cryptocurrency
The financial system is one of the main control levers. With its help the state regulates almost everything. Everything that is not controlled by money can be controlled by force. But in the end the law enforcement agencies also have to pay.
Therefore it is extremely important for the state to keep everything related to finance in its hands: money issue, control over payments and transfers and the behavior of prices for basic goods. If someone violates the monopoly on the of the state’s finance management the state finds and neutralizes the troublemaker rather quickly.
However, not this time. Bitcoin does not have an issuing center. It does not have a control center. It’s just a computer program that runs simultaneously on tens of thousands of private computers around the world. Therefore, the state is not in a position to act straightforwardly in this situation.
It acts within its powers and the last century’s technologies because it can’t afford anything else. All that the state can do is attempts to make the cryptocurrency flow transparent to it. This is a control at the surveillance level for each exchange transaction. These are the bans on those projects that Gary Gensler and his entourage personally did not like – repressive use of the law and arresting unsympathetic SEC people for weak and far-fetched motives.
Conclusion: governments will continue to cause harm
Neither a single bill nor a single government decision has ever been aimed at improving, simplifying, making life and operations more comfortable for participants in the cryptocurrency market – to reduce their risks or raise their earnings. No, it has always been about control and prohibitions and never about creating a comfortable working infrastructure.
The figure of the Securities and Exchange Commission (SEC) chairman Gary Gensler has been mentioned nominally here. The next chairman will play the executioner’s role just as neatly as Gensler. The White House in its release on mitigation of cryptocurrency risks clearly indicated its negative attitude towards cryptocurrency projects. Therefore one should not expect states to increase their loyalty to the field of digital finance.
Or do you have other opinions?
Lado Okhotnikov, CEO of Meta-force.space, former Forsage.io*
Those who once used cryptocurrency in settlements with their customers or simply when making purchases could not help but notice how simple and fast the payment is. Traditional (fiat) payment systems have begun to adopt the methods that first appeared and were implemented specifically in digital finance, for example, payment by QR code.
Bitcoin has emerged as a supranational system. Partners in different parts of the world can do business with each other without outdated bureaucratic procedures. Cryptocurrency transfers easily across any borders.
«And I think all this happened because none of the states interfered with the development of the basic principles of the bitcoin blockchain. This is what led to the result –pure mathematics and the Internet only», – as Lado Okhotnokov said.
The problem for the states is that none of them has been able to see the future of emerging blockchain technology. This is because the state is a reactive system. It only deals with what has already happened. But it does not create tools for the future. If the states saw the potential of the blockchain at the start, they would intervene at the first stages. And most likely they would only hurt.
Therefore, I think that the states represented by their services will have to drastically reconsider the approaches to their work with new technologies. Otherwise, they will not be able to provide security to the population – that is they will become unable to do their main job. And they will only interfere with the country development.
*has taken here
Emily Parker, CoinDesk Author*
Cryptocurrencies like Bitcoin are supposed to be independent of any government. But we have now reached the point where stronger government regulation of the crypto industry is both necessary and inevitable. At the same time, the industry can not just wait for the government to act. Crypto companies must also try to better police themselves.
That starts with providing more transparency. While transparency is one of the core ideals of blockchain technology — all transactions on the Bitcoin blockchain are viewable for the world to see, for example — some crypto companies are strikingly opaque. In the case of Celsius, Vermont’s Department of Financial Regulation has said that “customers did not receive critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors.” At the very least, companies need to put much clearer warning labels on their products outlining the risks of depositing or investing with them, as well as more information about how customers’ deposits are being used.
With stronger regulation, the Celsius situation might have played out differently. Its model was essentially to take user deposits and use them for risky and illiquid investments, and users enjoyed high interest rates in return. Celsius was essentially acting as a bank, without the regulatory protections or FDIC insurance.
*has taken here
Michael Sonnenshein, CEO, Grayscale Investments*
The results from the survey, conducted by Grayscale in partnership with The Harris Poll, show that crypto presents a rare opportunity to bring voters together in support of bipartisan legislation that will benefit American investors across the board – from those who are unbanked and using crypto to access the global financial system to those who seek to have crypto in their retirement accounts.
The survey found that more than half of Americans (53%) agree that “cryptocurrencies are the future of finance,” including 59% of Democrats and 51% of Republicans. Not only do both Democrats and Republicans believe that cryptocurrency is an issue that is growing in importance, but they also agree on the need for appropriate regulation.
Nearly four in five Americans consulted (79%) feel there needs to be clearer regulation of cryptocurrency – with support from Democrats (87%) and Republicans (76%).
Finally, and perhaps most importantly, voters view cryptocurrency as a path to a more equitable financial system. The survey found that over half of adults (56%) say that innovations in finance that rely less on banks/financial intermediaries (e.g. cryptocurrencies) will create a more equitable economy (by allowing more people to access the global financial system).
*has taken here