introduce

In a recent article, Nic Carter of Coindesk put forward a very good reason for Bitcoin Bank. Although I agree with him that Bitcoin will play an innovative role in the traditional banking industry in the future, I want to look at this issue from a slightly different perspective, that is, the perspective of emerging economies. The definition of emerging economies is somewhat incomplete. Including Europe, America, Japan and all other markets/economies that have not entered the fully developed economies, Russia is one of them now. Whatever the definition, emerging economies have one thing in common, that is, their currencies are relatively weak, they will face the risk of sudden capital flight, and their banking and credit systems are not mature enough.

This is one of the main factors that hinder local investment and economic development.

The dollarization of some of these economies is a similar aspect, which at least alleviates the disastrous effects of hyperinflation suffered by local residents in Venezuela, Argentina or Turkey. In the future, as cryptocurrencies become more and more popular around the world, the effectiveness of capital control will be greatly reduced. Therefore, emerging economies will embark on the accelerated road of currency substitution, using both cryptocurrencies and cryptocurrencies linked to legal tender (that is, stable currencies), such as Bitcoin or Taser /USDT, trueUSD or USDC, which are easy to obtain and tend to gradually replace their own currencies.

Perhaps counter-intuitively, it is necessary to support the exchange between local currencies and foreign stable currencies, and at the same time promote the banking system centered on Bitcoin (rather than the dollar-centered banking system), which is the solution that emerging economies need to protect their markets from currency substitution, strengthen their banking systems and promote investment into local economies.

The economic and geopolitical risks of dollarization are very obvious. So, how can the bitcoin-centered economy maintain the exchange between different currencies while running?

The Lost Art of Commercial Banks

1974, E.C. Harwood, an American self-taught economist, established the American Economic Research Institute in 1933, predicted the Great Depression in 1929 and instructed his clients to invest in gold, and predicted it in 1970. He wrote an article about "The Lost Art of Commercial Banks". At that time, after 197 1 Nixon's notorious dollar default and the link between gold and American currency was broken, the issue of currency depreciation became a hot topic at present.

E.C. Harewood pointed out that from the end of 1800 to the first world war 19 14:

"It represents the monetary development peak of western civilization. It promotes business development and makes it possible to keep meaningful rather than fictional long-term accounting records. The development of savings institutions, life insurance and pension funds not only promotes business exchanges between countries, but also encourages a large increase in useful capital. "

It is generally believed that this period may mark the greatest progress in the evolution and development of the monetary credit system in modern industrial society. Another fact is that gold was the international monetary base of all major industrial countries and many other countries in the world at that time.

But Harewood is not a gold standard activist. He is a pragmatic man full of common sense, not a thinker. He understands the history of currency and puts forward practical solutions to the problem of currency depreciation brought about by globalization and the continuous development of trade.

In fact, he also criticized the position of supporters of 100% reserve gold standard. "They will limit their purchasing media to gold coins, silver coins or paper money, and limit them to checking accounts that directly represent these currencies. They will go back to the Middle Ages, before the sound commercial banks first appeared. How they will deal with the proliferation of products sold in modern industrial civilization, they have not yet put forward. Other advocates of the gold standard put forward a simplified solution to raise the "price" of gold and restore the convertibility of money and gold. They don't seem to realize that the existence of a large number of inflation buying media, like counterfeit money, is polluting the world's money supply. "

In fact, even the gold standard itself has not solved the problem of currency depreciation, unless it uses what he defines as "the basic principle of sound commercial banks", which is the lost art of commercial banks. So what is this lost art?

The normal operation of commercial banking system is very important to the development of capitalist economy. Its two main functions are saving and lending, mainly to earn profits between the interest paid by saving and the interest charged by lending. However, banks can borrow money from the deposits/savings they collect, or they can borrow money by creating new money. Harewood pointed out that the difference factor is that new funds will be created only when funds enter productive investment, that is, when funds increase the quantity of goods and services in circulation (that is, companies build factories to produce cars), rather than when funds subsidize consumer spending or any other unproductive investment (that is, individuals get loans to buy cars). In the first case, bankers can create new money because it has no inflation. In the second case, the money for buying cars should be drawn from savings/deposits, because creating new money-instead of offsetting it by increasing productive goods-will lead to inflation.

Although the gold standard was effective at that time, as long as banks ignored this basic principle of perfecting commercial banks and printed money crazily, a banking crisis similar to that of "Wildcat Bank" or Bank of Scotland would occur. After all, it was the era of free banking, and banks often closed down.

This will not happen today, just because there is no anchoring relationship between money and physical assets such as gold. However, the impact of large-scale depreciation is the same, but due to the intervention, manipulation and rescue of the market by the central bank, these effects have been diluted by time and have not immediately appeared. Look at this comparison chart of gold and US dollar, and you will know that the inflation of purchasing power has been lost since the gold/US dollar peg of 197 1 was cancelled. You need 1830 dollars to buy an ounce of gold today. It has increased 52 times in 50 years.

Opportunities for Emerging Economies: Commercial Banking System Centered on Bitcoin

Now let's fast forward to 202 1 and see how the commercial banking system of E.C. Harwood is realized today.

The first consideration is that we cannot return to the gold standard. Or at least not as before, because of various reasons, our economy and society need a system different from hard currency today, so we need to create a new financial system. Gold is not suitable for this use case for many reasons, the most important of which are the following three points:

Of course, in the international monetary system, gold still plays an important role at the level of government and central bank. Gold is likely to be used in the new Bretton Woods system, and governments and central banks around the world have decided to re-monetize gold at a price several times higher than today to balance their huge debts and support their rapidly expanding currencies.

But below this level, a new hard asset/sound currency is needed to perform the reserve function of modern digital commercial banking system. Assets that can be deposited, extracted, preserved and audited conveniently have 100% reliability and objectivity.

This asset can't be anything other than bitcoin.

Why Bitcoin is digital gold and more, I have explained it in many articles before. I also put forward the reasons why central banks in small countries and developing economies hold bitcoin instead of gold as their currency reserves.

In fact, Bitcoin is a 100% auditable reserve voucher, and its holding cost is zero, so it can be easily managed by itself and withdrawn from personal wallet, which makes it a perfect modern reserve asset and collateral. On this basis, it can build a solid banking infrastructure and rebuild a benign commercial bank Harewood.

First of all, it will force commercial banks to create money only within a certain strict range, but not excessively, because everyone can see the number of new cryptocurrencies created by banks transparently and in real time on the blockchain, and compare them with the number of bitcoins held by banks as reserves. Secondly, if the bank issues cryptocurrency, depositors can withdraw the bitcoin lent to the bank, thus increasing the risk of bank run. Therefore, if banks want to maintain solvency, they have the motivation to maintain healthy development. The market will be free to price the risks of each bank separately. There will be banks with high profit margins paying lower deposit interest rates, while some reserve banks will pay higher interest rates because they will be regarded as more risky.

If you think I'm imagining things, you're wrong. This art of encrypted banking has appeared and will always exist.

Because of the companies around BlockFi, political and business leaders in these countries should soon realize that there is a short window of opportunity to jump into the carriage of bitcoin and reshape the local banking industry around the bitcoin-centric model instead of the dollar-centric model. At least-except for a sound currency, Bitcoin is neither anyone's money nor everyone's money, and there is no geopolitical prejudice and risk. Compound finance will first target the demand customers of emerging economies. The real risk is that the local banking industry will be bypassed and the local economy will be encrypted and dollarized (by using a stable currency denominated in dollars). This will bring long-term geopolitical and economic adverse consequences to emerging economies.

Zac Prince, founder of BlockFi, said: "We provide these banking products because we operate on a global and digital scale in a world where encryption is the first, which is impossible in the context of traditional banking business. ..... If we can start with the concepts of blockchain and encryption and build this new infrastructure, while still introducing capital from that ancient world ... We can provide these products for Bitcoin, which is what we are really excited about. "

With BlockFi, you can borrow or lend bitcoin and encrypted dollars. BlockFi uses the traditional cheap dollar credit liquidity pool to change legal tender into stable dollars (such as USDT), lend it to customers in emerging economies to obtain higher yields, and hold bitcoin as collateral. They implement a strict loan/collateral ratio and liquidate the collateral when the ratio falls below a certain safe level. The borrower with a stable dollar is happy because he can borrow at a lower interest rate than the local currency.

Another advantage of emerging economies is that the local banking system has not reached the full maturity of the United States or Europe, which makes the former much more flexible and responsive than the latter in adapting to sudden changes.

However, it is not only the task of the local banking industry to move towards bitcoin standards in commercial banks. This is a transitional process involving the whole society, which requires smart and brave political leaders and regulators to grasp the level of opportunities they face quickly enough. If they can do this, emerging economies can lead this revolution and find themselves in a huge advantage in front of direct competitors and developed economies within 5 to 10 years.

This is an important point that regulators and politicians in emerging economies should carefully consider: American regulators have proposed the simplest and fastest solution, and new banking infrastructure can be established simply by inserting bitcoin blockchain. This is very clever.

Emerging economies need to establish a competitive framework to start this industry and activate a virtuous circle.

(a) Adoption of laws and regulations conducive to encryption, mainly involving the recognition and legal status of digital token assets (such as stable currency and token securities). The regulatory frameworks implemented in Liechtenstein, Switzerland and Wyoming are good examples.

(b) Implementing flexible cryptobanking regulations, mainly supervising the issuance and custody of cryptoassets, as Wyoming has done for special purpose vehicles. AvantiBank has recently obtained a cryptobanking license from Wyoming, and can hold cryptoassets and issue cryptocurrency USD. It is worth noting that the OCC of the United States recently issued an opinion allowing American banks to use blockchain infrastructure and existing stable coins. If this is unanimously confirmed by government policies, it may be a fundamental change, which may trigger a global shift to encrypted banks.

(c) Encourage the issuance of licenses to local cryptographic exchanges.

(d) Using CBDC interoperating with cryptocurrency 100% for frictionless exchange with bitcoin and stable currency. Digital currency based on financial technology-unable to interoperate with cryptocurrencies-will not achieve the goals I have described. Obviously, it doesn't have to be decentralized like Bitcoin, and it doesn't have to be unauthorized like Bitcoin. It can be completely centralized to achieve the same function as currency, but the most important thing is that its money supply should be completely auditable in the blockchain like a stable currency. In fact, its structure can easily imitate the structure of a stable currency.

Fundamentally speaking, this is industrial capitalism and financial capitalism.

Incentives to attract cryptocapital/investors and excellent human capital. Preferential tax policies are very important. Funds flow to places with better treatment. But human capital will also flow to places with better business opportunities and living standards, or at least places with better prospects. Citizenship for investment or permanent residency after a few years is also sought after. There are many talented individuals and investors in the field of encryption, who are going to leave Europe or the United States, where their funds are better, but at the same time they are also places where basic freedoms are truly implemented, and the environment for encryption investment is more friendly. This is a rapidly developing global movement.

When Europe and the United States quickly become oligarchs, extremely corrupt and high taxes encroach on the surplus wealth of the once productive middle class (certainly not the super-rich), emerging economies in South America and Asia can provide a safe paradise for secret capital and talents. Small countries with political stability like Uruguay (also known as Switzerland in South America), Costa Rica or Singapore can reap huge dividends from this wise policy.

Bitcoin reset order

The lost art of commercial banks described by Harewood is essentially the foundation of industrial capitalism, which is exactly what China is doing now.

"/kloc-the capitalist thought of the 0/9th century ... is to get rid of the landlord class. To get rid of the landlord class. It is also to get rid of the banking class. "

Americans today say that public investment is socialism. This is not socialism. This is industrial capitalism. This is industrialization and this is basic economics. The idea about what economy is and how it works is so distorted academically, which is just the opposite of what Adam Smith, john stewart Mill and Marx talked about. For them, the free market economy is an economy without tenants. But now (Americans mistakenly believe) the free market economy is to let renters, landlords and banks make free profits. The United States focuses its planning and resource allocation on Wall Street. This central plan is more corrosive than any government plan. "

This well summarizes what the fully developed western economy has become: a new feudal economy and a new capitalist society, which is far from the industrial capitalist model that made us prosper and lead the world from 65438 to 0800 to 70. Today, China has become a true follower of the theory of industrial capitalism. This tells you how the geopolitics of the future world will be formed. Economic financialization-starting from the United States and even following up in Europe now-is a terminal disease in western developed countries.

As Parker Lewis of Liberated Capital said, financialization is "the direct result of the dislocation of monetary incentive mechanism, and Bitcoin has reintroduced appropriate incentive mechanism to promote savings. More directly, the devaluation of monetary savings is the main driving force of financialization. If currency devaluation induces financialization, then returning to a stable currency standard will have the opposite effect, which should be logical. "

Of course, the financial system left by the west will have serious consequences. The ruling elite will continue to kick the ball and maintain the status quo as much as possible. But in the end, unsustainable things will be unsustainable, and the whole system will need to be reset around the only two real currency assets that do not bear the risk of counterparties-bitcoin and gold.

conclusion

Financialization, the end of financial repression, the distortion of negative interest rates and the return to a capitalist production society based on a stable currency will all be the positive consequences of institutional reset. Even better, based on hard currency and sound banking structure and principles, a new economic recovery is coming. These structures and principles are not stipulated above, but the result of free market forces and good incentive mechanism. Emerging economies should wisely position themselves at the center of the new bitcoin standard. They can stand at the forefront of the new economic revival, which may imitate the success of those powerful and wealthy small Italian countries, which have been leading the world's economic and cultural development from the end of the Middle Ages to the Renaissance.

They have nothing to lose at all, but all the gains. Just like Bitcoin, this is an asymmetric bet of emerging economies, with unlimited upside potential.

Author Li Hanbo, translated by Andre Bianconi.