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Even many of cryptocurrency’s harshest critics acknowledge that there are serious problems with fiat currencies.

Strangely, enough the most outspoken critic of government-issued currencies; former International Monetary Fund (IMF) Chief Economist Kenneth S. Rogoff, is also a foe of cryptocurrency. Rogoff even wrote a book; The Curse of Cash, in which he recommended governments abolish paper cash completely.

Rogoff’s argument is that cash is draining money away from legitimate free enterprise and into the black market. He also accuses the world’s central banks of promoting the black market by profiting from the sale of paper bills.

“And all this cash is facilitating growth mainly in the underground economy, not the legal one,” Rogoff charged in a Project Syndicate editorial. He noted that the $100 bill; which average Americans almost never see makes up 80% of the U.S. money supply. The $100 bill is the favorite medium of exchange of the world’s criminals.

Fiat Currency

Paper currency encourages violent crime by making robbery pay off and drug dealing and illegal immigration profitable; by giving criminals an easy to use means of payment, Rogoff pointed out. In The Curse of Cash; he noted that the Swedish government greatly reduced the number of bank robberies by simply lowering the amount of cash in circulation, which made such crimes less profitable.

Ironically, this is a claim that is leveled at Bitcoin and other Cryptocurrencies, that they facilitate crime when it reality cash is by far the largest method or exchange for criminals.

Is Paper Currency Obsolete?

Rogoff is the same man who denounced Bitcoin (BTC) as “Crypto Fool’s Gold” in a 9 October Project Syndicate column. Rogoff; a Professor of Public Policy at Harvard University, is no fan of cryptocurrency but he thinks present-day fiat currencies are worse.

Interestingly enough, Rogoff believes governments will scrap present-day fiat currencies; and replace them with national cryptocurrencies (he uses the term digital currencies), in the near future. His belief seems to be that paper cash is an obsolete technology that should be abolished.

“But the long history of currency tells us that what the private sector innovates, the state eventually regulates and appropriates – and there is no reason to expect virtual currency to avoid a similar fate,” Rogoff wrote at Project Syndicate.

His prediction is that governments will simply takeover cryptocurrency. Historically, paper currencies were first printed by banks – but eventually adopted by governments because they were a superior payment technology.

Bitcoin Ban

The Danger when Cash Goes Away

One person who agrees with Rogoff is India’s Prime Minister Narendra Modi. On November 8, 2016, Modi demonstrated all the problems with fiat currencies by declaring 86% of the cash in his country worthless.

Modi simply went on television and told the Indian people that their two largest bills; the 500 rupee ($7.50 or £5.40) and 1,000 ($15 or £10.81) notes were instantly worthless, CNN Money reported. Not surprisingly, the Prime Minister’s action created instant panic and an immediate cash shortage.

India Cash

Indians waiting in line for Cash withdrawals, Image from CNN.

Over the next 50 days, tens of millions of Indians learned what it was like to live without cash. Some businesses resorted to barter, while some people were sleeping in lines outside banks and ATMs rumoured to have cash. Such chaos occurred because 98% of all consumer transactions in India are conducted in cash.

Modi showed the world why cash is such a lousy payment mechanism; it can be instantly destroyed or taken away. Just as a person who keeps all of her money in bills under the mattress can lose everything to theft or fire. An entire nation can lose its buying power to one government action.

The Hyperinflation Menace

A major problem with Fiat currency is the inflation problem, governments can print as much new money as they like which devalues the money already in supply. For example, after the financial crisis in 2008, the bank of England created £375billion of new money. This is an ongoing concern and one of the problems that cryptocurrencies solve completely – for example, we know that there will only ever be 21 million Bitcoin in existence.

The residents of Venezuela are experiencing the other grave danger from government currencies: hyperinflation.

Prices in Venezuela may have risen by 12,875% during 2017 and by 85% during December 2017, Johns Hopkins University economist Steve Hanke told The Economist. Hanke thinks that prices in Venezuela are doubling every 52 days.

If Hanke is right that would place Venezuela among the worst cases of hyperinflation in history. The International Monetary Fund forecast that inflation might increase by 13,000% in Venezuela during 2018.

The Venezuelan government is now printing a 100,000 bill in its fiat currency the Bolivar, The Economist reported. That bill might be worth less than 50¢ (£0.36) in US Dollars. The black market exchange rate for one US dollar (£0.72) in Venezuela is 228,000 Bolivars, Reuters reported.

Hyperinflation

Hyperinflation Graphic, Image from The Economist.

Average Venezuelans are feeling the pain, an egg now costs 10,000 Bolivars; or a day’s pay in the nation’s minimum wage, on the country’s streets, The Havana Times reported. Eggs have apparently replaced Bolivars as one of the favoured mediums of exchange in Venezuela. A single carton of eggs now costs 60,000 Bolivars – or six days the minimum wage.

The Bolivar is worthless because Venezuela’s President Nicholas Maduro destroyed the economy, and wasted the entire nation’s oil money. Not surprisingly, many Venezuelans; including Maduro himself, have become cryptocurrency geeks out of necessity.

Cryptocurrency vs. Hyperinflation

Thousands of Venezuelans are using the country’s super-cheap electricity to mine Bitcoin (BTC) and Ethereum (ETH), The Atlantic reported in September 2017. A Venezuelan can make around $500 (£359.56) or 125.4 million Bolivars a month mining Bitcoin.

Bitcoin Mining

Venezuelans like Bitcoin because police, criminals, or soldiers cannot seize it at gunpoint. They can also use Bitcoin to pay for items from e-commerce companies in Miami and have them shipped to the South American nation. It is even possible to buy Visa and MasterCard gift cards; that can be used at Amazon, with Bitcoin or Ethereum.

This enables some Venezuelans to purchase essential items like food, medicine, and diapers online, Atlantic reporter Rene Chun discovered. These people can live a better life than their neighbors who are bartering eggs for consumer goods in the street.

Bitcoin is now so valuable in Venezuela; that corrupt police are seizing mining rigs and rebooting them at their stations, Chun wrote. The only way cops can get paid; and feed their families, is to mine Bitcoin.

Letting Politicians Loot the Nation’s Wealth

The country’s newest cryptocurrency geek is Maduro himself; who announced the creation of an oil-backed altcoin he calls the Petro in December 2017, Al Jazeera reported. Maduro even has plans to try and get the Organization of Petroleum Exporting Countries (OPEC) to issue an altcoin.

Maduro

Venezuela’s President Maduro, Image from AlaJazeera.

“I am going to officially propose to all OPEC and non-OPEC producing countries that we adopt a joint cryptocurrency mechanism backed by oil,” Maduro said.

The Petro probably will not help average Venezuelans; but it will make it easy for Maduro and his henchmen to move all the oil money out of the country, before the revolution. Whether the international community will let Maduro get away with looting Venezuela’s wealth is not clear.

The fate of Venezuela reveals what might be the greatest flaw in government fiat currencies; they make it real easy for corrupt or incompetent leaders to loot the nation’s wealth. All the dictator has to do to get more cash is to run the printing press.

The victims are average citizens who have no choice but to accept the worthless paper. The dictator and his cronies have the option of selling assets for other currencies with value and moving it to overseas bank accounts. Disturbingly, it is in the interest of the dictator to print more money; because he can exchange it for currencies with value, making the cash even more worthless.

Venezuela Demonstrates why Cryptocurrency will Supplant Fiat Currencies

Average people are at the mercy of this horrendous system because they cannot spend the tyrant’s worthless paper outside the nation. Nor do they have a good means of moving cash outside the nation, because nobody else accepts their national paper.

Cryptocurrencies enable average people to bypass government-issued Fiat which is subject to their whims – which is what makes them so valuable. The true advantage of cryptocurrency is that it allows average people the ability to make cross-border transactions with no exchange rate. That gives them spending power and money transfer capabilities once only reserved for the rich.

Rogoff and Modi are absolutely right, the problems with fiat currency will kill it off in the near future no matter what governments do. Like it or not, cryptocurrency is the future of money, and governments will ether be forced to adopt it or try to ban it which will prove futile due to it’s decentralized nature.

Posted by Oliver Dale

Founder of Blockonomi and Kooc Media, A UK-Based Online Media Company. Believer in Open-Source Software, Blockchain Technology & a Free and Fair Internet.

All content on Blockonomi.com is provided solely for informational purposes, and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security, product, service or investment. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate.

3 Comments

  1. Thanks Oliver Dale, for sharing this great information about cryptocurrency. I think one day it will take the place of fiat money and solve this issues

    Reply

    1. There are many countries around the world who dont recognize cryptocurrency as a legal tender.

      Reply

  2. Interestingly, there are many parallels between South Africa and Venezuela. Pity we don’t have such cheap energy to mine Bitcoin!

    Reply

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