Ever since Bitcoins dramatic conception and explosion in popularity following the 2008 financial crisis; it would be a safe bet to assume that financial incumbents worldwide have had all there top think tanks planning on how they can marginalise, undermine, circumnavigate and prevent one of the biggest black swans in global finance for centuries from coming to fruition.
Bitcoin having previously been ignored & laughed at looks to be reassuringly into the ‘fight you’ stage, as an anonymous source allegedly linked to IBM has revealed this week:
“The company has been in informal discussions about a blockchain-tied cash system with a number of central banks, including the U.S. Federal Reserve, the source said. If central banks approve the concept, IBM will build the secure and scalable infrastructure for the project”
“Unlike bitcoin, where the network is decentralized and there is no overseer, the proposed digital currency system would be controlled by central banks, the source said”
Whilst we don’t yet know the full details or validity of these statements; if they are true, a system of this nature (whilst potentially offering some advantages for traditional currencies) goes completely against the fundamental ideology of the Bitcoin protocol as an open source, decentralised, trust free network.
In my opinion, it would not be unfair to interpret this as an attempt by central banks to bootleg the underlying technology of Bitcoin, whilst trying to remain completely in control of the global financial system and monetary policy; which has caused unprecedented mal investment bubbles in recent times.
Whilst on the surface this is likely to be perceived as increased competition for Bitcoin ( and rightly so). There are a lot of reasons why a system of this nature may not be able to stop the surge in Bitcoin adoption. Here’s why:
1) Trust – Any closed proprietary system removes one of the cornerstone attributes of the open source Bitcoin network & currency, which is the universal trust of the network. The fact that Bitcoin is not controlled by any sovereign state or banking entities is one if not ‘its’ killer attribute that provides the network with tremendous potential value and utility.
2) Surveillance/politicised system – Point 1 is exacerbated by the loss of confidence in the US and the US tech industry since the Snowden NSA revelations and the use of back door surveillance in US technology. In addition, nations outside the US are not going to jump at using a new SWIFT’esq system at a time when they are becoming increasingly aware of SWIFT’s ability to be used as a political tool/leverage with regards to geopolitical events such as international sanctions. A great example of this is China’s recent completion of a SWIFT alternative.
3) Innovation – Open source networks such as Bitcoin and the internet create a free market environment that encourages large scale innovation by removing prerequisites for participation in the development of services and Businesses that sit on the network. The result of this is large scale & rapid innovation. A closed proprietary walled garden system such as the one rumoured by IBM could potentially lack the ability to compete with the rapid innovative progression of the Bitcoin economy and infrastructure.
4) Confidence – in Central banking and governments worldwide is on the verge of being decimated. Years of promises that QE would benefit the wider real economy are failing, with evidence of massively deteriorating global macro-economic data in 2015, led by the United States.
During the next recession ( which looks to be imminent) there will be no easy policy tools left for the central banks, such as lowering interest rates & there are only so many times you can announce another QE program before losing all credibility. The lessons learned from this monetary experiment could be so egregious and detrimental that people worldwide will be massively sceptical of any monetary system tied to these central institutions in the future.
5) Currency wars – We are currently experiencing an era of large scale & accelerating currency wars worldwide. The race for all fiat indebted currencies to devalue their currencies to relieve debt burden’s and support their global exports has already led to over 20 instances of monetary easing by central banks in 2015 alone.
This trend looks set to continue, as the amount of debt needed to produce additional amounts of GDP growth has led to extreme volatility and risk in Forex markets. In 2015 this has rattled institutional investors and led to billion dollar losses for funds worldwide. In a period of financial turmoil and unpredictable events, investors and individuals will move to currencies without counterparty risk such as bitcoin and precious metals
6) Currency Attributes – Whilst the details are not 100% clear yet on the system reportedly being created by IBM. If the idea of the system is to represent traditional fiat currencies in a tokenised format with an underlying blockchain infrastructure; what will be the attributes of the currencies that operate on this network? Blockchain protocols at their core are monetary systems with unique characteristics that define the desirability of the currency on that specific network/system. Bitcoin is highly desirable because of its finite supply (inflation hedge) low counterparty risk, and open source protocol that provides a level playing field on a global scale.
If the traditional government currencies that are to operate on the new IBM system still have the attributes of current fiat currencies such as: infinite supply (through fractional reserve & QE policies). Are still unpredictable and manipulable due to policy oversight by a few individuals and are on a trust based closed proprietary system. Then what IBM system will achieve will only be a fraction of what Bitcoin can offer and currently provides. Due to the nature of good money driving out bad, you would still expect in this scenario for capital flows away from this system and into bitcoin.
7) Time – Bitcoin has already been around for over 6 years and in technology terms that means its potentially nearing the tipping point of ‘S-curve’ adoption. The point where adoption becomes an exponential curve. This happens on average approximately 4-7 years after the technology is created.
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The longer it takes for IBM’s system to come to fruition, the more chance Bitcoin will have already ready reached its critical tipping point for mass adoption.
8) Revolution – With the relentless militarisation of police forces, the use of armed forces domestically and increasing amounts of legislation to clamp down on protesters and belligerents. Protesting what could be argued the most unbalanced and unfair global monetary system in history, is becoming physically dangerous. It is here where Bitcoin could become the digital revolution, a way to peacefully push back, by deleveraging the out of control current financial system, without having to take volleys of rubber bullets and lung fulls of tear gas, if not worse.
As people awaken to the realities of the current monetary system, the anger phase of this awakening is more likely to push people to alternative currencies outside of the current system and away from those controlled by central financial institutions.
Since the first day I invested in Bitcoin there has always been two main fundamental reasons that have driven me to Bitcoin as a currency and store of value.
The 1st is debasement of traditional fiat currencies and 2nd to eliminate counterparty risk to the financial assets that I hold.
If the IBM/central bank blockchain system comes to fruition in the way described by the IBM source, it is difficult so see how this system would compete with these two main fundamental reasons for investing in and holding Bitcoin.
Along with all the other reasons above, there is a lot of hope that Bitcoin will continue to lead the way against competition; to a fairer global financial system in the future.