Is Cryptocurrency the Future of Money?

 

The Silicon-Valley firm Nvidia recently got in trouble with the SEC for not disclosing that a good bit of its profits in 2018 were due to sales of their graphics processing units to cryptominers.  Cryptominers verify cryptocurrency transactions in operations that take a vast amount of computing power, real electrical power, and cooling.  One estimate quoted in a recent Associated Press story says that cryptominers making Bitcoin, only one of several types of cryptocurrency, use up 0.2% of the world's electrical supply. 

 

The reason the SEC fined Nvidia $5.5 million was that cryptocurrency, and presumably the cryptomining that goes along with it, is notoriously volatile.  In the SEC's judgment, Nvidia should have told its investors that a lot of their 2018 profits came fron the up-and-down business of cryptomining.

 

For a firm with $26 billion in revenue, $5.5 million is chump change, and most of the damage to Nvidia was already done once the press releases came out.  But the SEC's action bespeaks a larger prevalent attitude that government institutions, at least in the U. S., have toward cryptocurrency.  If a company can get in trouble merely for selling their products to cryptominers and not telling their investors about it, the SEC must be really down on cryptocurrency.

 

And this is not a surprise.  Whoever came up with the idea of Bitcoin in 2008 clearly wanted to leave governments and their meddling with currency behind.  In a sense, cryptocurrency is a libertarian's dream:  nobody controls it and nobody can do Federal-Reserve-type manipulations to it or attempt to tie it to any particular conventional currency.  A unit of cryptocurrency is worth exactly what people will pay for it—no more and no less.

 

In retrospect (Monday-morning quarterbacks are always right), it was almost foreordained that the few lucky people who bought bitcoins and other cryptocurrencies as they were issued ended up making fantastic profits, at least on paper (or bits).  But after the first cryptocurrency-rush days, the crypto market turned into something resembling the futures market for hog bellies,  but without the inconvenience of having to keep a lot of smelly hog bellies around.

 

And unlike hog bellies, cryptocurrency uses a lot of energy, much of which is generated with fossil fuels that increase the globe's burden of carbon dioxide.  That bothers some people more than others, but it is a definite downside to cryptocurrency compared to more conventional media of exchange.

 

Another factor that gives cryptocurrency a somewhat shady reputation is that it has proved very popular with international criminals.  An untraceable, serial-number-free virtual currency is just what the drug dealers and online extortionists like to use, and many of these types will not accept any other kind of money.  (I'm told this—I've never tried to pay a drug dealer myself, either with cryptocurrency or cash.)

 

So with those counts against it, one shouldn't be too surprised that although cryptocurrency has been accepted in certain circles and by at least one government as legal tender (El Salvador), its progress is slow.

 

While some may view the advance of cryptocurrency as progress, in some ways it marks a return to a system that prevailed in the early and mid-19th century in the U. S.  While the U. S. government (and the Confederacy during the Civil War) issued its own currency, many private banks chartered by state governments also issued their own currency.  In a given locality, you might have businesses trading in three or four different kinds of money, and so someone would have to keep an exchange chart stating what their comparative worths were. 

 

And volatility was also an inevitable consequence of that system.  Private banks could flood the market with bills or even go broke, rendering the currency they issued worthless.  In a time before the telegraph had penetrated to most parts of the U. S., a store might take in payment a bunch of bills issued by the Pawtucket State Bank of North Carolina, only to learn a few days later that the bank had ceased to exist.

 

Of course, all paper money back then was exchangeable at some rate with gold, which was the main medium of monetary exchange between governments.  There are stories of one company loading a ton or so of gold bullion onto a ship at Port A bound for Port B, and another company loading a ton of gold onto a ship in Port B bound for Port A.  Besides being downright silly, such mechanical exchanges were prone to the hazards of ocean travel.  If one of your ships went down with your gold bullion, you were out of luck.

 

That can't happen with bitcoin, but it can certainly "sink" metaphorically, and has numerous times, wiping out value just as effectively as if it was a pile of gold bars going down to Davy Jones's locker.  As long as cryptocurrency developers insist on staying independent of government control, it seems like volatility will be part of the game.  And that means only people who like to take lots of risks anyway (e. g. drug dealers and online shakedown artists) will accept the risk of volatility for the anonymity and other advantages cryptocurrency has for their business models, if we can call them that.

 

Three years ago, Facebook launched its own version of cryptocurrency, then called Libra.  Originally, they tried to tie it to a basket of currencies, but regulators nixed that idea.  Then it was rebranded as Diem, and tied to the dollar, but reportedly the Federal Reserve pressured the bank involved to cut its ties with the organization, thus dooming it.  If a substantial outfit like Facebook can't launch a modified cryptocurrency that has some promise to maintain a stable value, it looks like nobody else will try any time soon. 

 

So for the foreseeable future, all five minutes of it, cryptocurrency looks like it will remain a fringe enterprise, enjoyed by a few rich risk-takers, disappointing others who buy it at the wrong time, and having a core constituency of users whose characters are dubious, to say the least. 

 

Sources:  The AP story about Nvidia's fine by the SEC appeared in numerous outlets, including the Sacramento Bee at https://www.sacbee.com/news/business/article261167522.html.  A report on the fate of Facebook's Libra can be found at https://www.theverge.com/2022/1/25/22901830/facebook-meta-libra-diem-crypto-project-explores-sale.  I also referred to Wikipedia articles on Nvidia and cryptocurrency.  My blog on Libra when it came out in 2019 is at https://engineeringethicsblog.blogspot.com/2019/06/is-facebooks-libra-cash-in-your-future.html.

Is Facebook's Libra Cash In Your Future?

A recent item in the San Jose Mercury News says that the social-media giant Facebook is planning to announce that it's venturing into the cryptocurrency business with something it has code-named Libra.  The earliest and most well-known such currency—Bitcoin—has not exactly taken the financial world by storm.  But Facebook is reportedly lining up cooperation with credit-card companies Visa and Mastercard as well as PayPal to make using Libra more appealing than its predecessors.

Most of my readers are probably familiar with the basics of cryptocurrencies such as Bitcoin, which is based on a technology known as "blockchain."  From what I understand, it's a way of guaranteeing that everybody knows what has been done and who owns what, but without anyone being able to trace ownership of a particular unit of currency beyond the person you are immediately dealing with.  Anyway, it works well enough to have attracted the attention of investors who have sent the value of Bitcoin on a roller-coaster ride that has enriched a few and impoverished probably just as many.  And the fact that most cryptocurrencies are subject to just such wild and unpredictable fluctuations is one big reason that non-speculators have mostly stayed away from them, unless their desire to transact illegal business with untraceable cash has overcome their fear of short-term changes in value.

The way Facebook plans to fix the fluctuation problem is to tie their Libra to a basket of government-issued currencies.  So the idea would be that anybody holding 100 units of Libras (or whatever they end up being called—I suggest "zuckers") could take them at any time and trade them in for a certain fixed number of pounds, dollars, and euros. 

That's fine in theory.  But if Facebook suddenly finds itself in the position of the Federal Reserve, able to issue as much or as little currency as it wants, and able to say how much the currency is worth, the firm will face temptations that few governments have been able to resist in the past.

The open secret about the U. S. Federal Reserve, and for that matter any entity that issues fiat currency, is that they can print money.  Or, what amounts to the same thing, they can loan you money that they don't have until they write you the check, but then you have to pay it back in real cash that you have to earn somehow.  This is why you almost never run across a banker in the line at the soup kitchen.  The Federal Reserve System is open to numerous criticisms, but at least it has some semblance of being under the control of the U. S. government, and if it went totally crazy one day we citizens would stand a chance of doing something about it before it bankrupted us all. 

Facebook, however, as a private (though publicly traded) entity, is under no such restrictions.  If the company chooses, it can go the way of the nineteenth-century "wildcat" banks that predated the establishment of the Federal Reserve System in 1913.  Back then, every bank that wanted to could issue its own currency, and many of them did.  But if you accepted a note from the Second National Bank of Podunk, Indiana, you were taking a chance that it wasn't worth the paper it was printed on if that bank had decided to go on a note-printing spree, which many of them did—and then closed forever, leaving holders of their notes with no recourse.

An entity as big as Facebook isn't likely to vanish in a shower of virtual zucker notes.  But there are reasons why sovereign governments typically reserve the right to issue the primary legal tender in their respective domains.  As is usually the case with governmental behavior, it has to do with power.

You may have heard the saying, "The power to tax is the power to destroy."  Nobody's saying Facebook will start taxing people and calling it that, but you can certainly picture them charging people for certain services involving their currency.  It turns out that the quotation is taken from an oral argument that the great U. S. statesman Daniel Webster made before the even greater U. S. Supreme Court justice John Marshall in 1819.  And at issue was the power of a state to tax guess what?  A bank.

Bitcoin, or for that matter all the cryptocurrencies lumped together, represent such a small fraction of all the money in circulation today that governments can afford to ignore them.  But suppose that Facebook's venture into this business turns out to be really successful.  People start getting paid in zuckers instead of dollars.  Banks start carrying your account balance in zuckers instead of dollars.  On April 15 you write a check to the U. S. Treasury in zuckers instead of dollars—uh-oh, that won't wash.  Uncle Sam gets to say how you pay Federal taxes, and he won't take anything but dollars.

If this alleged stabilization business with the currency basket works, maybe there won't be a problem with paying taxes in cryptocurrency.  But if governments haven't been able to resist the temptation to tamper with the exchange rate of their currency, my guess is that Facebook won't be able to resist the temptation either.  And presumably, Facebook (or whatever co-op ends up running the currency) will be able to determine how many zuckers are in circulation.  That right there is a temptation that is hard to resist.  Why go to all the trouble of developing a business model and charging customers and paying employees and making a profit, when you can just issue another few million zuckers and there you are?  And if the exchange rate stays constant, those zuckers are just as good as dollars or what have you. 

No, there are good reasons why any government faced with the advent of an increasingly popular medium of exchange that isn't under its control sooner or later grabs it for itself.  And I predict that either Facebook's venture into cryptocurrency will vanish in the welter of other such products without a trace, or if it becomes really popular and lots of people and companies start using it, Uncle Sam will come along and take away Mr. Zuckerberg's new toy.  Even if they are called zuckers. 

Sources:  The San Jose Mercury News carried the article "Who is Facebook getting to support Libra, its cryptocurrency?" on June 14, 2019 at https://www.mercurynews.com/2019/06/14/who-is-facebook-getting-to-support-libra-its-cryptocurrency/.  The attribution to Daniel Webster is from https://www.bartleby.com/73/1798.html.  For one of the clearest explanations of the Federal Reserve System, and for arguments that actually favor the limited issue of currency or its equivalent by private entities, I recommend distributist author John C. Médaille's Toward a Truly Free Market (ISI Press, 2010).