Digital Currencies: Let’s Start At The Start

If you’re a resident of planet earth, you’ve likely heard your preferred mainstream media outlet referring to a strange thing called “Bitcoin”, or more recently Dogecoin and a handful of other oddly named mascots. What are these weird items that have suddenly become a trending treat that people like to collect and trade? They’re not stocks or shares in companies, and the “experts” always seem to be warning people to run in the opposite direction as fast as they can.

When you hear “Bitcoin”, “Ethereum”, “Doge”, the talking heads of Wall Street and finance are referring to cryptocurrencies. In recent months, Bitcoin broke into the national and global news feeds, topping it’s previous all time high (ATH), climbing all the way to nearly $65,000. In the weeks to follow, an ecstasy of exuberance grew over investors in a tsunami of FOMO, or the ‘fear of missing out’, where it seemed that ‘up’ was the only direction for things to go. But, we’ve all learned that what goes up, must come down, and for certain that is what came next.

Elon Musk, tech billionaire and attention-seeking tweeter, threw his hat into the ring of influence to play part of a price pump (in the crypto-sphere, much like traditional stocks, we call this a pump and dump), announcing Tesla would be accepting Bitcoin as payments. Then, he ‘tested’ Bitcoin’s liquidity by selling a small, but still substantial amount of Tesla’s coins, making a shift to promote Dogecoin, hinting at a soaring price as he was to appear as guest on SNL. Gordon, watching the writing on the wall, shouted around town “buy the rumor, sell the news”, and seems to have been the only one expecting a massive drop.

Gordon was not disappointed, nor was he wrong. We saw a series of events, including those manipulated by Elon and the Chinese government, bringing Bitcoin down from $64,899 to $30,000, and in an even more brief time compression, Dogecoin dropped from an artificial high  of $0.72 to $0.18.

This is just a tiny piece of recent cryptocurrency history, to make the point that you’ve likely heard of Doge or Bitcoin, but may not realize just how substantial a market they represent, and importantly, you likely have never heard of a competing type of digital currency called a “CBDC”, which stands for Central Bank Digital Currencies. Typically, these important technologies are rarely reported to the general public unless there is a new price spike, or a massive dip, giving the impression that the only feature of crypto is its volatility and risk.

Cryptocurrencies VS. CBDCs: There Is A Difference

Before this takes a turn towards becoming an opinion piece (almost guaranteed to happen), let me first make an important distinction; there is a big difference between general cryptocurrencies like Bitcoin, Ethereum, or Doge, and CBDCs. Although it is quite the rabbit hole, the largest distinction I’d like to suggest, is that ‘cryptocurrencies’ as we think of with Bitcoin, represent a free market enterprise, where CBDCs are government issued national currency. Think of CBDCs as legal tender for the nation or collective that they represent.

This article does not serve the purpose to deep-dive into either category, but is a surface level introduction, and anyone who buys, sells, or works for money truly must be aware of ‘crypto’ and CBDCs. It used to be one of those things I felt certain of, but was only capable of speculating about, but now CBDCs are an absolute certainty, and in fact they already exist.

Let’s start by identifying what the most popular cryptocurrencies represent. The first, biggest, most well known cryptocurrency, or ‘crypto’ for short, is Bitcoin. It’s creation goes back to 2008, with a fully tested, operational blockchain network of computers running Bitcoin’s service protocol in 2009. Minus a couple of start-up hiccups, the network has essentially run 24/7 error free for well over a decade now. The purpose that Bitcoin outlines is to solve some complex issues in digital payment systems by allowing for a trustless “peer-to-peer” electronic means of sending value in such a way that a transaction cannot be faked, security is unlikely to be broken, and there is no need for a middle man to guarantee or provide escrow in confidence.

To put this in plain English, Bitcoin was the first electronic payment system to resolve the biggest challenges in security, privacy, and certainty that transactions could not be faked, while no longer requiring any form of intermediary. Think of it like using PayPal without PayPal. There’s no platform to sign up with, no middle-man you have to trust, and you can transact directly with whomever you wish, 24/7 anywhere in the world.

Cryptocurrency Means Blockchain and Mining

Bitcoin represents two important technologies (well, a lot more than 2, but this is an intro!): Blockchain, and Mining. Blockchain is the actual process that occurs to allow transactions in Bitcoin across a network of computers, where information is tested and confirmed, given a timestamp, and made highly unlikely for anyone to ‘fake’ a payment.

People who are running computers in the network to process these transactions are in competition to be the first to receive new transactions, and at a specific number of blocks of data, a reward will be issued to the “winner” of this search for new transactions, known as a block reward. They are paid in Bitcoin, and as you can imagine, the incentive only goes up the longer it has been in existence. In the first years of mining, we saw Bitcoin rise from less than a penny to being worth $1 for the first time. As you can imagine, a few early participants are very happy to have held on to their coins when a Bitcoin has risen in value to over $20,000 and then above $60,000.

But, all of this is just one coin. There are literal thousands of cryptocurrencies in the marketplace now. Ethereum and Litecoin where two of the earliest projects to come along, where Litecoin is essentially a ‘lighter’, simpler and some say more efficient version of Bitcoin, Ethereum is an entirely different kind of project, and to be true to the history of crypto, 90% of all other coins would not exist without Ethereum.

While Bitcoin is seen as a form of electronic payment, or at least a store of digital value, Ethereum is designed more as a platform, where people are meant to build new projects on top, using a sort of smart computer code to perform all sorts of fancy tasks. The main thing to know about Ethereum is the introduction of “smart contracts” into crypto, and the most popular format of Ethereum-based projects, called “ERC-20” tokens. I would also be serving an injustice if I didn’t state that the truth of the matter, is that Ethereum is actually supposed to be referred to as “Ether”. What’s the difference? The organization that created and maintains the token, Ether, is called Ethereum, while the actual token itself, is called Ether. Ether can do a wide range of interesting things, but there are literally hundreds and hundreds of tokens created on the Ethereum platform, so we won’t be covering much on the topic.

Cryptocurrencies like Bitcoin, Ether, Litecoin and others represent independent projects, teams of developers, corporations raising funding rounds, tech companies seeking to solve world problems, and are as diverse as the business landscape found in the stock market.

The most universal and distinctive qualities that most will share, is that they are built on blockchain technology, they tip their hat to the huge invention that Bitcoin represents, they are designed to provide security and privacy, but not necessarily anonymity, and they display the entirety of transactions to the network like a transparent ledger that anyone can view. Different coins represent ambitions and goals, but they are made by independent individuals and teams, and they are commonly run like standard start-ups in the tech and banking fields.

To briefly help a person understand the enormity of what has grown in this sector, we have coins, or tokens as I should refer to them, that act as payment systems, and there are coins that have been issued like securities. There are projects that aim to solve problems in remittance, and there are coins made as a joke or fun pass-time. There are projects worth tens of billions of dollars, and there are tokens that pumped in value the one time they were listed on an exchange that have zero volume being traded. There are projects that aim to reward people for holding on to their tokens, or even staking them or lending them to others, and there are projects designed to recreate important elements of the internet, with social media platforms and video sites built purely on their own blockchains. There are tokens designed to allow people to create art or music files that can be sold in online auctions, and there are others aimed to solve issues in buying and selling intangible items inside of video games. It is a field that literally changes every single day.

Crypto Can Mean Freedom From Tyranny

Another thing to distinguish crypto, is that because it is such a new asset class and technology, it is hard for governments to classify them, and as you can imagine, governments are not fond of that feature. The past several years have been a fury of activity, watching countries attempt to classify, regulate, tax and control crypto markets. We are coming to a time where we see every color of the rainbow represented, where forward-thinking states and nations are competing to embrace the technology, while others are flat-out seeking to ban their use completely. One has to consider, these cryptocurrencies have the potential to be traded like stocks, to be cashed out to credit cards and bank accounts, to transact in place of national currencies, and are even proving the obsolescence of the national currencies for many countries. Money being the backbone of industry and global stability, it doesn’t take a lot to imagine there would be tension in the fight for freedom versus control.

CBDCs: The Government Wants More Control

This brings us to the most important distinction between cryptocurrency and CBDCs.

Central Bank Digital Currencies, can more easily be defined than the crypto that’s currently popular. Think of CBDCs as a digital representation of a country’s national currency. At least to begin with, the purpose of CBDCs is not to replace physical cash, which most people in the crypto world refer to as ‘fiat’, whether accurately or as an intentional insult. A Digital Dollar CBDC, for instance, would be a digital version of the dollar, to be used as legal tender by U.S. citizens when it launches. It is not going to end the circulation of coins and paper money, but it is designed to represent the same value, and in order to work, it has to be issued, minted, and accounted for in the same manner as the ‘fiat’ dollar. When we speak of fiat, it is to designate a nation’s currency that is printed and distributed as legal tender, but because fiat is no longer backed by gold or other tangible assets, it holds no literal, tangible value of its own, beyond a trust that the government expects its citizens to use their money for the resolution of all debts.

Central banks will have to play the same roles with CBDCs as they do with fiat, and this has many countries concerned about a move in this direction. There will certainly be a lot of naysayers and governments that arrive late to the ball, but China, for instance, has already released their pilot and beta programs for a digital Yuan, and they see it as a tool of economic leverage to help propel them ahead of the U.S. economy. China’s aim is to overtake the fiat standard and use the digital Yuan to become the dominant power in the world.

Every country on the planet is most likely going to have their own CBDC, unless collectives like the European Union enter agreements to issue only one CBDC for the Euro, instead of each country having, for instance an Italian Lira and the British Pound.

In my view, what we are witnessing is the early signs of a competition developing between statehood and relatively free, open markets. Nations seek to protect their self interests, but also fear the challenges of the unknown, so there is mounting pressure to over-regulate the use of crypto, while stalling full understanding and confidence in a  purely blockchain-backed digital system. There will be more crypto bans, fines, taxes, and attempts to threaten people who wish to exercise their interest in Bitcoin and the like, but it is becoming clear that there will be a race towards the forefront of technology, and every country is going to be forced to compete in this new sector.

With CBDCs, Less Is Definitely More

What I, Gordon, hope to see, is an understanding of the good things that crypto projects can bring to the table, and countries looking to stand in support of innovation, viewing the benefits of new businesses, new means of industry, savings, trade and finance. To balance this, my hope is to see a slow, gradual roll-out of CBDCs that are designed to support, not replace, fiat, with as little tech built-in as possible. Why? Well, many reasons, but the most important being that governments can have a unique opportunity to use CBDCs to spy on citizens, to control and curve spending, to build taxable events into the economy that don’t currently exist, and to steer freedom of speech and other important values away from the rights of citizens.

History shows us that rarely do those in power seek to reduce their reach, so everyone should be aware, but also skeptical, of the good news we will hear preached in regards to CBDCs. A CBDC dollar could be launched, allowing what appears to be a seamless transition from the electronic forms of cash we already use. After a while, once everyone is used to the idea, the government starts programming new features into this digital dollar, and likely in the years to come, there is a consolidation of numerous forms of digital identification tied into the CBDC, always under the premise of fighting fraud, money laundering, extortion, a recent buzzword “ransomware” and the like. Those these events are relatively rare compared to the billions of instances where things go smoothly, they will always strike the necessary fear to cause people to readily accept programmable money that ties their identity to all of their purchases, and perhaps even political affiliations, social media activity, and tax history.

We are likely to vastly underestimate our governments’ lust after control, data, and surveillance. In the current economy, these things are already happening, but they have to pass through an intricate network of arrangements between public and private companies and governments. There are laws that protect us from certain types of data collection and surveillance, but these rules are avoided by going through intermediaries, which is ironic in the vision that true cryptocurrencies represent, bypassing the middle-man entirely.

Perhaps I could have simplified the topic to say there’s the good guy with the white hat, and the bad guy with the black hat. The good guy is crypto, like Bitcoin, and the bad guy is the CBDC, using technology for control. But, wasn’t this a lot more interesting? Yeah, I thought so too.

What are your thoughts? Do you worry about the government having access to a much deeper layer of all of your spending activities? Or, do you trust that they will use technology for good and believe that all innovation is our friend?

I’ll leave it on that note.

And for now, a skeptically optimistic crypto Gordon Freeman, the free man… out.