Reinventing Money and Lending for the Digital Age
Bitcoin and other privately created digital currencies are beginning to challenge central banks’ monopolies on money creation. These decentralized cryptographic payment media could ultimately displace legacy banking, finance, and Payment services at a low
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Abstract Bitcoin and other privately created digital currencies are beginning to challenge central banks’ monopolies on money creation. These decentralized cryptographic payment media could ultimately displace legacy banking, finance, and Payment services at a lower cost across the globe. These currencies are likely to continue experiencing a faster rate of improvement than traditional payment media and require less force for safekeeping. This chapter explores some of the forces that led to the rise of Bitcoin including the ball-in tax on deposits during the Cyprus banking crisis in 2013. We also examine the relative stability of Bitcoin as a store value. We also consider new internet-based P2P lending arrangements using Bitcoin rather than dollars as a payment media. Finally, we reassess Stanley Fischer’s criticism of Hayek’s competitive private currency proposal in light of Bitcoin and other open source digital currencies.
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Keywords Bitcoin Open sources crypto currencies P2P lending with Bitcoin Gresham’s law and crypto currency adoption in china Cyprus, and Iceland relative stability of Bitcoin
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1 Introduction Money is a social invention (Samuelson 1958; Menger 1892). Through trial and error processes, societal improvements in monetary capabilities are ongoing. According to (Cohen 1998; Sargent 2002), private money predated governmentsanctioned coins. Anthropologists have studied it (Hart 2005), and experiments indicate that there is greater voluntary use of monetary tokens as the size of the R.D. Porter (✉) Cooksville Digital Coin Lab, Evansville, WI 10905, USA e-mail: [email protected] W. Rousse Northern Arizona University, Flagstaff, USA e-mail: [email protected] © Springer International Publishing Switzerland 2016 P. Tasca et al. (eds.), Banking Beyond Banks and Money, New Economic Windows, DOI 10.1007/978-3-319-42448-4_9
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using group increases.1 Native Americans used beads on strings as their form of money, wampum. Many assume that the predicates associated with traditional monetary technology must inevitably carryover to the new. But the particular form of money depends on both social customs and technology. State-issued currency has been the norm for the two last centuries or so. Initially, gold convertibility backed U.S. currency. However, after Nixon closed the gold window in 1971, American legal tender, Federal Reserve banknotes, were only able to satisfy tax obligations or discharge debts. Oddly, in value terms 78.5 % of U.S. banknotes are held in an anomalous denomination, the $100 bill—currently a grand total of over $1T or more than 32 bills per U.S. resident. For transactions, this concentration is remarkable since $100 s are effectively disallowed at most retail outlets. Given this illiquidity, why do so many hold this particular non-interest bearing asset? We can resolve this paradox by noting that the bulk of the $100 s are stashed overseas negating their tax-paying capabilities.2 Since the dollar remains the world’s primary reserve currenc
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