Three Kinds of Money
Understanding the Importance of the Right to Transact
“Even though national currencies such as the dollar and the yen may continue to exist, electronic technology is producing money in so many forms that, at least for a while, the state will not be able to control them. Once free from state control, money will play an even more important role in our lives than it has in the past.” -Jack Weatherford from The History of Money
Weatherford published the words above in 1997, 12 years before the first bitcoin (BTC) was mined. Quite prescient of him.
I lead with Weatherford’s words today because I’d like to add some nuance to them as I discuss the only three kinds of money we have in the world today that are free of counterparty risk - or “the probability that the other party in an investment, credit, or trading transaction may not fulfill its part of the deal and may default on the contractual obligations.”
So, without further ado, let’s take a look at what actually serves as money - and not IOUs - in our modern world.
Paper fiat currencies - The word “fiat” means “by decree.” When used to describe money, the term denotes money issued by governments has value because governments say it does. Fiat is excellent for in-person, peer-to-peer transactions. Fiat is not excellent for storing value, though. The world has seen hundreds of fiat currencies come and go, and the average lifespan of a fiat currency is approximately 35 years. A fiat currency like the British pound - which has been around for over 300 years - is an exception to the rule. It’s also important to keep in mind that fiat currencies are liabilities - or debts. Technically, if you were to hand your paper fiat currency back to a commercial bank, that bank could go to the central bank and request the loans - or government bonds - in exchange for the fiat. The dynamic is actually a bit more complex than that, and, to learn more about it, I recommend reading the article linked in the tweet below this section. The key takeaway for paper fiat currencies, though, is that they are great way to transact counterparty risk-free in person, but they tend not to store value in the long run.
Physical gold - Gold was first used as a medium of exchange approximately 3,500 years ago. And before that, gold was a sign of wealth in Middle Eastern and Egyptian cultures (Source: “The History of Gold”). In modern times, gold has served of a unit of account - or “a standard numerical unit of measurement of the market value of goods, services and other transactions.” Countries/governments/central banks have gone on and off the gold standard - or “a monetary system where a country's currency or paper money has a value directly linked to gold” - repeatedly in recent centuries. They mostly abandon the gold standard when they need to finance wars. (This is explained in greater detail in the interview linked below this section; I highly recommend you give it a listen.) One main way that gold differs from paper fiat currency is that gold is a bearer instrument - or an asset that holds value over time and that isn’t a liability. The problems with gold are that it’s not very divisible, and it’s quite cumbersome to transport. So, it ends up being used more as a store of value than a medium of exchange these days. Important note: Owning a share of a gold ETF or an asset of that nature is not the same as owning gold itself. When you own a claim to gold via an exchange, you only own an IOU for said asset. And that IOU may have been rehypothecated - or used as collateral for one party is reused as collateral in another transaction. The rehypothecation of assets played a massive role in the Great Financial Crisis (GFC) of 2007-2008. Essentially, it leads to their being more claims for assets than there are actual assets. Bad stuff. Lastly, you could also consider a commodity like silver as another bearer instrument that can serve is money (though, silver isn’t quite as resilient and robust as gold.)
Bitcoin in a self-custody wallet - Before I begin here, notice I say “Bitcoin” and not “crypto.” For more on the difference between the two, please check out the video below this section. I make the distinction between Bitcoin and crypto because 1. While all crypto is technically traded peer-to-peer, all blockchains other than Bitcoin have some sort of centralized group that more or less governs them - and most of these groups have the power to censor transactions and 2. Jack Weatherford uses “them” to describe the digital currencies that the state won’t be able to control. He’s slightly off in saying this, as Bitcoin is the only truly censorship-resistant, counterparty risk-free digital network on the planet today. This doesn’t mean that other blockchains don’t have value; it just means they are a different type of animal. No one person or institution governs Bitcoin, which makes it more like a commodity such as gold. Bitcoin is also highly divisible and can be used in peer-to-peer transactions, like cash. My main takeaway for you here, though, is that the BTC that you purchase through an exchange isn’t technically your BTC until you move the private keys for it from the exchange into your own custody. One of the safest and easiest ways to do that is to store the keys to your BTC on a hardware wallet. Here’s a piece I wrote on some of the best crypto hardware wallets out there. And here’s another piece I wrote on what I consider to be the best crypto hardware wallet for the price: the Ledger Nano S Plus. These are the types of devices that some Ukrainians took with them when they had to flee their country due to the recent Russian invasion.
So, why is all of this important?
Well, as Weatherford stated in this new electronic era of money, “money will play an even more important role in our lives than it has in the past,” and you might want to understand what money (and/or assets) you actually have control over and what money/assets you don’t.
Also, what Weatherford didn’t mention in his book is that this new era of money will also include Central Bank Digital Currencies (CBDCs). And this form of money will give central banks, governments or other international agencies the ability to turn your money on and off as it likes, which gives a whole new level of meaning to the term “fiat.”
Below is the full version of the tweet Alden commented on (above):
You might be thinking, “But Frank, CBDCs sound great! We can just turn off bad people’s money and give money to good people.”
That works if everyone agrees on who is “bad” and who is “good.”
But we don’t - and no one should have that right.
If someone like Donald Trump comes back into power, I don’t want him - in conjunction with a central bank - determining who is free to use their money and who isn’t. I actually don’t want any institution or leader - however benevolent they might seem - having that sort of power.
And I don’t believe that oppressive institutions all of a sudden care about “financial inclusion.”
I believe in the right to transact peer-to-peer in a permissionless manner.
I believe in some semblance of privacy in our financial transactions.
And I don’t believe major institutions should have the right to turn our money on and off and/or to deplatform us.
With all of that said, I’ll leave you with the words of Rufas Kamau, senior contributor to Forbes, from a recent piece of his entitled “Bitcoin as a Human Rights Platform”.
Below is an excerpt from the piece:
“The privacy of financial transactions is eroding as transactions rapidly shift from cash to the digital world, which requires strict know your customer (KYC) procedures to be onboarded. You have a right to privacy and a private life under the Universal Declaration of Human Rights (Article 12), the European Convention of Human Rights (Article 8), and the European Charter of Fundamental Rights (Article 7). How does traditional finance violate your right to privacy, and how does Bitcoin address this?
"Without financial privacy, you don’t have political rights." In his podcast, Andreas M. Antonopoulos described how a group of Chinese protesters were tracked down for using their subway cards while protesting. They had learned a hard lesson about financial privacy during the previous protest, so they wore masks and paid for subway tickets with cash on the subsequent one.
Though quite controversial, JPMorgan ChaseJPM +1.2% deplatformed Kanye West last week without giving a reason. While this is big news that this is happening in the US, a third of the world living in authoritarian regimes face this more frequently than you would think.
That’s all, y’all! Happy Halloween!
Best,
Frank
Twitter: @frankcorva
