Obi Nwosu is the CEO and co-founder of Coinfloor, the UK's longest-running Bitcoin exchange. He has over 20 years’ experience building online marketplaces and bringing virtual currencies to tens of millions of people. Obi writes The Road to Bitcoin Hegemony, a weekly recap of some of the most impactful developments in Bitcoin.
Some years ago, Private Eye ran a cartoon in which one man asks another, “do you want to buy my house?” And the other simply replies “yes”. It was captioned “Life before estate agents.”
It was a pithy comment on one of capitalism’s biggest myths: that every business in the complex, multi-layered financial ecosystem is somehow indispensable, and that society couldn’t function without these vital middlemen.
But this myth was at serious risk of becoming a reality back in the dark days of the Great Recession, when many questioned the purpose of banks, which had done so much to bring the world’s economy crashing to a halt. And we all know what happened: nothing. The banks went to governments with cap in hand and got their bailouts because they were “too big to fail.”
Banks have grown used to thinking of themselves as the Untouchables, so they must have been alarmed by last week’s comments from Bank of England Deputy Governor Jon Cunliffe on the future impact of digital currencies. “Our job is not to protect bank business models,” said Cunliffe. “[They] will have to adjust.”
He’s right. They will have to adjust—and faster than they ever thought they’d have to. Last week Christine Lagarde said she had a “hunch” that a digital euro would launch in two to four years, while China has already started experimenting with a digital yuan.
I’ve covered the rise of central bank digital currencies (CBDCs) before, highlighting how they promise nothing but a return-free risk. But whatever their failings, CBDCs are coming. That should worry commercial banks, as it appears that the world’s king-making central banks have decided that commercial banks should have their royal warrants withdrawn.
Since every euro, dollar, or yuan deposited with a central bank is one fewer on commercial banks’ balance sheets, if CBDCs take flight, banks face the very real prospect of going from “too big to fail” to mere middlemen between consumers and central banks, their only role being to respond to client queries for a small monthly fee. Their remaining business lines such as lending, stock trading, and insurance brokering will face fierce competition from more agile specialized competition, hastening their decline.
This may seem like a good thing for consumers, and in some ways it is, but it is important to remember that CBDCs are not the final financial destination when it comes to where to safely store your shekels.
In 1995, John Nash, the father of modern economic game theory, conceptualized what the perfect or “Ideal” Money would be. Simply put, it would be money with no inflation and no interest. Sadly, money has been travelling not towards, but further away from this ideal. Currency has been through three phases in its history: first, there was low inflation, no-interest money based on precious metals like gold; this was followed by high-inflation, no-interest fiat currency. Given that consumers will likely have to pay an account or administration fee, CDBCs represent a third evolution of high inflation and negative interest money—the exact opposite of John Nash’s ideal.
Luckily, 12 years ago, an anonymous inventor named Satoshi Nakamoto created Bitcoin, and in so doing, transformed Nash’s Ideal Money from a theoretical notion into a real life monetary marvel. Now ordinary people have a choice?either to store their value in CBDCs, a digital version of the same-old inflationary currency but with the “bonus” of monthly fees, or in Bitcoin, a proven digital currency that’s not only free to use, but is also inherently inflation-proof.
It’s clear from the growing numbers of people swallowing the orange pill that Bitcoin is gaining momentum at an ever-increasing rate. Just as the big commercial banks are set to lose their privileged positions, a new decentralized king of the hill is emerging. However, this king rules with transparency, meritocracy, and consistency. Who knows, we may look forward to the time where being “too big to fail” is not something to fear but rather, something to fight for.
Regular readers will know that I rarely say much about Bitcoin’s price. It’s not that I’m unmoved when Bitcoin breaks a new barrier: as an investor, of course it’s exciting to see the price, at the time of writing, having surged to $16,800.
This isn’t a sprint, and I’m no more going to react to a peak or plunge in price than Mo Farah celebrates or despairs over a single mile in his marathons.
That being said, there is something different about last week’s news that Bitcoin broke $300 billion in market cap. Yes, we’ve been here before: December 2017, to be precise. But whereas the last time Bitcoin reached such a heady height was right at the top of a long bull run, this time around the run’s just begun.
The world has changed immeasurably in the three years since Bitcoin was so highly valued. People can see a looming, corona-caused economic catastrophe and are searching for an investment that will hold its value. They can see that in spite of all the dire predictions, Bitcoin has stubbornly refused to die, and that those who once predicted its demise are much quieter today, or have even invested in it themselves.
Sure, Bitcoin will retain its bubble reputation among the chattering classes: those desperate to have a clever opinion about the new monetary revolution. But smart people (like the financially-savvy over-55s) continue to flock to Bitcoin.
It’s all set up for 2021 to be the most momentous year yet in Bitcoin’s unstoppable march down the road to hegemony.