By Marcelo Martins - August 15, 2020
Part 1: The case for cryptocurrencies Permalink
“The Chancellor will decide within weeks whether to pump billions more into the economy as evidence mounts that the £37 billion part-nationalisation last year has failed to keep credit flowing. Options include cash injections, offering banks cheaper state guarantees to raise money privately or buying up ‘toxic assets’, The Times has learnt.”
This is the second paragraph of the newspaper article whose title is written in the first mined block of Bitcoin blockchain, called ‘Genesis block’. The actual message reads: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”, and the article explains a new phase of a rescue plan as a development of the 2008 financial crisis.
Banks’ bail out started after the beginning of the crisis and that was not the first or the last time. In 1983, Margaret Thatcher explained that “there is no such thing as public money; there is only the taxpayers’ money” (Thatcher, 1983). Actually, there is also the creation of new money when central banks perform a process called ‘Quantitative Easing’ (QE) (Bank of England, 2019), but this one was huge, unprecedented and highly impacted the value of money, exchange rates, taxation and fiscal policies, and consequently, the taxpayers’ money. A decade after the crisis, bankers and CEOs from those private institutions moved on, leaving their ‘troubled assets’ and debt behind for someone else to pay. (Wall Street Journal, 2018). “That ‘someone else’ is you.”, Ms Thatcher would certainly add. That was not the first time, or the last1, that Central Banks bought ‘junk’ bonds2.
Investment and commercial banks, mortgage lenders, insurance companies, and savings and loan associations gambled with the customer’s money, took more risk than they could afford to and covered their losses with new money, although not all QEs are fully financed by money creation. The world became very inventive in this decade of entrepreneurship, innovation, unicorns and taxpayers’ money. Innovation programmes are the new “free lunch”. Now the ‘investors’ sign up for no-reimbursable money, taking advantage of innovation policies that reserved to the state the role of entrepreneurship. There is one difference in modus operandi: the banks were placing bets first and having the government covering their losses (or not) after the fact; now they get the free money first, and if the initiative sinks, they are already covered. Entrepreneurship and innovation without risk. It is necessary to quote Ms Thatcher one more time to remind the taxpayers that it would be very pleasant to say “(…) ‘spend more on this, expand more on that.’ We all have our favourite causes—I know I do. But someone has to add up the figures. Every business has to do it, every housewife has to do it, every Government should do it” (Thatcher, 1983).
In 2019, the European Parliament decided to add up the figures in a report with the warnings that the different supervisory authorities have issued, including the market developments and key financial stability risks that show that “leveraged finance, comprised of high-yield bond and leveraged loans, has since the global financial crisis approximately doubled in size both in the US and in the EU, though in absolute terms the US exposure is much higher.” (European Parliament, 2019).
It is unlikely that someone with the knowledge of economics and cryptography as demonstrated by Satoshi Nakamoto in his paper and creating a cryptocurrency (or digital money) would make such an allusion by chance. One may interpret that Bitcoin is also an attempt to create a sound notion of money, but the paper starts with a simpler statement, that “commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.” (Nakamoto, 2008, p. 1).
Aside from cryptocurrencies, the technologies behind the blockchain allow for a secure transfer of digital assets, or analogue assets anchored in the blockchain, between “two willing parties (…) without the need for a trusted third party” (Nakamoto, 2008, p. 1). Blockchains can also be used as timestamping machines for system logs and digital notaries, distributed databases for voting platforms and to authenticate users, messages and digital assets.
This article series investigates how Decred Project created its own version of money and implemented security measures to improve governance and remove trusted third parties from money issuance and e-voting. This is particularly relevant to those investigating the use of blockchain technologies to improve governance and avoid the tyranny of the majority.
The next part starts with a brief explanation of the technologies behind the blockchain, the governance of money and the use of blockchains for public governance. Then we introduce Decred Project, incentives to launch attacks against blockchain to obtain profit, how Decred improves the governance of consensus rules, the network funding and the minimisation of attacks. After this introduction on Decred comes the findings of simulations, calculations and observed blockchain data to try to answer a few questions: could price variance impact investor’s decision to keep Decred in their portfolio? Could price variance impact the number of devices providing network security? Is Decred capable of providing a predictable, scarce, trustworthy digital asset? Finally, the last parts conclude and present remaining unsolved questions by a governance model implemented with the use of blockchains.
1 “ECB: Our response to the coronavirus pandemic”, available at https://www.ecb.europa.eu/home/search/coronavirus/html/index.en.html.
2 “ECB predicted to beef up asset purchases with shift into ‘junk’ bonds”, available at https://www.ft.com/content/41b3d01d-029b-469a-be4b-8b1967455472.
Bank of England. (2019). What is quantitative easing? Retrieved from Bank of England: https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
Bitcoin Community. (2017, November 30). Genesis block. Retrieved from Bitcoin Wiki: https://en.bitcoin.it/wiki/Genesis_block
Elliott, F., & Duncan, G. (2009, January 3). Chancellor Alistair Darling on brink of second bailout for banks. Retrieved from The Times: https://www.thetimes.co.uk/article/chancellor-alistair-darling-on-brink-of-second-bailout-for-banks-n9l382mn62h
European Parliament. (2019, March). Leveraged finance: a supervisory concern in the Banking Union? Retrieved from European Parliament: http://www.europarl.europa.eu/RegData/etudes/BRIE/2019/634369/IPOL_BRI(2019)634369_EN.pdf
Nakamoto, S. (2008, October 31). Bitcoin: A peer-to-peer electronic cash system. Retrieved from Nakamoto Institute: https://nakamotoinstitute.org/bitcoin/
Thatcher, M. (1983, October 14). Speech to Conservative Party Conference. Retrieved from Margaret Thatcher Foundation: https://www.margaretthatcher.org/document/105454
Wall Street Journal. (2018, April 5). Where are They Now: Profiles of the Biggest Figures From the Financial Crisis. Retrieved from Wall Street Journal: https://graphics.wsj.com/image-grid/fcprofiles/