Stephen DeMeulenaere

Alternative, Community, Complementary, Bitcoin, Cryptographic, Digital Currencies & Payment Systems specialist

Stephen DeMeulenaere - Alternative, Community, Complementary, Bitcoin, Cryptographic, Digital Currencies & Payment Systems specialist

Bitcoin: A Revolution in Payments – Not a Revolution in Money

*work in progress

Bitcoin, the digital cryptocurrency that is getting the banking system’s ‘knickers in a knot’ for everything from its perceived secrecy, security and relative anonymity, to it’s disruptive payments technology, the Blockchain, makes many of us think the monetary revolution has finally arrived.

Sorry to break it to you, it hasn’t arrived — yet. 

Bitcoin resembles it’s arch-rival Fiat Money (national currencies) in several important ways:

  1. Issuance: Fiat Money is created through issuance of debt. Bitcoin is issued through the mining process and valued primarily through conversion of Fiat to Bitcoin. 
  2. Roles: Fiat Money and Bitcoin share the dual roles of money as a Store of Value/Wealth and Medium of Exchange. By design they seek to accommodate all functions of money in one form. This is important, I’ll explain at the end of this list.
  3. Wealth Pyramid: The Ratio of Wealth to Poverty in the current international monetary system is 88:1. In Bitcoin, the top 100 of 35,000,000 addresses hold nearly 1,600,000,000 of a total capitalization os 8,100,000,ooo. This is also a very unequal ratio.

Bitcoin differs from Fiat in one important aspect:

  1. Currency Stability Controls: The fiat system has a few mechanisms for controlling the value of currency, interest rates being the primary mechanism. Bitcoin does not have a stability mechanism. It’s basically the same as circulating shares in a company as money.  The function of Bitcoin as a Unit of Account fluctuates in value wildly, driving future cryptocurrencies toward Fiat Denomination.

The Bitcoin Dilemma

The dilemma stems from Bitcoins similarity with Fiat in being both a store of value and medium of exchange. In the Complementary Currency movement, we sought to separate these two functions into two or more different currencies, which is basically why we call them “complementary”. In the crypto ecosystem, this is best represented by Freicoin, which charges a holding fee on the currency to incentivize circulation over hoarding, which makes it an unattractive investment currency, as noticed on coinmarketcap where it’s sitting at around 65th place. The dilemma with Bitcoin then is whether to save it, expecting the value to rise, or to spend it because it’s so easy and that’s what should be incentivized to flatten the pyramid.

What’s coming up around the corner? Bitcoin and other cryptocurrencies denominated in Fiat values, putting control over currency stability in the hands of the bankers and machinery of banking.

Ridiculous! Why would Bitcoiners just go stab their currency in the back like that?

Now for some headlines to back me up:

July 9, 2014
Dollar Backed Digital Currency Aims to Fix Bitcoins Volatility Dilemma
http://blogs.wsj.com/moneybeat/2014/07/08/dollar-backed-digital-currency-aims-to-fix-bitcoins-volatility-dilemma/
Founded by Brock Pierce, a former Disney child actor who is now a prolific bitcoin investor, along with ad industry entrepreneur Reeve Collins and software engineer Craig Sellars, Realcoin is the latest in a wave of so-called Bitcoin 2.0 ventures…

5 July, 2014
“Bitcoin-backed Dollars” and How the Blockchain could Enable a Billion Unbanked to Enter the Middle Class
http://cointelegraph.com/news/111995/bitcoin-backed-dollars-and-how-the-blockchain-could-enable-a-billion-unbanked-to-enter-the-middle-class-patrick-dugan-interview

24 June, 2014
“The End of Bitcoin Volatility?” The Soft Launch of Bitreserve
http://www.coindesk.com/first-glimpse-inside-halsey-minors-new-payments-platform-bitreserve/
Bitreserve is founded by Halsey Minor, who also founded CNET.

Friends, these are not small-fry startups jumping up and down trying to gain attention and hopefully a slice of market share. These are projects being started by the founder of CNET, and a Bitcoin Foundation board member, among others!

Conclusion

The revolution in Money, the explosion of the emerging monetary ecosystem happens when the functions of money as a Store of Value and Medium of Exchange are separated. This was the case from ancient times, when Precious Metals and items were Stores of Value and only rarely and for large purchases as mediums of exchange while on the other hand Warehouse Receipts representing food and goods in actual storage were circulating as money.
Read “Debt: The First 5,000 Years“.

Then, once this has been achieved and we have a plethora of currencies around us to choose from, to use for specific purposes and according to certain incentives and to strengthen certain personal or community bonds, these currencies will have mildly fluctuating Units of Account that will remain stable over the long term. This being achieved by two main mechanisms, being issued as interest-free credit, and demurrage, a charge on the holding fee of money.

Money or items that are designed to function as a Store of Value, what Bernard Lietaer calls “Yang” currencies probably won’t be eliminated, just as there are still remnants of the Monarchy in some countries. But what will change is money as a currency, and Bitcoin will be merely a jumping board for people to join the emerging multi-currency monetary system.

Dollar-Backed Digital Currency Aims to Fix Bitcoin’s Volatility Dilemma

It’s happening much faster than i thought.

Dollar-Backed Digital Currency Aims to Fix Bitcoin’s Volatility Dilemma

Excerpt:

The startup, Realcoin, is set to announce that its digital currency, dubbed realcoins, will be backed one-to-one by a fully auditable reserve of dollars.

Founded by Brock Pierce, a former Disney child actor who is now a prolific bitcoin investor, along with ad industry entrepreneur Reeve Collins and software engineer Craig Sellars, Realcoin is the latest in a wave of so-called Bitcoin 2.0 ventures, which use bitcoin’s computer infrastructure to exchange property and execute contracts without third-party intermediaries. These projects open up bitcoin’s decentralized, peer-to-peer network to a variety of commercial uses beyond just transactions denominated in bitcoins.

Link to the article:

http://blogs.wsj.com/moneybeat/2014/07/08/dollar-backed-digital-currency-aims-to-fix-bitcoins-volatility-dilemma/

Bitcoin-backed Dollars

“Bitcoin-backed Dollars” and How the Blockchain could Enable a Billion Unbanked to Enter the Middle Class – Patrick Dugan Interview

http://cointelegraph.com/news/111995/bitcoin-backed-dollars-and-how-the-blockchain-could-enable-a-billion-unbanked-to-enter-the-middle-class-patrick-dugan-interview

In this interview, Patrick Dugan proposes to create a fund that will short Bitcoin and thus be able to issue a dollar-denominated circulating credit. By reducing the supply of Bitcoin further, it is expected that prices would rise, protecting the short position further and even offering dividends as the price of Bitcoin rises.

Your thoughts?

“The End of Bitcoin Volatility?” The Soft Launch of Bitreserve

bitreserve_accountJust a few days after my series of posts on cryptocurrency stability, a new bitcoin-only payments platform, Bitreserve, has opened its system for beta use. Bitreserve is founded by Halsey Minor, who also founded CNET.

Bitreserve enters the market somewhere between Coinbase, Bitpay, Circle and Ripple, offering ease-of-use for crypto-newbies and multi-currency accounts to provide some relative stability. Hence Bitreserve’s first (but probably not last) tagline: “The End of Bitcoin Volatility”.

Although there is no direct contact with the Banking System, meaning that Bitreserve is a Bitcoin in/Bitcoin out platform, Bitreserve allows people to diversify their risk in holding Bitcoin in an online wallet denominated in 5 different currencies. Holding funds in an online wallet is risky in an ocean filled with surfers and sharks.

The systems for increased transparency by providing records and audits is intended to assist the account holders to make better financial decisions with their Bitcoin, leading to increased stability in the currency. However, this is for the account holders in Bitreserve, not for the currency in the system.

Is it necessary to end Bitcoin volatility, as Halsey Minor is expecting consumers want? While this is still debatable, my bet is on the No side as small fluctuations in value provide useful signals that help us to adjust our economic behaviour. However, given Bitcoin’s small currency pool (presently at 2.5% of the market value of Google), it’s a safe bet that Bitcoin’s value in a variety of national currencies will be volatile throughout its lifespan.

A better question would be, what would consumers and businesses benefit more from? a new cryptocurrency whose value is either permanently stable as in the Gogo example, or relatively stable, as in the Terra example, or less stable as in the Bitreserve example, or wildly unstable, as in the Bitcoin example?

The link to the full article is here: http://www.coindesk.com/first-glimpse-inside-halsey-minors-new-payments-platform-bitreserve/

A Cryptocurrency with a Stable Unit of Value – Some Options Toward a Solution (5/5)

* work in progress

In the previous posts, I described the disincentives to using cryptocurrencies as currencies. Until there is a stable Unit of Value, it may be better to call them cryptocommodities that can circulate electronically.

The Community or Complementary Currency Movement, which predates cryptocurrencies by 30 years, debated constantly over the issue of whether or not to peg the currency to the national currency. Time-valued currencies with a national-currency value was one option that worked well for HOURS and Time Dollar currency systems, which set a standard for example of 1 Hour = $10. Each hour value could then circulate as either value.

Most other systems felt it was just too difficult to try and explain and educate about the new value to prospective members, and so they stuck with the dollar peg, with the idea that this would some day be removed once a better method was found.

In Argentina before 2002, the economy was running well enough with the Argentine Peso pegged to the US Dollar. When I was there in 1999 to attend the founding conference of the Latin American Socio-Economic Solidarity Network, the 500,000 members of the Red Global de Trueque (RGT) were circulating completely independent alternative currency notes that were pegged to the Argentine Peso and the Dollar. Then 2002 came, and the RGT crashed along with the Peso. There were reasons for this crash other than just the rapid change in Peso – Dollar valuation when the peg unhinged, but an independent and stable Unit of Value could have helped to prevent the RGT crash.

The Terra TRC was one step in the right direction, and the Gogo was another in a different direction. But these were ways of mitigating the inherent inflation in debt-issued national currencies. How might it look for inherently deflationary Mediums of Exchange like Bitcoin? Would an incentive be necessary to encourage people to move to a more stable Unit of Value? Should the stable Unit of Value be on a side-chain, or in another cryptocurrency?

Using the Gogo as a model, factoring in the total amount of currency to be issued according to any variety of proofing methodology, during a shorter specific Period than most existing cryptocurrencies, say 10 years, and in a series or periods so that new series may change in value, an amount could be found that would most resemble a national currency value that the users would be most familiar with, but not be pegged to a national currency.

Using the Terra TRC model, people would need to be familiarized with the Unit of Account that would be based on a basket of currencies and commodities. Many items cost relatively the same around the world, so this would not be impossible to achieve.

Would an incentive to convert be necessary? I don’t think so. Bitcoin and its could go on being the stock or commodity it is presently being traded as, and be the first point of entry to the new multi-currency world that is already here.

Effective commerce demands a relatively stable Unit of Exchange. Why haven’t cryptocurrency designers realized this?

Social Justice also demands a currency that is in the hands of the people. Should cryptocurrencies be accessible only to those who have other forms of money in the first place, and should everyone else have to wait for the trickle-down effect?

 

Ecological sustainability also demands a stable currency, one that prevents unnecessary speculation and stops unlimited growth on a finite planet.

Development is done, the Post-Scarcity Era is here. Shouldn’t a cryptocurrency also contribute to sustainability, or has nobody read Herman Daly or Bernard Lietaer or Murray Bookchin?

Your thoughts?

Example of a More Stable Currency: The Terra – Trade Reference Currency (4/5)

We Bitcoin enthusiasts need to brush up on our alternative currency history. Since 1980, alternative currency enthusiasts around the world began to tinker, individually and collectively, with new forms of money. Their tool? The computer. Long before the internet was invented, the computer helped us to organize our thoughts and design new concepts in ways many of us would have found impossible otherwise.

Bernard LietaerBernard Lietaer is often mentioned as one of the leading theorists of alternative currencies, in fact there was a post on the Ripple website that mentioned him just this morning, about financial inclusion, the idea that anyone, not just those who have money, should have access to money and banking services. 40% of the world’s people do not have this access.

Bitcoin is financially exclusive. You can’t just go online somewhere and download it for free, like you can with other kinds of complementary currencies. Bitcoin as a commodity currency harkens back to the days of Empire, while those of us working with complementary currencies believe that the future is with interest-free mutual credit currencies.

My point here is that many of the elements of better forms of money have been designed already, and designers of new cryptocurrencies should take a quick look back to see if there’s anything interesting. Freicoin, for example, draws from the work of Silvio Gesell and has implemented the concept of Demurrage, negative interest, into its cryptocurrency.

Now, regarding our ongoing discussion of stable currencies, Bernard Lietaer introduced the concept of the Terra Trade Reference Currency in 2010, as a way to “systematically stabilize the effects on the business cycle and re-align financial interests with long-term sustainability.”

[Sustainability? What's that? We can design a currency without unlimited planet-destroying growth built in? We'll talk about that later...]

According to the Terra Whitepaper, the lack of an international standard of value is behind much of the world’s currency instability, the boom-bust cycle and political-military conflict. The Terra, in summary, would be a privately-issued currency circulating alongside (complementary to) national currencies, “backed by a standardized basket of the most important commodities as well as some standardizable services traded in the global market”, with Demurrage at a rate of around 3.5-4% per year, charged in order to incentivize circulation over investment or hoarding, as well as to be inflation-proof by being issued only to assist the exchange of goods or services. To convert back from Terra to a national currency, a 2% fee would be charged.

The Terra concept sounds very much like what Bitcoin could have become, a stable international currency to replace the dominance of the US Dollar and whatever we know is backing it. Since Bitcoin is not going to become what the Terra had designed, will another alt coin be able to achieve this goal?

Endnote:

Oddly enough, Terracoin has nothing to do with Bernard Lietaer’s Terra currency, instead opting to become a prepaid-Bitcoin card. Gogocoin is not related to the Gogo, the completely stable currency I wrote about in my last post, whose design predates Gogocoin by about 15 years.  Too bad.

Working example of a Completely Stable Currency, the Gogo (3/4)

investorbrainAny currency that rises or declines in value too quickly discourages people from spending it, and they will look for other exchange options that are more stable. This is true for national currencies, that are inherently inflationary, as much as Bitcoin, which is inherently deflationary.

The Gogo is a design for a completely stable currency invented by Austrian Hans Eisenkolb in the small town of Grand Forks, British Columbia, Canada around the year 2000.  This town which has its own population of wild deer grazing the front lawns in the center of town is about a four hour drive through the countryside from Kelowna, where Ryan Fugger designed the concept for what is now known as Ripple classic.

Eisenkolb studied Silvio Gesell and his disciples Karl Walker, Otto Lautenbaxh, Otto Valentin, Fritz Schwarz and Rudoplf Steiner who went on to develop the well-known teaching methodology for the better part of the past 60 years.

Although barely noticeable, inflation is inherent in the present debt-based international monetary system. In the west, one will barely notice the rise in prices over a 3 year period. However, in developing economies where inflation is much higher, prices can increase several times over the same period.

The main problem with this is that price increases happen in advance of wage increases, so those who earn a salary are always making less in terms of what they can purchase, than their salary would earn if prices did not change. Inflation also means that the currency is always being devalued, so that today the value of a Canadian dollar or any national currency is much less than it was a decade ago. If you are old enough to remember the prices of goods from ten years ago, this is easy to see.

Eisenkolb’s solution then, was to peg the value of a Gogo to the value of a Canadian dollar in 1980. One could then chart the decline in the value of a Canadian dollar from that period using the official Consumer Price Index, which would then become the exchange rate for converting a Canadian Dollar into a Gogo.

Here’s an example from the Tauschring Hintertupfing:

Tauschring Hintertupfing

Knowing that the value of a Deutschmark, or a Euro would continue to decline, the holder would be incentivized to convert their national currency into the stable currency as soon as possible.

A popular myth says that Bitcoin is a non-inflationary currency, however this doesn’t mean much when the value of Bitcoin can rise or fall by 30% in a month. The main issue is stability in the unit of exchange.

Whether you purchased two Pizzas three years ago for 10,000 Bitcoin, now worth about $5,650,000 at June 2014 exchange rates, or purchased a $1 lighter three years ago which is now worth $560 dollars, or purchased Bitcoin when it was at $1,300 and reluctant to spend it at a +%50 loss, people holding Bitcoin are disincentivized from spending, and this is going to hinder its circulation as a currency for the foreseeable future.

The possibility of stablizing the value of a Bitcoin may come with the introduction of Side-Chains, or through an alt-coin, specially designed to be permanently stable.

The website archive for Gogo is here: http://www.hanseisenkolb.de/gogo.htm

Your thoughts?

Could a National-Currency Pegged Cryptocurrency be the next Step? (2/4)

Shortly after my previous post on a stable unit of value for a cryptocurrency to be really treated as a currency, Juan Manini asked the timely question in a recent post in a Bitcoin discussion group on Linkedin, “could a fiat-pegged cryptocurrency could be the next evolutionary step for money?”

Despite all the dislike of fiat national currencies which suffer from inherent inflation, and are only issued as debt by banks which we now know to be unpayable, national currencies do have a relatively stable unit of exchange, at least in the top 20 countries in the global economy. If the increase in prices is only a few percent per year, we don’t seem to mind, but for those of us living in one of the other 170 countries, where inflation is often above 10% per year, it becomes very noticeable.

On the other side, Bitcoin is a deflationary currency, and as the hoped-for equilibrium will bring this deflationary aspect under control, it’s still too much for people to bear, and this is keeping them from spending their Bitcoins.

The value of Bitcoin is very much tied to the state of national currencies because that is the only way to acquire them directly, and what is wrong with these national currencies, mainly the fact that we know that world will never be debt-free is one reason people are converting them to Bitcoins.

However, only people with money and access to being able to buy them can convert their national currency into them. The rest of us get to wait for it to trickle down on us, and with 927 people owing half of all bitcoins in existence in December 2013, which has only changed very slightly 7 months later in June 2014, where less than 100 people hold between 10,000-100,000 Bitcoins in their wallet(s) and 18% of the market, it seems to be taking a while to broaden. If money gets tight as it does in a crisis some people who have wealth may convert them to Bitcoin, gold or silver, while others will not have such an opportunity.

This is Bitcoin as a commodity, but until a way is found to stabilize its value so that you don’t feel like you’re paying more every time you buy something when Bitcoin is rising, or losing money if you bought it when it was higher-priced, then people will not be encouraged to use it as a currency.

Maybe it’s time to look back at the 40 year history of Complementary Currencies before cryptocurrencies were created. Today there are some 4,500 communities worldwide that have their own local interest-free non-inflationary/non-deflationary/non-crypto/non-convertible to national currency currency, a truly independent unit of exchange. There is a database on 250 of these systems at the Complementary Currency Resource Center at  www.complementarycurrency.org, and there are many different types of systems with many different kinds of features. Bitcoin and Freicoin are listed there as well.

A national-currency pegged cryptocurrency is not necessarily the next step, but a stable unit of exchange for cryptocurrency is. It would also be great if there was a fairer method of issuance rather than mining, purchasing or earning.

In the next installment, I’ll be presenting two ways that complementary currencies are able to stablize their value, one relatively stable, and one absolutely stable.

Could a Stable and Convertible Cryptocurrency be the next Alt Coin? (1/4)

*Work in Progress

While the value of 1 bitcoin changes in value by tens or even hundreds of % on a regular basis, the use of a Bitcoin as a currency, as compared to a store of value or tool of speculation, is greatly diminished.

The Unit of Exchange, what 1 bitcoin will buy, is the least stable aspect of this cryptographic currency. Let’s use the past 3 months as an example…

bitcoin_chart_apr-jun2014

Looking at the 30 year history of Complementary Currencies, the Unit of Exchange has always been the most important part of the local currency exchange network. Many systems came up with unique names for their currency, such as acorns, shells, green dollars, etc, and unique valuations, such as 1 Ithaca HOUR = $10 USD.

While early underestimates of Bitcoin’s value, such as the famous purchase of a pizza for what is now a [couple hundred thousand dollars?], even in May 2014 we can see Bitcoin’s value increase by 30%, which means whatever purchase you have made, you’ve technically paid 30% more that you would have if you just paid for it in national currency.

If Bitcoin in particular, and Alt Coins or Cryptocurrencies in general are going to move beyond being a Commodity, much like bullion gold or stock shares, as they have been classed by most central banks, then the unit of exchange must change.

It doesn’t make sense to just peg the cryptocurrency at a national currency value, like Argentina’s Central Bank did in the 1990s which led to an unhinging in 2002, but a more stable valuation that achieves two main goals: 1. encourages people to convert their national currency to cryptocurrency for a clear monetary advantage and 2. results in a long list of goods and services with clear and relatively (or permanently?) unchanging prices. If I pay $3 for a loaf of 7-grain bread today, I would like to pay $3 for that same loaf in 4, 6 or even 12 months time.

Is this possible? Can we design a mechanism to that would achieve these two goals?

The answer is Yes, it has been done although few people know about this mechanism, and I will be writing about this in my next four posts.