The return of currency competition

How many note issuing banks does Britain have?

It sounds odd. The Bank of England issues our pounds and De La Rue in Basingstoke prints them. So the answer is of course “one”.

Why then do Clydesdale Bank, Bank of Scotland, Royal Bank of Scotland, Danske Bank, Northern Bank, First Trust Bank, Ulster Bank, Bank of Ireland, Guernsey, Jersey and Isle of Man all issue pound banknotes?

They are all worth the same as Bank of England pound notes. Except at customs in Australia, where they think you’re some sort of counterfeiter and detain you for half an hour when you try to exchange them.

I used to carry the three Scottish banks’ notes around with me show people until that happened. Britain’s variety of bank notes are a remnant of the days when banks, not governments, used to issue our money. After all, who’d trust a politician to issue money?

Those days were known as “free banking”. Banks competed with each other to issue the soundest currencies. Dodgy banks which issued too much currency saw their paper money decline in value relative to others’. Too many people would show up demanding the redemption of their gold or silver pounds in exchange for the bank’s notes. Then a bank could go broke.

It sounds like a messy system. None other than Adam Smith was caught out by such a bank run and failure. But the general evidence suggests the system worked quite well for the time.

Currency competition is back

Competition in currencies has the same effect as competition elsewhere. You end up with an improved product and a proliferation of consumer choice.

Thanks to cryptocurrencies like bitcoin, currency competition is back. And the improvements are already in. Faster transaction times, less loss of value through inflation, redeemability into something of value – usually gold or silver, a predictable money supply, international acceptance, lower costs and much more.

The beautiful thing about cryptocurrencies is that they can be designed in all sorts of ways with all sorts of features. There are already so many it’s hard to keep track of them, let alone the extraordinary gains they’re delivering for early adopters.

But let’s take some steps back in time.

In 1999, Neil Stephenson published his book Cryptonomicon. That’s a decade before the first cryptocurrency bitcoin. But my favourite ever book just happens to be about a particular cryptocurrency.

Don’t believe me?

Here’s a segment where the protagonist Randy gives away the business secret of the company he founded with his tech-whizz friends to the girl he’s besotted with. Please note, Stephenson’s style is rather direct, depending on the character he’s immersed in for a particular chapter:

“We are going to launch our own currency.” By saying this, Randy is divulging proprietary information to someone not authorized to hear it. But he does it anyway, because opening himself up to Amy in this way, making himself vulnerable to her, gives him a hard-on.

“How do you go about that? Don’t you have to be a government?”

“No. You have to be a bank. Why do you think they’re called banknotes? Randy is fully aware of the insanity of divulging secret business information to a woman solely for purposes of sexual self-titillation but it is in the nature of things, right now, that he doesn’t especially care.

“Okay but still, usually it’s done by government banks, right?”

Only because people tend to respect the government banks. But government banks in Southeast Asia have a huge image problem right now. That image problem translates directly into crashing exchange rates.”

“So how do you do it?”

Get a big pile of gold.

Issue certificates saying ‘this certificate can be redeemed for such-and-such an amount of gold.’ That’s all there is to it.”

“What’s wrong with dollars and yen and stuff?”

“the certificates—the banknotes—are printed on paper. We’re going to issue electronic banknotes.”

“No paper at all?”

“No paper at all.”

“So you can spend it on the Net.”

“Correct.”

“What if you want to buy a sack of bananas?”

“Find a banana merchant on the Net.”

“Seems like paper money’d be just as good.”

“Paper money is traceable and perishable and has other drawbacks. Electronic banknotes are fast and anonymous.”

“What’s an electronic banknote look like, Randy?”

“Like any other digital thing: a bunch of bits.”

“Doesn’t that make it kind of easy to counterfeit?”

“Not if you have good crypto,” Randy says. “Which we do.”

“How did you get it?”

“By hanging out with maniacs.”

“What kind of maniacs?”

“Maniacs who think that having good crypto is of near-apocalyptic importance. By reading about people like [Japanese WW2 admiral] Yamamoto who died because they had bad crypto, and then projecting that kind of thing into the future.”

“Do you agree with them?” Amy asks. It might be one of those pivotal-moment-in-the-relationship questions.

“At two in the morning, when I’m lying awake in bed, I do,” Randy says. “In the light of day, it all seems like paranoia.”…

Conveniently, Amy is the descendent of a POW who escaped a World War 2 Japanese General’s gold horde somewhere in south east Asia. That story is the other half of the book. It follows Alan Turing’s fictional friend to illustrate the importance of cryptography – the essence of cryptocurrencies.

Real money returns to us

Cryptocurrencies backed by precious metals are already up and running. Thanks to certain Islamic rules, one has become popular in the Muslim world.

OneGram is backed by a gram of gold. It’s Sharia compliant. ZenGold is the same idea and the Chicago Mercantile Exchange, the biggest commodity market in the world, is working on its own version using gold in the UK’s royal mint.

So now there are vast amounts of cryptocurrencies to choose from. Some are backed by precious metals, some are easy to use, some are doomed to failure. Some could make you very rich. Figuring out which is which is the key.

As before, in the age of free banking, knowing which bank to choose made all the difference. That’s the problem with currency competition. It adds another choice to your life. Not that this seems to bother people when it comes to their investments, cars, or toothpaste.

Figuring out which cryptocurrency will end up proving its metal is missing the point. There are some to avoid, for sure. But the real issue is, which one suits you best personally? Do you want one that offers easy payment? An asset backed option like GoldGram and ZenGold? Or the mainstream bitcoin? Perhaps the dynamic Ethereum which is far more than just money?

If you’d just like to speculate on the currencies, here’s how. The gains are measured in thousands of percent. And the market is only getting started in size and new offerings.

Either way, it’s clear you need a guide to all this. The perfect one from a credible source and early adopter has popped up and you can access it here.

When will governments compete too?

Advocates of free banking and privatised money don’t necessarily want money to be privatised. (Who would want to buy the pound after the Bank of England has been on a printing spree that would make hyperinflator John Law blush.) They just want the opportunity to compete alongside government. That’s the best way of allowing private money, if it does work, to take over gradually.

The thing is, governments might just jump on the cryptocurrency bandwagon. Rumour has it that Russian President Putin requested Ethereum founder Vitalik Buterin to look into creating a national cryptocurrency for Russia. Putin reportedly doesn’t have a computer screen in his office and does all his work by paper, so that’s quite a step.

Singapore went a step further and actively tested the idea of a national cryptocurrency.

Imagine a world where you can choose your money. It’s already a day to day matter for Venezuelans, Zimbabweans and many others. But the digitisation of money has enhanced the selection you can choose from infinitely. Anything could be created.

Perhaps the most important feature of cryptocurrencies isn’t their particular characteristics or the digitisation of the payments system. Perhaps it’s the re-emergence of competition itself. Perhaps the real innovation is yet to come.

Cryptocurrencies mean the return of currency competition. And given what competition did to all our other goods and services compared to the likes of consumer choice in Soviet Russia and Communist China, we probably have a long way to go.

You need a guide through what’s to come. Not just for the extraordinary profits. But simply to benefit from what cryptocurrencies promise in terms of convenience, safety, security, flexibility and much more. Get yours for here.

Until next time,

Nick Hubble,
Capital & Conflict

Category: Investing in Bitcoin