Op-Ed: Without Crypto, Your Money Doesn’t Exist

Athens, Greece - July 1, 2015: People waiting to withdraw cash money from ATM cash point outside a closed bank during Greek financial crisis.

Athens, Greece - July 1, 2015: People waiting to withdraw cash money from ATM cash point outside a closed bank during Greek financial crisis.


If you’re like most people and you one day plan to retire, then you’ll need to think about saving and investing to replace the earnings that you’ll no longer get from employment. It is natural for humans to look to the future to work out what action they need to take today to ensure a better future, but too often a lack of information about the world around us distorts these calls to action. And while we may sometimes be ignorant of economic reality, economic reality doesn’t ignore us when things go belly-up.

Healthy economies should be based on sound money for fairness and long-term viability. Sound money is the idea that the integrity of your money’s value is maintained over time — that any attempt to deface or counterfeit money should be easy to detect, and that no person or group will have the ability to produce more legal tender for their own use. Today’s fiat monetary system doesn’t meet the requirements of sound money, and leads to decreased economic stability, and at worst, collapse.

To understand the problem, we need to take a look at how the money supply in economies expanded without the underwritten assets to back it.

Before modern banking, goldsmiths were used as depositories for the safekeeping of money from the time — gold and silver. Customers left their gold or silver in the hands of the goldsmith and could later withdraw that same piece of gold or silver when they wanted in exchange for their ‘depositor’ receipt. During this time, the goldsmiths would lend out some of the gold they held onto as loans that had to be repaid with interest.

In the mid-seventeenth century goldsmith’s fell upon a new idea to make their business more profitable. Instead of returning the exact pieces of precious metal to the customer that deposited it, they instead issued ‘bearer receipts’ that would entitle whoever held the receipt to withdraw the weight in gold that was written on it. The gold receipts began circulating as a medium of exchange (money), because they were backed by the ability of the bearer to withdraw the ascribed amount of gold.

The advantage lay with the goldsmiths, who knew that because bank-runs (where all their stored gold was requested at one time) were uncommon, that they could issue extra gold receipts (loans) than they could physically repay. It meant that goldsmiths were getting repaid the full balance and interest from loans on gold that they never had, or in other words, they were able to make something from nothing by expanding the money supply. The system heavily relied on customers’ confidence in their ability to withdraw their gold whenever they pleased — something that could not be guaranteed.

The unbridled issuance of money without a corresponding increase in economic productivity leads to inflation — the fact that money’s value is a direct function of the amount of money circulating in the economy. Inflation is most often noticed as an increase in the cost of purchasing goods & services in an economy as people bid higher numerical units of money for the same items. This debasement in the money supply makes us poorer unless the distribution of newly-minted money is equitable, which it is not.

Choosing not to leave your savings with the goldsmiths meant an inflation penalty from lost interest on your account deposit, and the risk of losing your savings entirely in a ‘bank run’ if you did.

Incorporated banks are the modern-day version of those goldsmiths, with their aptly-named ‘fractional reserve banking’ system - and bank runs are now precluded by the reassuring presence of government-sanctioned central banks who may step in to alleviate some of the pressure when bank reserves are sufficiently drained. Of course, this is not always the case, as seen with Lehman Brothers in 2008 and Greek banks in 2015. Moreover, rising government debt may further reduce the likelihood of bank bailouts in future financial crises.

Banks no longer fulfill the function for which they were originally designed — to keep our money safe in collapse scenarios. In those collapse scenarios, unless you’re one of the first to withdraw your money, it will not be available to you. Why, you ask?

Because that money never existed.

Digital currency presents a new take on money creation: an equitable process where anybody who wants to contribute to the network and receive the algorithmically dispensed newly-minted coins can do so without fear that some central or third-party will arbitrarily print new coins in the distributed network. Your crypto is also available to you whenever you request it from your wallet, without regard to what third parties are doing, provided you don’t hand over access to third-party custodians like goldsmiths. With digital currency, you can now be your own bank.

If volatility can be reined in, digital currency’s advantages in the areas of equitable money creation and security could make them a better store of value for savers than present monetary systems.

Author: Timothy Goggin

Timothy Goggin is an economic analyst with an interest in the application of moral philosophy and decentralized systems. He studied economics at the Business School at Victoria University of Wellington, New Zealand. His area of research is the consequential and moral dimensions of implementing digital currencies and the resulting synergies for consumers in the trading environment.

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