LaGarde and the IMF miss the point: With blockchain, you don’t need to trust
“A new wind is blowing, that of digitalization,” Lagarde, the chair of the International Monetary Fund explained.
She continued, “[M]oney itself is changing. We expect it to become more convenient and user-friendly…” (source)
Hmmm, very provocative. Sounds like the IMF might be coming around to the idea of cryptocurrencies as a global currency.
What else did she have to say?
“For their part, cryptocurrencies seek to anchor trust in technology. So long as they are transparent — and if you are tech savvy — you might trust their services… Still, I am not entirely convinced. Proper regulation of these entities will remain a pillar of trust.”(source)
Trust. Interesting choice of words. The IMF is suggesting that they would be a superior force in creating and regulating a trustworthy digital currency. And this is where we encounter a pretty important misunderstanding regarding the nature of blockchain technology and cryptocurrency.
The IMF touts itself as a trustworthy entity, an upholder of global stability and a protector of healthy economies everywhere.
There’s a pretty obvious problem with this that anyone who cares to notice has known for quite some time. There aren’t a whole lot of truly stable or healthy economies in the world. One could argue that the current system of fiat, fractional reserves, interest rate manipulation, and quantitative easing are huge factors in the creation of this problem.
Yet, we are told, these are the entities in which we should entrust our world’s collective financial future.
On the other hand, we have cryptocurrencies. It needs to be said, digitalized money and cryptocurrency are not one and the same. While they appear in many ways to be identical, they are far from it, in reality.
Take the example of Bitcoin — the most dominant and, by hashing power, most trusted cryptocurrency of all. Bitcoin is mathematically created and cryptographically secured in such a way that only 21 million bitcoins can ever exist. While it is true that an infinite number of Bitcoin forks could be created, there are only 21 million real bitcoins that can ever exist, and this is mathematically provable. Just as you would not accept that board game Monopoly money and your country’s fiat cash are interchangeable, the same is true of the many forks of Bitcoin and the one and only actual Bitcoin. It can never be duplicated in a manner that would make it indiscernible from the original Bitcoin currency due to the nature of blockchain technology.
Now take the example of fiat currency. While it’s true that your fake Monopoly money can be easily distinguished as counterfeit, the same cannot be said for massive quantities of money that are regularly brought into existence by central bank currency printers and mints. This form of money is printed when debt is sold to large debt-holders, who later make profits by being paid back with interest. The fiat can be printed again and again as needed, all the while increasing principal and interest debt load, while simultaneously reducing the value of the currency as its scarcity dwindles.
The one currently predominant form of money — fiat — touted by the IMF as money that can be trusted — is still fiat, even if digitalized. If the fiat can still be created out of debt and infinitely printed, it is no better than the current system and does nothing to solve the current financial problems of fractional reserves, interest rate manipulation, and quantitative easing. It still requires users to trust that the central bank will not print the currency into oblivion, or manipulate the currency to drive down economies, or prop up corrupt spending in governments and military industries.
Which they do, by the way, on a constant basis.
A new form of money — Bitcoin — despised by central banks worldwide, and for good reason, is nothing like fiat. If anything, it is more like gold. It is difficult to attain, causing it to be expensive. It is ruled by market forces, which admittedly, does mean it is susceptible to massive ups and downs as buyers and sellers circulate the currency in its currently relatively illiquid state due to the much, much smaller size of its market when compared to gold.
The key difference between cryptocurrency and fiat, even in a shiny, new digital form?
You don’t need to trust anyone with Bitcoin or with blockchain technology. It is trustless, meaning, its veracity is confirmed by mathematics rather than by some person or bank somewhere who tells you it’s trustworthy or not trustworthy.
So while LaGarde suggests that money will likely be digitalized over the course of time, she is missing the key change that will shift the way money works in the future; that is, that money, at some point in time, will not be created, maintained, and traded by a central organization that deems it to be trustworthy. It will instead be created and exchanged through a mathematical process that requires no trust whatsoever, by all who wish to participate in its exchange and utility.