Blockchain has enormous possibilities as part of the digital infrastructure. Bitcoin, the most well-known cryptocurrency, is only one application.
I never bought any Bitcoin, even though I saw it as inevitable. (One of many times I didn’t act on my certainty!) Bitcoin, Ethereum, and other cryptocurrencies will continue to grow. If nothing else, there is a deep distrust of sovereign currencies, and a desperate hope of investment returns when most all else is struggling. Western governments outlawing cryptocurrencies would generate huge backlash.
I think Bitcoin will be significantly limited by the relatively low throughput for processing transactions on a decentralized blockchain. There is significant and encouraging recent progress in improving speed. One can forecast see events unfold when it will become very convenient for governments to decry the massive computation costs of blockchain. I think data centers overall are still consuming ~5% of the world’s electricity supply, and an even higher percentage in some areas. “These bitcoin miners are exploiting electricity you subsidize, and they aren’t paying their fair share.”
The issue I’ve given the most thought to is a digital currency backed by a government. China has made the first move. Most Americans are already executing 90%+ of transactions digitally, and it’s even higher in many parts of the world. Cash is still very useful for criminals. The global financial house of cards gets shakier, and potentially “resets” – VERY painful – it could be an opportune moment to institute a government backed digital currency.
Digital currency could “solve” multiple problems for a central government:
- A tool against crime and corruptions. All transactions monitored. All debts known and potentially centrally managed.
- We don’t even need the fiction of “printing” money. If we need more, we expand it.
- After a time, there is no longer the expense of producing physical bills and coins.
- The overhead of delivering welfare, paying for Medicare expenses, etc. could be much lower than existing “We’ll send you a check.” The lower expenses would probably offset the value of the “float” that the government enjoys today. UBI would be trivial to implement.
- Taxation can be optimized. In principle, a central agency would have sufficient information to tell you what your tax bill is, get a quick confirmation from you, and settle it.
- “Garnish your wages?” “Required to pay alimony or a fine?” Done.
- Restructure outstanding debt via a digital IOU to be delivered on a schedule later.
Here’s the biggest factor: Digital currency is programmable. “New regulations went into the algorithm the day after Congress approved it.” “Oh, Glenn, you already have more than X in your 401K, so your interest rate will be lower. Your son’s interest rate will be higher.” “Your social credit score is low; no UBI for you this month.” “No one should have more than Y in a private account for retirement because the government is here to help you. We’re reallocating funds to people who deserve it more than you.” “The government algorithm has determined that you do not qualify for a loan.”
A massive government can readily persuade the majority to go along. “You’re already mostly digital now, this is just a final half-step.” “You’ll receive a fair exchange for your existing dollar-monetized savings and assets.” If a digital currency is the only way to get paid by the government, or receive aid, could you object? If there is only a short window of time to “redeem” bills and coins, then they can enact stiff penalties for anyone using no-longer-legal tender. I presume the US government and most other governments would come to some new agreement about currency exchange and information sharing – especially on information available about US Citizens’ financial activities in other nations. Private banking would be forced to adapt. They would be in the same position as doctors and hospitals in a Medicare world, or Proctor & Gamble in a Walmart world.
Cryptocurrencies get past the “can I trust this?” by using a distributed general ledger; it’s practically impossible to alter it and deceive others. I don’t think the US government would use a blockchain approach for a digital currency. They’d use the same capabilities as credit card companies. They might have fancy language and lofty statements, but it will fundamentally come down to “trust us, we’re your government and we’re here to help you.”
There are definitely upsides to a digital currency. The problem is I see zero-to-few methods for citizens to hold government accountable when money can be programmed. I see tremendous potential for abuse. Despite language to the contrary, financial forensics is likely to be even more difficult than it is today. Designing safeguards will be crucial to establish trust. One of the ways our forebears spoke about the nature of man was this: “King David was a man after God’s heart, but you’d be wise to keep your daughter away from him.”
What do you think?
