XRPUSD Ripple

Introduction

Crypto-assets have drawn much attention of late. From https://www.forbes.com/sites/rhockett/2017/12/17/betting-on-beta-coin/#20a9cc364670" href="https://www.forbes.com/sites/rhockett/2017/12/17/betting-on-beta-coin/#20a9cc364670" target="_self">Bitcoin’s market volatility through https://cointelegraph.com/news/coinbase-reportedly-secures-20-billion-hedge-fund-through-its-prime-brokerage-services" href="https://cointelegraph.com/news/coinbase-reportedly-secures-20-billion-hedge-fund-through-its-prime-brokerage-services" rel="nofollow noopener noreferrer" target="_blank">regulator puzzlement over how best to regulate Bitcoin’s cousins, stories in the financial press seem as often as not to concern digital currencies, blockchain technology, or any of a bewildering array of newish topics now routinely lumped together under the barbarous rubric of ‘https://ftalphaville.ft.com/2017/08/18/2192493/the-finance-franchise-and-fintech-part-2/" href="https://ftalphaville.ft.com/2017/08/18/2192493/the-finance-franchise-and-fintech-part-2/" rel="nofollow noopener noreferrer" target="_blank">fintech.’

Against this backdrop one hears https://www.businessinsider.com/hedge-funds-being-lured-by-coinbase" href="https://www.businessinsider.com/hedge-funds-being-lured-by-coinbase" rel="nofollow noopener noreferrer" target="_blank">countless dark and countless sunny augurs. Some claim that crypto-monies will supplant ‘fiat’ money, thereby liberating us all from both government oppression and central bank ‘debasement’ of currencies. Others warn blockchain will aggravate crime and yet-further shade shadow-markets, which we’ll lose all capacity to regulate. And still others look forward to privacy utopias and revived https://www.forbes.com/sites/katiegilbert/2014/09/22/why-local-currencies-could-be-on-the-rise-in-the-u-s-and-why-it-matters/#4f627dc44e95" href="https://www.forbes.com/sites/katiegilbert/2014/09/22/why-local-currencies-could-be-on-the-rise-in-the-u-s-and-why-it-matters/#4f627dc44e95" target="_self">local ‘circulation economies.’

Many a layperson who’s lacking in info-tech education might wonder now just what to make of these claims. Must one be a programmer or cryptographer before s/he can weigh-in on such heady matters?

I think the answer where most fintech’s concerned is a ‘probably not.’ Where crypto-currency’s the subject, however, I’m sure that the answer is no. For as it happens, we have been here before.

The story of America’s money is a preview of the story we’ll soon see unfold for crypto-money. Our money’s past is, in short, our cryptos’ future.

Dollar bills are remarkable things. They’re the same all over the United States. Take out money from a bank branch or an ATM anywhere and you’ll get the same thing for your trouble: a combination of green one dollar, five dollar, ten dollar, twenty dollar or perhaps hundred dollar notes. They’ll all look the same, and they all will be worth the same when their denominations are the same.

That is what sovereign-issued currency looks like, even when paid out by nominally ‘private’ banks. Because they all deal in national currencies, banks are not really as private as you might think. They are licensed by us, the sovereign public, to deal in our money – http://dollarsandsense.org/archives/2018/0318hockett.html" href="http://dollarsandsense.org/archives/2018/0318hockett.html" rel="nofollow noopener noreferrer" target="_blank">our Federal Reserve Notes, as our money bills call themselves.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2820176" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2820176" rel="nofollow noopener noreferrer" target="_blank">In effect, banks are franchisees, while we the sovereign public are the franchisor and our national money is the franchised good.

You can think of the uniform value and appearance of our currency as being a bit like those golden arches you see all around if you like: They serve to let everyone know that the item’s the same irrespective of just where you are in our nation – New York, California; Florida, Alaska ... They are always and everywhere the same.

And if a bank abuses the brand by, say, issuing bad loans or over-levering itself, it will risk losing its charter much as a restaurateur who sells spoiled food risks being booted from the franchise. That’s how franchises work. They are ‘quality control’ pacts, with the franchisees abiding by the terms and the franchisor administering the terms. Where our money’s concerned, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2820176" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2820176" rel="nofollow noopener noreferrer" target="_blank">we are the franchisor.

You might be tempted to think things have always been thus. Didn’t the U.S. make the dollar its money right from the start?

The answer is, ‘yes and no.’ The key feature of the dollar in the early days of our republic – until 1863 – is that it was then a mere unit of account, not a currency. Sure, the Mint minted coins, but paper money – ‘notes’ – were issued by private banking institutions. Hence the term ‘http://dollarsandsense.org/archives/2018/0318hockett.html" href="http://dollarsandsense.org/archives/2018/0318hockett.html" rel="nofollow noopener noreferrer" target="_blank">bank notes’ for paper currencies that circulated in the 19^th century. America’s paper money supply was a plethora of privately issued ‘bank notes.’

Bank notes were denominated in dollar increments, but were not sovereign-issued liabilities. The banks were their own franchisors and franchisees alike, and their notes were their own liabilities - liabilities of their private issuers. Different issuers, for their part, were differently reliable. Two banks might both promise redeemability of their notes into the same quantum of something more solid – gold, for example – but might well be differently able to live up to their promises.

These differences among banks’ reliability stemmed from a variety of factors. One was that bank regulation was more technologically difficult in the 19^th century, meaning that regulators could be only so effective at exercising ‘quality control’ over paper currency issuers. Another was that all banks were chartered and regulated by states rather than by our federal government, meaning that differing state competencies at regulating could bring differing values to currencies issued in different states.

The upshot of this ‘https://www.youtube.com/watch?v=qdR4ujneQzo" href="https://www.youtube.com/watch?v=qdR4ujneQzo" rel="nofollow noopener noreferrer" target="_blank">Banking Babel,’ as I call it, is that the nation’s currency supply consisted in thousands of distinct bank notes all trading at various discounts to stated par. A dollar note issued by Billy the Kid Bank or Sidewinder Bank might trade at 50% of par, for example, amounting to no more than ‘four bits,’ not a dollar. A dollar note issued by Wyatt Erp Bank or Bald Eagle Bank might, by contrast, go for 90% of par, or even full par.

Making things worse, these currencies constantly fluctuated in value, both in relation to the goods and services they could command and in relation to one another.

‘How much money’ you had in your pocket thus varied with whose notes you carried and when, even though all were denominated as dollars. Shopkeepers in consequence had to maintain regularly updated discount schedules behind their counters, instructing clerks how much to discount separate banks’ notes in determining ‘how much’ (of what) to charge buyers for goods.

If you carried multiple banks’ notes in your pockets, making purchases at the general store could take you – and the store clerk – much longer than we’re used to now. Imagine what queues would form at the ‘checkout lines’ if we did that now…

Scarce wonder that this period of U.S. banking history is called the ‘https://www.youtube.com/watch?v=qdR4ujneQzo" href="https://www.youtube.com/watch?v=qdR4ujneQzo" rel="nofollow noopener noreferrer" target="_blank">wildcat banking’ era. (Those who think this was a good idea call it the ‘free banking’ era. It was free alright – it was pretty much value-free.)

Needless to say, private banknote money didn’t make for an optimal payments system. It was good that the nation had a unit of account – the dollar – but unfortunately it still lacked an actual currency.

This all changed in 1863. By that point the nation was embroiled in civil war. The Civil War threw up two factors that made a uniform national currency possible. The first factor was that the stresses of war made a single and stable currency more clearly necessary than ever before. To prosecute the war the federal government had to be able to spend its own currency anywhere in the union where government operations were necessary. The second factor was that the southern slave states, which had always been the principal objectors to national monetary uniformity, were conveniently unrepresented in Congress during the war years – they were trying to secede, after all.

The upshot was that Congress passed the https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/national-bank-act-1863" href="https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/national-bank-act-1863" rel="nofollow noopener noreferrer" target="_blank">National Bank Act, signed into law by President Lincoln in 1863. The Act established, for the first time in our nation’s history, a system of federally chartered ‘National Banks,’ located all over the nation, all issuing the very same currency. The latter was named, tellingly, the ‘Greenback.’ Sound familiar?

The National Bank Act (‘NBA’) transformed our interlinked banking, financial, and monetary systems. In very short order there were federally chartered banks in every state of the Union, all of them subject to uniform regulatory standards and all of them issuing, accordingly, a uniform currency with a uniform value.

These banks could also sell U.S. Treasury securities, making of them a system of outlets for issuance of both of our federal government’s principal circulating liabilities – Greenbacks and T-Bills. In no time at all, ‘wildcat’ banknotes left circulation, with Greenbacks and T-bills – our two sovereign financial instruments – the proverbial ‘only game in town.’

The administrator of this national bank system was called, tellingly, the https://www.occ.treas.gov/" href="https://www.occ.treas.gov/" rel="nofollow noopener noreferrer" target="_blank">Office of the Comptroller of the Currency, or ‘OCC.’ The name is telling because ‘comptroller’ is merely archaic English for ‘controller.’ The OCC, housed in Treasury, was the ‘controller’ – the administrator – of our first truly national currency system. That, and only that, was why the OCC was founded as the nation’s first federal bank regulator.

The OCC remains to this day one of our principal federal bank regulators. It is the chartering authority for national banks, administers those banks’ portfolio-regulatory and other regimes, and has final word on whether a national bank has gone bankrupt. It has rather less to do with the national currency, however, than it had for its first fifty years.

That is because, by 1913, we as a nation had come to realize that a healthy economy needed more than a uniform currency. It also needed what is known in the discipline as an elastic currency.

An elastic currency is a currency whose supply can be adjusted to accommodate, while not over-accommodating, transaction demand. The idea is to maintain just enough money supply to accommodate desired transaction volumes, so as not needlessly to squelch desired transacting, while at the same time preventing over-issuance of the sort that can spark inflation – the classic problem of ‘too much money’ chasing ‘too few goods.’

The OCC and Treasury more generally were not well equipped, operationally or transaction-technologically speaking, to engage in what I elsewhere call the daily ‘money-modulatory’ task that an elastic currency requires. Central banks of the kind found all over the ‘developed’ world circa 1913, by contrast, were well suited to the task. The U.S. accordingly established its version of a central bank, patterned partly on European models and partly on private clearinghouse arrangements among banks, with the Federal Reserve Act of 1913.

The https://www.federalreserve.gov/aboutthefed/fract.htm" href="https://www.federalreserve.gov/aboutthefed/fract.htm" rel="nofollow noopener noreferrer" target="_blank">Federal Reserve Act (‘FRA’) established the Fed that we all know today, and transferred administration of the national money supply from the Comptroller to this new entity. This is why the ‘Greenbacks’ you now find in your pocket call themselves, not ‘Treasury Notes,’ but ‘Federal Reserve Notes.’ So we now use ‘bank notes’ as currency just as we did in the 19^th century. It’s just that they’re public bank notes – ‘central’ bank notes – rather than private bank notes. They are Citizen Notes, you might say.

Now, what has this to do with crypto?, you might be asking. Well, think about it for a moment …

The Stages Go Digital

Let’s call the pre-NBA ‘wildcat banking’ era of wildly fluctuating private currencies ‘Stage 1’ of American monetary history. Let’s call the post-NBA, pre-FRA period of uniform but imperfectly elastic national currency ‘Stage 2’ of American monetary history. And let’s call the post-FRA period we’ve inhabited over the past century ‘Stage 3’ of American monetary history. Where might we situate digital currency development along this phased sequence?

I think it’s perfectly obvious that we’re at Stage 1 where digital currency’s concerned. We’re amidst, that’s to say, digital currrency’s ‘wildcat’ era. For one thing, there are many such currencies – indeed, a bewildering and seemingly all-the-time growing array of them. For another thing, they are all of them issued by private issuers, some of which seem to be more or less reputable, others of which seem to be … well, not so much. And finally, thanks to the factors just mentioned, these currencies fluctuate wildly in value, both relative to what they can purchase and relative to one another.

They’re essentially https://www.youtube.com/watch?v=qdR4ujneQzo" href="https://www.youtube.com/watch?v=qdR4ujneQzo" rel="nofollow noopener noreferrer" target="_blank">digital wildcat banknotes.

This is of course not a sustainable future for crypto. Nothing whose value is so wildly unstable can function for long as a ‘money.’ Something must change, then, before digital currency can expect a future.

What, then, might change? What might a ‘digital Stage 2,’ then ‘digital Stage 3’ look like? It seems to me that here, too, the future is obvious.

Note first that, unlike during the late 19^th and early 20^th centuries, there is no reason that what I’ve called ‘Stage 2’ and ‘Stage 3’ can’t be reached simultaneously. The reason is that our nation came to see the necessity of a stable currency before it came to see the necessity of an elastic currency, and accordingly instituted those things pursuant to the same ‘stage chronology’ of its own learning. Now, however, we’re well familiar with both those necessities, and can accordingly move to uniformity and elasticity in the digital currency space simultaneously.

Next, note that the Fed, like other central banks worldwide, is now looking to upgrade the national payments architecture, which it administers. https://en.wikipedia.org/wiki/Distributed_ledger" href="https://en.wikipedia.org/wiki/Distributed_ledger" rel="nofollow noopener noreferrer" target="_blank">Distributed ledger technology (‘DLT’), which forms the backbone of the better-known digital currencies, looks to be particularly promising where such upgrading is concerned. Within the next several years, I am wagering, payments systems worldwide will be built on distributed ledgers. The U.S. will be late as we always are where payments technology is concerned, but we’ll still soon be there.

When we do, what do you suppose happens? Easy: The dollar will go digital. The Fed will issue ‘Federal Reserve “Coins”’ and their keystroke equivalents much as it issues ‘Federal Reserve “Notes”’ and their keystroke equivalents now. In this new world, there will be little more use for what I’ll call ‘Wildcat Crypto’ than there was for ‘Wildcat Currency’ after the National Bank Act of 1863. These ‘assets’ will simply fade out, retained only as means of illicitly transacting in criminal activities until caught.

This is true even of the ‘https://cointelegraph.com/news/report-stablecoins-see-significant-growth-in-adoption-over-recent-months" href="https://cointelegraph.com/news/report-stablecoins-see-significant-growth-in-adoption-over-recent-months" rel="nofollow noopener noreferrer" target="_blank">stablecoin’ products that have developed in recent months with a view to addressing the wild fluctuations problem. Most of these peg to the dollar. What need of that when the dollar itself soon goes digital?

The Digital Dollar and a Citizens’ Fed

A Fed-issued and -administered digital dollar will be every bit as uniform and elastic as the Fed-issued and administered pre-digital dollar has been. Indeed it will likely be even more easily managed thanks to the superior tracking ability afforded by DLT. It will also, I predict, be something more: Because of the speed, reliability, and tractability of distributed-ledger-tracked credits and debits, a Fed-administered payment ledger will render quite feasible something that would have been difficult until recently: what I elsewhere call ‘Citizen Central Banking.’

That’s right, we shall soon be able to ‘cut out the banks’ as proverbial ‘middlemen’ between our citizens and their central bank. All citizens will be able to maintain what I call ‘Citizen Accounts’ with the Fed. Not only will all citizens be ‘banked’ – https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435534" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435534" rel="nofollow noopener noreferrer" target="_blank">no one ‘unbanked’ – in these circumstances, but the Fed will then have more potent monetary policy instruments at its disposal as well.

In the midst of recession or liquidity trap, for example, our central bank will no longer need supply cheap money to private banks and then hope they’ll lend it to ordinary citizens so’s to prime the consumer spending pump. Instead it can credit our Citizen Accounts directly. The ‘https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1987139" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1987139" rel="nofollow noopener noreferrer" target="_blank">pushing on a string problem’ that so plagued the Fed’s QE strategies in 2009-12 will be much diminished. By the same token, when spending appears to be ‘overheating’ and inflationary pressures loom, the Fed can simply offer or raise interest payments on Citizen Accounts.

Direct central banking, in short, is apt to be far more effective even than indirect central banking has been. And the new digital dollar – still Fed-issued, still Fed-administered – will make that more feasible than it’s ever been.

Conclusion

There is of course much more to say about all of this, which I do in more scholarly as well as technical policy-pushing and program-designing work. But for present purposes the point should be clear. Money’s past is always and everywhere money’s prologue. All that changes is the technical base upon which our money systems are founded.

Insofar as the state of the art now is DLT, money itself will be DLT. But it still will be stable, and still will be elastic, if it is money. And that means it still will be sovereign – it will be ‘our’ money.

So long, then, Bitcoin, and so long, Etherium. And welcome to America, new Digital Dollar.

Source: Forbes
Robert Hockett Contributor