The Truth About Cryptocurrencies

The Truth About Cryptocurrencies

The news today is full of stories of fortunes made or lost through investment in Bitcoin, Ethereum, and other cryptocurrencies. But what exactly are these new digital currencies? How did they come about, how do they work, and why are they so popular? In this interview, David Roche tells the story of the birth and development of this new kind of money, the impact it is already having on global economics and politics, and the reasons why central banks and governments are so worried by the rise of cryptocurrencies. David Roche is a global investment strategist based in Hong Kong. During a long career he has forecast some of the major turning points that have affected global markets, such as the demise of the Soviet Bloc and the subsequent fall of the Berlin Wall, and the financial crisis that swept Asia in the late 1990s.

David Roche, founder Independent Strategy Ltd.

The Truth: What are Cryptocurrencies?

David Roche: [00:00:33] Ok, well, the crypto bit means they’re encrypted. Which means that they work through something like a blockchain technology, which I would explain. I’m not trying to kind of confuse people with more jargon. What they are a form of currency which fall outside the control of a central bank or a government. (Fiat money is a type of money that is not backed by any commodity such as gold or silver, and typically declared by a decree from the government to be legal tender). And they represent an alternative way of investing or using money to transact or measuring value. That’s the theory. So, they are meant to do everything that what is called a fiat currency, which is the traditional sort of currency you get from your corner bank. They’re meant to do everything it does, but without having government in the cockpit. That’s in a nutshell. Now, blockchain. Let me explain that for a minute. That is a succession of transactions. So, you sell me your cat. I buy some cat food and I take the cat to the vet, and then I sell the cat to another person. So, we have four transactions going on in that now. What a blockchain transaction is, it links one transaction to the other, transaction to the other transactions. So, think of your model train set. And these are linked using encryption. So, you have these four wagons and let’s say, a locomotive chugging along link. They can only be unlinked or changed or taken off the rails or put on another siding or another rails, if everybody in that chain agrees, that’s a blockchain transaction.

Blockchain Technology and Cryptocurrencies

Neil Koenig: [00:02:18] How do you access the blockchain? Is this publicly available?

David Roche, founder Independent Strategy Ltd.

Bitcoin and Ethereum

Neil Koenig: [00:07:08] Bitcoin and Ethereum and lots of these other digital currencies we’ve been talking about are products of the private sector, but now the public sector is starting to get involved, isn’t it?

Fiat Currencies and the Lack of Trust in Them

David Roche: [00:15:00] Because they don’t trust the existing fiat currencies. They see what is going on between central banks and governments, governments spending money they don’t have and central banks providing governments with the money to do so. They see an instinctively that this is a debasement of fiat currencies. They also see the rise of government control. And not only is it the CCTV cameras everywhere. If the government controls currency, then the government can control how you spend it. And it also can keep increasingly tabs on you through how you behave. So, the second issue is that people want to get out of the way of governance, and that was a function which was given to the individual by having the anonymity of cash. If you went around the place with 500-euro notes in your pocket, you could basically do what you like. There was no way the government could trace what you did. But now there are no more 500-euro notes. Now why is that? And the answer is because the growth in demand for traditional cash anonymity has been rising outside of the countries which issue it. So, you have to go to the Russian mafia to find out why they all love for euros. Now, what digital currency does is it increases the anonymity of cash. Because people in all sorts of activities, they might be legitimate, they might be antisocial, or they might be just plain, downright criminal or fraudulent. They can achieve anonymity using digital cash. That’s one reason, but it’s not the only reason. The perfectly legitimate reason is that people do not trust fiat currency anymore, and above all, they do not trust the people in charge of the fiat currency, be they central bankers or ultimately, governments.

Fiat Currencies

Neil Koenig: [00:26:36] It’s the difference, though, between a traditional fiat currency issued by a central bank and a central bank digital currency just really a question of semantics or theology?

Central Bank Cryptocurrencies

David Roche: [00:32:24] Well, the pros for a central bank cryptocurrency are that it gives you stability. You’re basically owning the national currency, whatever that Central Bank is responsible for. And it won’t vary in value. So that’s the pro. The negatives are that if these powers to issue cryptocurrency do not get you out of the way of the risk that central banks will debase the national currency anyway, so they can debase it through issuing too much of it or, the government spending too much money and borrowing too much of it from the central bank and I can go on. So, that’s the plus and the minus of a central bank digital currency. The plus and the minus of a private sector digital currency. Is, one transactability. Can you really go around the place like you do, with a UK bank deposit and spend and use this money without ever actually seeing it in a cash form, coin are banknotes? And the answer is it’s still very difficult. It’s slow. And the fact that the value of cryptocurrency is highly volatile, means the price you paid for something yesterday is not necessarily the price you’re going to pay tomorrow. So, that’s a big disadvantage. The advantage is the flip side of everything I’ve said about central banks. You get out of the way of government, and you get into a currency, which is determined purely on the basis of transactions. And as we started in the beginning, blockchains of transactions between people who agree to do so. And that currency is then out of national power and people like it for that reason now. They can like it for good reasons. In other words, there can be sound reasons for them to be like that. Or they can be criminals.

It is All Dependent on How it is Used and Applied

David Roche: [00:44:22] It’s the same sort of thing. It’s at the same degree of maturity. But because people will continue to want to avoid the state and the state control, which state sponsored cryptocurrency will give, then I think you can say that this is a major plus from having a private sector digital currency because it limits the power of the state, and it provides anonymity to people who will lose that anonymity as a state increasingly moves towards things like central bank digital currency. So other advantages? Yes, the disadvantages we know. They’re volatile. They’re immature. They have not achieved the network which they need to be a real rival to fiat currency, but I say yet. And they involve fraudulent and criminal activity. And most of all, because it affects the most people, they can destabilize the financial system and the economy for everyone. So, there is a balance sheet. But again, like any other technological innovation, it’s misuse like Facebook for hate speech and so on. Its misuse is horrific. But that does not say that the tool of itself is horrific. The tool can be good or bad, depending on how it is used and how it is applied.

Neil Koenig, ideaXme board advisor.

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