Previous thoughts relevant to crypto currency:
Thoughts on the Intrinsic Value of Money: On the Surge of Bitcoin and Ethereum (2017.05.26.)
Ethereum’s Flash Crash: 319 USD to 10 Cents — A Warning on the Instability of Virtual Currencies (2017.06.23.)

Introduction

The following dialogue is a distilled record of a conversation with a junior mentee I supervised at a Singaporean asset management firm. While he has successfully transitioned into real estate asset management at a reputable domestic brokerage, our discussion revealed his persistent inclination to prioritize technological utility over the foundational principles of monetary theory and the social contract. I focused on viability of cryptocurrency as a substitue for fiat currency, such as the USD and JPY.

I. The Fallacy of Infrastructure as Instrument

Junior: Will cryptocurrencies like Bitcoin not eventually replace traditional fiat currencies? Amazon has already integrated Ethereum into its payment systems; if such titans expand their usage, could they not supersede the US Dollar?

Me: Cryptocurrency may be categorized as a distinct financial asset due to its low correlation with traditional asset classes, but the notion of it replacing a reserve currency is fundamentally flawed. What specific utility necessitates the substitution of the Dollar with Bitcoin?

Junior: It is more efficient—faster settlements and superior security. As you previously mentioned, blockchain systems significantly accelerate wire transfers.

Me: You are conflating the infrastructure with the instrument. Wire transfers require intermediaries like banks; blockchain technology increases the velocity of moving existing currencies like the Dollar. The utility of the settlement system is predicated on the existence of the currency being settled. Without the Dollar, the infrastructure for settling Dollars becomes meaningless.

Junior: But sending Bitcoin directly is simpler.

Me: We already operate in a digital paradigm; credit cards and PayPal facilitate near-instantaneous digital payments. For Bitcoin to achieve the status of a primary currency, its “value” must first reach parity with the Dollar’s global standing. However, the appreciation of that value is itself derived from the utility of blockchain in facilitating traditional fiat transactions. You have inverted the causality: one does not go to the bathroom to become satiated; one goes because they are satiated. The utility of the technology (the second floor) cannot exist without the structural integrity of the established monetary system (the first floor).

II. The Ontological Status of Money: The Vessel vs. The Substance

Me: Beyond causality, there is the issue of institutional stability. We have witnessed “flash crashes” where the value of certain coins plummeted by more than 99.9%, and the loss of private keys can result in the irreversible evaporation of hundreds of millions in assets—as seen in the recent case of the Canadian exchange where the CEO’s death locked away all access.

Junior: Yet, the decentralized nature and limited supply of cryptocurrencies empower the participants and ensure anonymity. Their ultimate ideological goal is economic decentralization, operating beyond the control of central banks.

Me: Money is not a “thing”; it is a “concept.” It possesses primary functions: the store of value, the medium of exchange, and the unit of account. All these functions are predicated on institutional credibility. A defaulted bond remains a currency in the broadest sense (M2, M3), yet it cannot be traded because the solvency of the issuer is compromised.

Consider high-value game currency within an online ecosystem. It has value within that insular market because there is demand among its users(i.e., participants in the same economy system). However, a luxury car dealer will not accept such currency because no established trust or external demand exists for that asset between the game users and car dealers. Bitcoin is ontologically identical to such game currencies in this regard; its so-called “value” is actually a “price” derived from the perceived utility of its underlying blockchain technology, not real value. Money itself does not have intrinsic value; it is the medium of exchange with the function of storing value. One does not eat the honey pot; one eats the honey within it. You’d better not confuse the value within the blockchain techology with the price tagged onto its byproduct, especially if there can exist countless ones built upon the same technology.

III. The Redenomination Crisis and the Social Contract

Me: The price of a currency is a matter of supply and demand, influenced by the economic strength and fiscal policy of the issuing state. Because decentralized currencies lack an issuing authority, they face insurmountable problems:

  • ⑴ They cannot utilize fiscal or monetary policy.
  • ⑵ They lack legal recourse for fraud.
  • ⑶ They have no guarantor for purchasing power.

Junior: If Bitcoin were to replace the Dollar, could we not adjust for inflation by simply subdividing the units further?

Me: As I have been emphasizing, your assumption reverses cause and effect. Without a central authority to manage the money supply, how do you adjust for hyper-inflation driven purely by demand volatility, which is sealed by the “Halvening” characteristics that Bitcoin advocates fervently praise? Furthermore, such volatility necessitates redenomination. Redenomination requires a sovereign state to declare the ratio of old currency to new through a mandatory social contract.

Junior: Could the leading exchanges not simply agree to a new unit of account?

Me: What is the enforcement mechanism? Law is the aggregate of social contracts that accept the coercion of individual interests for the enhancement of collective utility. Private exchanges are merely online platforms; they possess no mandatory power to enforce any legal regulations. Moreover, if an exchange were to possess such absolute power over the unit of account, it would cease to be decentralized and merely become the new Central Bank. Can it be called “decentralized” only because such authority has shifted from the central banks to private platforms? Bullshit! The ideology of decentralization is fundamentally incompatible with the practical requirements of monetary theory.

IV. Geopolitical Reality and Hegemony

Me: Finally, consider the geopolitical reality. Why would the United States voluntarily relinquish the hegemony of the Dollar? History shows that Washington does not tolerate any rival economic powers—as seen with the Plaza Accord and its 40-year impact on the Japanese economy and Yen.

Even China, despite deploying astronomical capital globally over a decade to internationalize the Renminbi, has struggled to achieve a status rivaling the Dollar or the Yen. Consider Russia, a nation possessing vast oil and natural gas reserves; yet, held back by the Petrodollar system, the Ruble can collapse almost instantaneously under Western sanctions. If sovereign states with such immense resources cannot usurp the Dollar, how could a decentralized data fragment of unknown origin hope to do so?

If a virtual currency ever posed a genuine threat to the real-world monetary order, it would be met with the full coercive force of the state—likely resulting in a joint intelligence operation to neutralize the “subversive” element. The notion of Bitcoin replacing the Dollar is either a delusion held by those ignorant of monetary fundamentals or a scam to inflate prices. To suggest otherwise is to ignore all the logical contradictions that arise the moment a “virtual” asset attempts to function as a currency in the “real” economy.

In sum, let’s put it simply: which medium would you prefer to receive as your paycheck, USD in $100 bills or Bitcoins of equivalent USD value at the current spot rate? I’m definitely down for greenback.