TLDR. For Governments, the only thing more scary than Bitcoin is getting their country destroyed by sanctions and other heavy-handed behaviour by bigger Governments. Bottom up traction for Bitcoin as a global currency is coming from sovereign countries with weak Fiat currencies; the people are taking action despite what the Government is saying/mandating. This is no surprise because innovation always comes from the edge, from those excluded from wealth & power by the current system. What is interesting now is how this innovation is coming both bottom up (by the people despite what their government tells them to do) and from top down (initiatives from governments to use Bitcoin). The recent news that shows that this top down innovation may be happening is that 3 countries (Afghanistan, Tunisia and Uzbekistan) are telling the IMF that they want to issue Bitcoin bonds.
This update to The Blockchain Economy digital book covers:
- Innovation always comes from the edge aka the Excluded
- Bitcoin is totally different from a Central Bank Digital Currency (CBDC)
- Commodities other than Gold as collateral
- The critical role of the IMF
- The dreaded v word – volatility
- Context from other Chapters
Innovation always comes from the edge aka the Excluded
I have been a fan of John Hagel for a long time. I first talked to him 10 years ago when I was COO of ReadWriteWeb (here is an interview from that era). John Hagel, perhaps best known for his book The Only Sustainable Edge, has been one of the leading strategic thinkers for decades. Today he edits The Edge Perspectives blog as a driver for Deloitte’s Center for Edge Innovation.
Hagel focusses on the importance of the edge as a source of value creation and strategic advantage. This insight – that traction comes from people who have been excluded from the current system – may seem obvious, but so many companies do the exact opposite (they compete to win market share among those who have lots of alternative services).
In the Blockchain Economy, innovation comes from people, businesses and countries that have have not done well from Legacy Finance – the excluded.
Bitcoin is totally different from a Central Bank Digital Currency (CBDC)
A Central Bank Digital Currency (CBDC) means a) government controls supply (ie can still print as much as they like b) transaction verification is done using DLT (Distributed Ledger Technology) rather than in a ledger in the central bank’s core accounting system. There may be some efficiency advantages for the central bank from using DLT and some PR boost, but no real advantage for citizens.
The much more radical alternative is a government issuing bonds denominated in Bitcoin. That means they have no control over supply. Although that loss of control is scary for governments, it is better than issuing debt using two alternatives as currency:
- their own Fiat currency which investors don’t want (whether it is settled using DLT or traditional methods).
- the Fiat currency of another Government (eg USD or EUR) that may be imposing sanctions or taking other actions they deem harmful.
Commodities other than Gold as collateral
In ye olden days, money was an IOU backed by gold as collateral. In 1971, Nixon changed all that and money became Fiat currency backed by nothing more than a promise to pay.
So a poor country issuing a bond denominated in a currency with a fixed supply like Bitcoin is a really big deal for some investors. Rather than getting paid back in a depreciating currency that could spiral into hyperinflation, investors are repaid in a strong currency.
This begs the question, what if the country does not repay the loan aka sovereign debt default.
In ye olden days, investors simply presented their IOU (aka paper currency) and demanded repayment in Gold. If you are a poor country with a weak currency, such as Afghanistan, Tunisia and Uzbekistan, you cannot simply buy a lot of gold as collateral for your currency. However you may have other tradable commodities that can be used as collateral. For example:
– Afghanistan can use lithium as collateral
– Uzbekistan can use cotton as collateral
The critical role of the IMF
Sovereign Bond Investors have historically demanded very high interest rates to compensate for the risk of a Sovereign Bond from a country such as Afghanistan, Tunisia and Uzbekistan. The idea of issuing a bond denominated in a currency with a fixed supply like Bitcoin and backed by a tradable commodity as collateral is a big innovation.
Last week’s news is only that these three countries are discussing issuing Bitcoin Bonds with the IMF; it is not yet a done deal.
The IMF has a critical role to play because Bitcoin is a global currency so investors will look to a global institution to give the bond issuance some credibility.
Stay tuned – this will be interesting to watch.
The dreaded v word – volatility
The devil is as always in the details, which in this case are:
- What if Bitcoin increases dramatically in value? A small increase in value is good news for investors and manageable for issuers. A dramatic increase in value is, on paper, great news for investors, but such a disaster for issuers that default is likely.
- What if Bitcoin declines in value? Investors may demand too much interest to compensate for this.
In short, this use case for Bitcoin falls foul of the dreaded v word – volatility
A stablecoin pegged to a basket of currencies could offer a better alternative.
Context from other Chapters
For context please read these chapters of The Blockchain Economy digital book
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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