- BLOOMBERG - Apr 4, 2021 -
Niall Ferguson -
What is the money of the future? My nine-year-old son thinks it will be Robux. For those of you trapped in the human museum known as adulthood, Robux is the currency used by players of Roblox computer games. If I oﬀer Thomas grimy dollar bills for household chores, he shows an almost complete lack of interest and motivation. But if I oﬀer him Robux, it’s a diﬀerent story.
The current exchange rate is around 80 to the dollar. So, in order to incentivize my son to do the dishes, I need to go online and buy 2,000 Robux for $24.99. This I do by entering my credit card details on a website, an act of self-exposure that never fails to make me feel sick. However, the dishes get cleaned and, later, my son blows some of his Robux on a cool new outﬁt and a pair of wings for his avatar, earning the admiration of his friends.
04/04/2021 Don’t Let China Mint the Digital Currency of the Future - Bloomberg
Robux is just one of the new forms of money that exist in the parallel world of online gaming. If your kids play Fortnite, then you’ve probably had to buy them VBucks (short for VinderBucks). And gamer money is, in turn, just a subset of the myriad means of payment that now exist on the internet.
Writers of science ﬁction got many things right about the future, from pandemics to ﬂying cars to artiﬁcial intelligence. None, so far as I know, got the future of money exactly right. In William Gibson’s seminal Neuromancer (1984), paper money (the “new yen” or N¥) has survived but is used only for illicit transactions. In Neal Stephenson’s Snow Crash (1992), hyperinﬂation has ravaged the value of the dollar so much that, in Compton, California, “Street people push … wheelbarrows piled high with dripping clots of million- and billiondollar bills that they have raked up out of storm sewers.” A trillion-dollar bill is known colloquially as an “Ed Meese.” A quadrillion is a “Gipper.” (Only we Boomers now get the allusions to the former attorney general and the president he served in the 1980s.) In other dystopian futures, readily available commodities such as bullets or bottle caps serve as makeshift money, rather like cigarettes in occupied Germany in the immediate aftermath of World War II. My favorite imagined currency are the “merits” in the British TV show Black Mirror, which have to be earned by pedaling on exercise bikes.
If some other author predicted the future of money accurately, I missed it. Unfortunately, this lack of foresight now seems also to aﬄict U.S. policymakers, leaving the world’s ﬁnancial hegemon vulnerable to a potentially fatal challenge. Not only are the American monetary authorities underestimating the threat posed to dollar dominance by China’s pioneering combination of digital currency and electronic payments. They are also treating the blockchain-based ﬁnancial innovations that oﬀer the best alternative to China’s e-yuan like gatecrashers at their own exclusive party.
In 2008, in a wonkish paper that bore no relation to any sci-ﬁ, the enigmatic Satoshi Nakamoto launched Bitcoin, “a purely peer-to-peer version of electronic cash” that allows “online payments to be sent directly from one party to another without going through a ﬁnancial institution.” In essence, Bitcoin is a public ledger shared by an acephalous (leaderless) network of computers. To pay with bitcoins, you send a signed message transferring ownership to a receiver’s public key. Transactions are grouped together and added to the ledger in blocks, and every node in the network has an entire copy of this blockchain at all times. A node can add a block to the chain (and receive a bitcoin reward) only by solving a cryptographic puzzle chosen by the Bitcoin protocol, which consumes processing power.
Nodes that have solved the cryptographic puzzle — “miners” — are rewarded not only with transaction fees, but also with more bitcoins. This reward will get cut in half every four years until the total number of bitcoins reaches 21 million, after which no new Bitcoins will be created. As I argued here last November, there were good reasons why Bitcoin left gold for dead as the pandemic was wreaking havoc last year. Scarcely over a year ago, when just about every ﬁnancial asset sold oﬀ as the full magnitude of the pandemic sank in, the dollar price of a Bitcoin fell to $3,858. As I write, the price is $58,746.
The reasons for Bitcoin’s success are that it is sovereign (no one controls it, not the “whales” who own a lot, and not the miners who mine a lot), scarce (that 21 million number is ﬁnal), and — above all — smart. With every day that the system works — not being hacked, not crashing — the predictions that it would prove to be a “shitcoin” look dumber, and the pressure on people to aﬃrm their smartness by owning bitcoins grows stronger. Last year, a bunch of tech companies, including Square, PayPal and Tesla, bought a pile. Several legendary investors — Paul Tudor Jones, Stan Druckenmiller, Bill Miller — came out as long Bitcoin. Perhaps most importantly, Bitcoin began to be treated like a legitimate part of the ﬁnancial system. BNY Mellon now handles Bitcoin. So does Mastercard. There are now well functioning Bitcoin futures and options markets. This kind of adoption and integration is what has driven the price upward — a process that has much further to run. My $75,000 target price back in 2018 (assuming that every millionaire would one day want 1% of his or her portfolio in XBT) now looks a bit conservative.
Meanwhile, as Bitcoin has grown more respectable, the cool kids have moved on to decentralized ﬁnance (“DeFi”), “an open, permissionless, and highly interoperable protocol stack built on public smart contract platforms” such as the Ethereum blockchain, to quote a recent and excellent St. Louis Fed paper by Fabian Schaer. Like Bitcoin, DeFi has no centralized third-party system of veriﬁcation and regulation. But it is a much looser, more variegated system, with multiple coins, tokens, exchanges, debt markets, derivatives and asset management protocols. As Schaer puts it:
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