Typography

Eshima Ohashi Bridge, Japan The value of all outstanding XRPs recently surpassed that of bitcoin, hitting $300 billion or so last month. XRPs are a cryptocurrency issued by Ripple, a company that is trying to shake up the business of cross border payments. Ripple has a number of strategies for doing this, but the one that has caught people's imagination — especially as the price of XRPs rocket higher — is to have banks and other financial institutions use XRP as a 'bridging asset' for moving value across borders. The idea of using a cryptocurrency as a bridge isn't a new idea. Bitcoin remittance companies have been trying to do this for several years now, without very much success . So what do I mean by using a cryptocurrency like bitcoin or XRP as a bridge asset? Does it make any sense? To answer these questions, let's dissect a hypothetical cross border payment. Straddling two universes As users of banks and other financial institutions, we rarely think about what...

by Alex Schaefer   Most of the world's money is currently in the form of deposits created by banks. After the 2008 credit crisis, which instilled a strong suspicion of banks among the public, it became fashionable to ask what money would look like in an economy without these organizations. Burn them to the ground or shutter them, what would take their place? One vision is to pursue pure centralization: have the state monopolize all money creation, say by providing universally-available accounts at the nation's central bank. Positive Money is an example of this. Another alternative, by way of Satoshi Nakamoto, is to pursue radical decentralization: replace bank IOUs with digital commodity money in the form of bitcoin and other private cryptocoins. I'm going to provide a few historical examples that sketch out a third option for replacing banks; bills of exchange . A system underpinned by bills of exchange is capable of converting illiquid personal IOUs into money using a d...

The whippersnappers who work in the cryptocurrency domain are moving incredibly fast. As I've been saying for a while, assets like bitcoin (or stocks ) are unlikely to become popular as exchange media; they're just too damn volatile relative to incumbent fiat currencies. There's a new game in town though: stablecoin . These tokens are similar to bitcoin, but instead of bobbing wildly they have a fixed exchange rate to some other asset, say the U.S. dollar or gold. Now this is a promising idea. If a crypto-asset can perfectly mimic a U.S. dollar deposit's purchasing power and risk profile, and do so at less cost than a bank, then the monopoly that banks currently maintain in the realm of electronic payments is in trouble. Rather than owning a Bank of America deposit, consumers may prefer to hold an equivalent stablecoin that performs all the same functions while saving on storage and transaction fees. To compete, banks will either have to bribe customers with higher inte...

Recent posts by Adrian Hope Baille and Sina Motamedi have got me thinking again about the idea of the Federal Reserve (or any other central bank for that matter) adopting bitcoin technology. Here's an older post of mine on the idea, although this post will take a different tack. The bitcoin ethos enshrines the idea of a world free from the totalitarian control of central banks. So in exploring the idea of Fed-run bitcoin-style ledger, I realize that I run the risk of being cast as Darth Vader (or even *yikes* the Emperor) by bitcoin true believers. So be it . While I do empathize with the bitcoin ideal—I support freedom in banking—I rank the importance of bitcoin-as-product above bitcoin-as-philosophy . And at the moment, bitcoin is not a great product. While bitcoin has many useful features, these are all overshadowed by the fact that its price is too damn volatile for it to be be taken seriously as an exchange medium. This volatility arises because bitcoin lacks a fundamenta...

A 1795 Spanish dollar, minted in Mexico, with several chopmarks One of the most interesting things about bitcoin, ripple, and other cryptocurrencies is how they are maintained by a dispersed user base rather than some central issuing authority. These users (miners in the case of bitcoin, nodes for ripple) ensure that each "coin" is a legitimate member of the total population of cryptocoins comprising that particular ledger. They are what stand between good coin and bad coin. I've run into two historical cases of a dispersed method of policing of the quality of exchange media: the endorsement of bills of exchange and the chopmarking of silver coins. It may be worthwhile to explore these two cases. The Watchdog role The watchdog or verification function is an important one, especially in anonymous trade where the unlikelihood of a repeat meeting between buyer and seller increases the incentives to be dishonest and pass off lousy coin. Not-so-liquid goods, say sofas, are ins...

by Paul Conrad When we talk about bitcoin, one thing we need to ask ourselves is this: can worthless things circulate and be accepted in trade? If so, how? And can this state of affairs continue indefinitely? An intrinsically useless, unbacked, and costless fiat object might be accepted in trade, but only if it already has a positive price. A history of positive prices will generate sufficient expectations among potential acceptors that they will be able to trade that object on tomorrow. But how might our fiat object earn a positive price to begin with? If we reply that early adopters expected it to be widely accepted by others in trade, how did these early adopters ever form these expectations if that object didn't already have a positive price? We're dealing with a problem of circularity. There is no way to "break into" a dynamic that might generate a positive value for a fiat object. So logically, worthless things cannot trade in the market at a positive value. How...

'...the peculiar feature of a money economy is that some commodities are denied a role as potential or actual means of payment. To state the same idea as an aphorism: Money buys goods and goods buy money but in a monetary economy goods do not buy goods. This restriction is - or ought to be - the central theme of the theory of a money economy.' -Robert Clower [ A Reconsideration of the Microfoundations of Monetary Theory , 1967] I started to sell some of my XRP yesterday, and the process of doing so brought to mind Robert Clower's famous quote. Clower's aphorism describes an idealized pure-money economy that exists only in theory. Were we to apply it to the real world, we'd be missing a lot. To begin with, Clower omits "money" for "money" transactions like the XRP trade I'm about to describe. XRP is the cryptocurrency used to pay transaction fees in the Ripple system . In order to arrive at my end goal of holding Canadian paper, I have to ent...

Stock trading on the New York Curb Association market, 1916 This isn't a bitcoin post. But it cribs some ideas from bitcoin and applies them to equity markets. Specifically, I'm going to play around with the idea that if equity markets were to adopt a bitcoin-style distributed ledger system, then some of the destabilizing effects of the so-called latency wars might be mitigated. Historically, most databases and ledgers have been maintained at a central hub. In order to get access to this information, users have had to walk into the building that houses the records, or sign into a server that stores them. Bitcoin, litecoin, Ripple, and other cryptocurrencies all demonstrate the possibility of distributing a database away from its center . Rather than a hub doing all the work, networks of independent nodes can store, maintain, and update the database. Bitcoin's ledger, the blockchain, is probably one of the best examples of a real living distributed database. A few weeks ag...

I'm starting to sell my position in bitcoin. I'll probably keep about 10% of my overall position but the rest will be repatriated back to the conventional fiat banking system. Anyone who's been reading my bitcoin posts knows that I consider the fundamental value of bitcoin to be around zero. Consider what a bitcoin is. When you buy a bitcoin, you're basically securing a spot in a ledger. Bitcoin isn't actually a coin—it's just a key, a ticket, or an identifier, that indicates where in the ledger you sit. When people trade bitcoins among each other, what they're doing is swapping themselves into or out of that ledger. Space is limited. The amount of bitcoin in existence amounts to about 11 million, so there are only 11 million spots available. Now there's nothing wrong with paying good money to secure a spot in a ledger. We've all done it before. When you buy an airline ticket you're basically buying room in an airline's ledger. The airline c...