Friday, September 22, 2017

Why the Penalty For Counterfeiting Was Death

 In olden days, the most gruesome punishments were not meted out for murder or rape, but for counterfeiting.  Why is this and what does it say about the future of cryptocurrencies?

One thing lost in all this discussion about cryptocurrencies is it one of the primary functions of the government is to control the currency.  A lot of what is driving cryptocurrency enthusiasts is this  political idea that somehow currency should be independent of governments.  This is not an economic idea but a political one - and there is a difference between the two.

There are a lot of people who waste a lot of time and energy on conspiracy theory websites arguing at the Federal Reserve is somehow "taken away" their money. What they fail to realize that in order for someone to take away your money you have to first have to have some money and usually these people don't have two nickels to rub together in first place.

But it's another example of externalization - blaming all their troubles on the government or some other agency rather than looking inward and wondering whether they could have worked harder, made more money, gotten a better education, spent less and saved more.  But of course, those are all hard things to do, and blaming the government is an easy thing to do and people tend to take the easy way out.

But one reason I think cryptocurrencies will eventually fail is that governments are very protective of currencies, and they're not going about to let some made-up currency take over.  And if you look at the history of money, you will see this has always been the case.

In the days of the kings and queens and crowned heads of Europe, the penalty for counterfeiting currency was death.  And by death I don't mean a simple hanging or beheading, but usually a gruesome death such as drawing and quartering, where the person would be tortured for everyone to see and then trampled into the ground.  The King was deadly serious about controlling the currency and people trying to spoof the currency were basically trying to undermine society as a whole.

Not much has changed since then, although we tend to be a little more forgiving in terms of counterfeiters.  We still pursue them with vigor, but we no longer draw and quarter them.

Cryptocurrencies provide no benefit to governments and thus goverments have no incentive to support them or even allow them to exist.   As they allow for money laundering and transfer of money for illegal purposes, they work against government interests.  In recent years we've seen how things like offshore accounts and numbered Swiss bank accounts have been pierced, one after the other, in order to track down tax cheats and other illegal activities. The era of anonymous banking appears to be coming to an end.

Cryptocurrency would seem to be bucking this trend and facing a strong headwind.  In an era where we are trying to track down terrorists and prevent money laundering, it would seem to cryptocurrencies are setting themselves up for a fall.

What is driving the cryptocurrency boom is not logic but emotion.  First of all, as I alluded to above, there are those people who believe that somehow the government should not control the money supply which is, of course, an emotional argument.  So they have a lot of emotion invested in cryptocurrencies because they believe in things like "Sovereign Citizens" and that the Federal Reserve is out to get them. These are not rational thoughts.

The second group of dreamers are people seeing these cryptocurrencies shoot up in value and thinking to themselves, "Gee, I'm missing out on the big opportunity here, I could be making millions of dollars like that guy they talked about in the paper!" So they go out and buy a new crypto-currency thinking that they're going to be the ones to make a lot of money.  But again, it is sort of like buying gold - you can make a lot of money if you bought it low and sold it high, but once it's published in the paper that it's going up, it's probably too late to get in on the gig.

The third and smallest group of cryptocurrency users are people are actually using it to transfer currency for one place to another, usually for illegal means.  For example drug traffickers might use it to transfer funds or arms dealers might use it to transfer funds. It is not clear, however, how much of the trading in cryptocurrency relates to actual monetary transactions and how much of it is mere speculation by people buying and holding the currency thinking it'll go up in value.  The people engaging in transactions are keeping their cryptocurrency for only the few milliseconds that it takes to go from one exchange to another (well, that and the minutes it takes to blockchain verify), where they are converted to local currency so the end user can actually spend it. The people using it as a means of exchange are at little risk for losing their money, as they don't leave their money in the cryptocurrency for very long.

In short, we have a speculative bubble, driven by fear and greed.  The fear is that people think they're missing out on something and if they don't invest in this they'll lose big and lose their one opportunity in life to make $1,000,000.  And the greed is the flip side of that buying and holding on to something they think is going to keep going up in value when historically, cryptocurrencies have been well demonstrated to be highly erratic and unstable.

And who knows, maybe governments will go back to drawing and quartering again.

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