Is cryptocurrency beneficial to poor Blacks? No.

Yesterday the Bank of International Settlements issued an annual report with a 24-page chapter discussing cryptocurrencies. The report is critical of cryptocurrencies and the premise of decentralization. It argues that cryptocurrency lacks the stability in value and pricing brought about by a centralized payments system. While I am not surprised by the report’s bias toward centralization (BIS is after all the central bank of central banks), I appreciated the detail the report went into when describing decentralized ledger transactions and comparing that system to a centralized, central bank-based system.

The volatility of cryptocurrencies like Bitcoin experience may be enough for most consumers to ignore cryptocurrency as a store of value or a medium of exchange.  As was a little perplexed last year when I saw a number of black Americans pushing cryptocurrency as the next big and best bet for achieving wealth. The sidewalk marketing was being done in an environment of unexplained rising Bitcoin value. I am not lying when I say I felt good about Bitcoin falling from highs of about $20,000 end of last year to around $7,000 today.  These people I saw riding buses through Brooklyn telling people to get onboard something so bloody technical that most never understood it needed a reality check, and the relative quiet I experience on social media from the silence was refreshing.

More importantly a pullback invites putting cryptocurrency and money in the proper perspective. First, analyzing new currency spawned by financial technology requires separating ourselves from the emotions.  In the American black community, the first cool dude with swag that can push the right emotional buttons on a people who are over-indexed on emotions will win the day, at least temporarily. Sheep, as Jim Cramer is fond of saying, get slaughtered.

Second, analyzing currency should come with the realization that we understand little about currency, money, markets, and economics. We conflate markets with consumerism and that is a mistake. Consumerist activity is low hanging fruit; easy to grasp because we are quick to meet our emotional needs with a gift bag. Meanwhile, those pushing Bitcoin on us didn’t have a clue as to the economic justifications for the increase. They asked us to view crypto the way we go out and buy houses and cars: come on down because the price is right. That kind of thinking, like the show, is corny.

Currency, whether digital or real, contains a message about an underlying economy. Cryptocurrency has no underlying economy. It cannot transmit messages about the value of an underlying economy because there is no underlying economy to begin with. The realities of an underlying economy keep a currency in check with market transactions providing consumers and producers with information as to how well the economy is doing and whether it is viable enough to project the “good faith” backing of a currency. Crypto does not have an underlying economy. While more vendors are using it, its use is nowhere near the use of real currencies.

For black people to push crypto on poor black people was abominable.

What the high price for a Bitcoin tells us is that if an underlying economy is developed, it will not be a world where the poor will be allowed to play. The price is transmitting a prediction about exclusivity. For example, urban cores like Atlanta, New York, and San Francisco are pricing the poor and middle class out of housing and other amenities. Why not develop a currency that reflects that new reality? Has it ever really been about inclusion or does the reality reflect exclusion?

When Bitcoin becomes a transmitter of valuable information

Bitcoin is not for speculation. Bitcoin is about the transmission and exchange of valuable information attached to a digital currency that measures the value of the information. The volatility we are seeing in the market for Bitcoin is based on the fear of missing out on a pop in value.

I think in the near future what will eventually drive the value of Bitcoin is the underlying value of the information that the individual sovereign either possesses or can produce. It is likely that person A holding Bitcoin may look at person B who allegedly has some information, x, and determine that the person B’s information or ability to generate useful information has no value. Think of someone in London approached by someone from Somalia who wishes to trade in Somalian currency. The Londoner wouldn’t touch it.

You may argue that scenario already occurs in the real world, that trader A is not required to transact with trader B. In a centralized world, trader B would bring a discrimination grievance against trader A for refusing to trade. In a decentralized, voluntaryist cyber world, no matter how much cryptocurrency you hold, the value of your true currency, the information that you possess or can produce, will determine your digital currency’s value.

As for the speculators, the error they make is using valuation methods created in a centralized, coercive political economy to assess the value of a currency designed for a decentralized cyber society. A speculators are enjoying the upside of Bitcoin’s market appreciation, but as the currency becomes more expensive and reaches its 21 million digital currency cap, will these speculators be able to purchase any more of the currency? Or, will they be able to ride out the inflationary characteristic the coin takes on should it become a matter of two few Bitcoin chasing too many goods? Will lower income individuals who may have made their first purchases with their credit cards be able to recover the dollar value of the coin in order to pay off increasing interest rates?

Not to mention the competing currencies that will eventually knock off Bitcoin from its perch. As technology improves such that “information rich” individuals create their own cryptocurrency, individual sovereignty will be complete. Just like western nations trade with each other based primarily on similar values and culture, the information rich will do the same. As the value of their currency increases so to will the demand from vendors who will likely prefer hold in reserve the currency of the information rich versus the “information poor.”

I believe that the information poor or “information losers” who were lucky to get a few pieces of a coin in the early days will not be able to participate on either side of a cyber trade in the future. Their focus should be on building their information gathering tools versus pursuing a quick fix, get rich path.

Cyber space will remain decentralized by the silos created by the information rich will prove daunting for the information poor.

The Federal Reserve Bank of Atlanta’s outlook on #fintech in 2018

What will be the challenges for the fintech environment in 2018? Douglas King with he Federal Reserve Bank of Atlanta wrote a piece back on 4 December 2017 laying out potential questions that the Federal Reserve may address. They include:

  • Will it continue to be up to financial institutions  to do due diligence on fintech companies, much as they do for third-party service providers?
  • Will regulatory agencies offer financial institutions additional guidance or due diligence frameworks for fintechs over and above what they do for third-party service providers?
  • Will one of the regulatory agencies decide that the role of fintech companies in financial services companies is becoming so important that the companies should be subject to examinations like the financial companies get?

In addition, as we get closer to Jerome Powell taken the helm as the chairman of the Board of Governors of the Federal Reserve, what type of relationship should the fintech industry expect? Probably one of proactive collaboration, according to comments Mr Powell made back in September 2017. The Federal Reserve has as a policy goal a faster U.S. payments system that is also ubiquitous and safe, and a positive relationship with the private sector is key.