Concerning Cryptocurrency
יהיו לרצון אמרי פי והגיון לבי לפניך ה’ צורי וגאלי
לי הכסף ולי הזהב נאם ה’ צבאות
الله أکبر الله أکبر، لآ إله إلا الله والله أکبر، الله أکبر ولله الحمدن الحمد لله نحمده ونستعينه ونستغفره، ونعوذ بالله من شرور أنفسنا ومن سيئات أعمالنا من يهده الله فلا مضل له، ومن يضلل فلا هادي له, وأشهد ألا إله إلا الله وحده لا شريك له
Let the words of my mouth, and the meditation of my heart, be acceptable in thy sight, O Lord, my strength, and my redeemer.
The silver is mine, and the gold is mine, saith the LORD of hosts.
Allah is Great, Allah is Great, there is no God but Allah and Allah is Great, Allah is Great and all praise belongs to Allah, All praise be to Allah. We praise Him and seek His help and forgiveness. We also seek His refuge from the evils of our inner selves and from our wicked deeds. Whoever is guided by Allah, there is none to mislead him and whoever is left by Allah in error, there will be none as guide for him (except Allah). I testify there is no god but Allah. Alone is He and he has no associate.
While much has been written about Bitcoin and the other cryptocurrencies from a technical point of view, I believe a proper economic treatment of the subject is wanting.
It is my view that cryptocurrency will not succeed in achieving its intended goals as I understand them, to wit
- A decentralized currency
- Which cannot be seized by the government
- Which cannot be inflated by the government
Bitcoin, &c. are decentralized inasmuch as record of their ownership is independently stored in more than one location via the blockchain. But there still exist nodes of centralization which will bring about the downfall of crypto. Exchanges and brokers are the primary servicers of crypto transactions. An exchange or a broker which seeks to maximize profit will lend some of the bitcoin in its accounts, maintaining only fractional reserves. This will inflate the supply of crypto. Eventually, the reserves will be low enough that some august crypto firm will be in danger of experiencing a bank run. The federal government will be called in. It will enact legislation requiring that the brokerage’s IOUs be accepted as legal tender at par for all debts denominated in crypto. This is exactly what has happened in every major country in the world with gold. Crypto is therefore not safe from inflation, as it is susceptible to the dangers of fractional reserve banking.
Additionally, all serious transactions and contracts require a legitimate threat of coercion in the event that one of the parties does not perform. On the majority of the Earth’s landmass, the threat of coercion is provided by the state. The state has the monopoly on coercion; no other form of coercion is tolerated. Thus, the state is required to coerce a non-performing party in the event of a breach of contract. Since the state is the only service that can enforce contracts, they also are in a unique position to decide on the question of whether or not a contract has actually been performed. They can declare that a crypto note from a broker or a banknote is legal tender at par with crypto.
The government, for perverse reasons that we need not dwell on, is forever interested in expansion of the monetary supply. It cannot accept a currency independent of its control. For this reason the private ownership of gold bullion was prohibited in the United States between the years 1933–1974. Government may seek to gain control of the bitcoin supply by gaining control of the bitcoin brokers and exchanges via a central bank, following a scheme similar to that governing the present banking system. It seems more likely, however, that crypto will be illegalized outright. This means that no individual or company could ever report it on its books. This would greatly reduce its utility.
In short:
- Bitcoin is not fully decentralized, and brokers and exchanges are perfectly able to operate a fractional reserve scheme. In fact they probably are already doing just that.
- Bitcoin cannot be seized by the government if nobody tells the government about it, but in the event that the government illegalizes its use, payment via bitcoin would be so impractical that it could only be used to pay drug dealers. Certainly no public company would ever record it on its books; it would immediately be seized.
- The supply of Bitcoin can (and will) be inflated via a fractional reserve scheme similar to that used by the centralized banking system.
For some more non sequitur crazed ravings, see these:
