Acceptance of cryptocurrencies for direct payments to merchants without having to convert to traditional currencies is a form of stimulus and potential source of inflation. With more companies planning to accept bitcoin for payments should we start talking about the Satoshi Treasury Department?
Although cryptocurrency enthusiasts had a party in social media after a recent announcements by Mastercard about allowing select cryptocurrencies for payments in the future after a recent announcement by Tesla and Elon Musk of an investment in bitcoin and acceptance of the cryptocurrency for payments, there is also the fine print that availability of these services may take a while.
What crypto enthusiasts seem not to understand is that acceptance and use of select cryptocurrencies for payments will require off-chain collateral and customer verification (know your customer) and therefore on-chain privacy is lost. However, it was the on-chain privacy cryptocurrencies offer that compelled many to become fierce proponents of the idea. Do these people think that Tesla will sell to someone they do not know and the payment processors will facilitate transfer of funds from someone they do not know to a merchant?
This is not the decentralize finance (DeFi) the crypto crowd was dreaming; it is rather a way of taking a piece of the action from the money that initially the Satoshi Treasury Department has printed (mined.)
But who is Satoshi and why is he(she)(they) allowed to compete directly with official Treasury Departments in issuing currency?
Let us start from the beginning because there are serious misconceptions in the blogosphere and social media: Central Banks do not print money, Treasury Departments do that in physical form such as paper and coins. Central Banks only increase/decrease reserves of banks and set interest rates through specific operations. Commercial and Retail banks issue (not print) digital money by making loans but they do not lend the reserves. The loans become digital money. As soon as a loan is approved, the amount is deposited in the account of the borrower. Many, even professionals, do not understand that the money loans represent disappear from the system as soon as the loan is repaid. This is very important to understand because this is not the case with cryptocurrencies and as long as they are minted, they will remain in the system forever or for as long as an interplanetary electromagnetic pulse (EMP) does not destroy all digital devices on the planet. In addition, their inflationary pressures if any will always remain in the system and no monetary policy is possible at least in a straightforward way.
New smart contracts can be developed at higher layers above the crypto asset layer to allow loans. However, this is where the concept of blockchain is problematic in addition to the energy consumption it requires: would anyone make a loan on-chain to someone without verifying their identity since they can just take the money and disappear in the bits and bytes sea of blockchain? Therefore, for financing projects some kind of on-chain or off-chain collateral will be required. Blockchain transactions are transparent but those using it may not be. Usually, arguments made by crypto and blockchain enthusiasts and other misinformed people are based on the wrong conception that everything will run on blockchain and therefore its transparency will prevent fraud. Well, that may take decades if ever and until then fraud will be common as long as there is convertibility to traditional currencies.
On-chain collateral is conceivable under conditions of high “social” or “business scores”. But until those tracking mechanisms become reliable, if ever, a lot of fraud may take place. On the other hand, off-chain collateral defeats the very purpose of DeFi; it is just a complicated way of doing things that are done with a trusted central authority, such as a bank’s credit department. There, you can even call a real person and ask questions. In blockchain, “no one can hear you scream.”
If collateral and derivatives will be avoided by those who accept/facilitate cryptocurrency payments due to verification issues, then use will be limited to minted amounts but those are enough to generate inflation and maybe that is what central banks want and the reason authorities let it happen by not regulating cryptocurrencies. I have written about this since 2017. Cryptocurrency acceptance for payments without conversion is equivalent to “helicopter money.”
Cryptocurrencies like bitcoin are rewards received by mining in blockchain to facilitate transactions using advanced hardware, as compared to the fiat currency most workers receive because they do some work that is for the most part useful to economic productivity, e.g. driving a bus or making pizza. Direct use of cryptocurrency for purchasing goods will inflate GDP by an amount dependent on the exchange rate to fiat currency. Imagine if bitcoin goes to one million dollars, as some enthusiasts’ hope, the impact on worldwide GDP from transactions based on it. This will create additional demand for goods and the supply chain will respond. This will be a stimulus package from the Satoshi Treasury Department in the case of bitcoin.
Companies like Tesla are rushing to accept this new Satoshi stimulus in times of economic decline due to pandemic. The pandemic has been a driver behind an explosion in cryptocurrency trading but also stock trading. Central Banks and governments appear to have lost control, or are fighting competing objectives due to politics. Life must continue and businesses must sell and make money to support their growth and employees. Accepting cryptocurrencies that are trading in similar ways as a Ponzi scheme is one way of generating profits for companies. But at the same time, this will shatter crypto dreams and essentially turn it into another form of fiat currency due to among other things “know your customer” requirements. The paradox that emerges is the following:
Cryptocurrencies are the future if they are not used widely. As long as they are used widely, they become the present and something else must be conceived as “the future”, ad infinitum. Or, put in another way, Utopia is always perfect as a concept but its application is far from it.