Michael Petraeus, better known as Critical Spectator, wrote an article for Vulcan Post arguing that digital currencies can only work with government backing. By ‘digital currencies’ he singles out Bitcoin for criticism. This in itself is the fatal flaw underlying his thesis.
To understand where Petraeus is coming from, he is one of Singapore’s highest profile bloggers. Most unusually, he is a pro-establishment blogger, one whose political values are almost perfectly aligned with the People’s Action Party. He thus favours stability and government control, and has high faith in the power and benevolence of state institutions. Keep this in mind as I address his arguments.
Petraeus’ central argument is that currency must have a ‘stable, predictable value’. This is because a currency must serve three of the following four functions: medium of exchange, measure of value, standard of (deferred) payment, and store of value.
Petraeus is applying the logic of fiat to cryptocurrency. This overlooks the utility of various cryptocurrency technologies, which brings a breath of innovation to transactions and contracts across the world. Ethereum, for example, can be used to run decentralised applications, host blockchain projects, fund cryptocurrency swaps, manage smart contracts—and pay for goods and services. These critical technologies differentiate cryptocurrencies from fiat so significantly that the logic of fiat cannot apply.
Patraeus’s first argument against Bitcoin as a currency is that Bitcoin is volatile. The volatility of Bitcoin makes cryptocurrency payments difficult. To quote:
Contracts for delivery of products or services can be settled within a window of a week, month or even a quarter. Of course, as long as a currency’s value is predictable, it isn’t a big deal as it’s unlikely that it is going to change dramatically.
30 days is a fairly standard timeframe for issuing payments. However, with cryptocurrencies being able to jump a few hundred per cent over a period of weeks, you can’t predict what the deferred payment you agreed to may actually be worth when the date is due. It would make conducting any business highly risky.
Such a scenario is easily remedied using a smart contract and taking reference from fiat. In the contract, the buyer agrees to pay the seller a certain amount of cryptocurrencies equal to a specific fiat value. Once the seller delivers goods and services, the contract automatically calculates the correct amount of cryptocurrency and executes payment. Job done.
Furthermore, there is no need to wait for 30 days to issue payments. The advent of digital currencies and global banking technologies mean that payment can be processed instantly. For transactions that can be handled on the spot, buyer and seller can simply agree to transact in a given cryptocurrency. This technology already exists in the form of online shopping carts that accept payment in crypto.
Buyer and seller can also use stablecoins instead: USDT, USDC and other stablecoins which have a predictable value because they are pegged to fiat. There is nothing stopping either party from choosing to transact in stablecoins.
Patraeus then goes on to argue that digital currencies are not a store of value:
Finally, the worst indictment against digital currencies is their demonstrable inability to store value in a safe, predictable way — for the very same reasons outlined above.
If you saved your 10 BTC in October, then you’re obviously super happy now – your $100,000 in savings has transformed into $500,000. But if you save 10 BTC today and the price tanks to past levels within the next few months, you will be a few hundred grand out of pocket.
To be blunt, this is how foolish money thinks.
Bitcoin is inherently volatile, more volatile than fiat, and it is this volatility that makes it an attractive investment option. When investing in Bitcoin for the long haul, you must do so in the recognition that market conditions may cause Bitcoin to lose its value by a significant percentage rapidly. Nonetheless, the value of Bitcoin has shown a consistent upward trajectory over the years, barring bear market conditions.
Bear markets will happen. People and investors will want to take profit at some point. When the value of Bitcoin, or any other crypto, drops, foolish money panics and thinks it is the end of the world. Seeking only to grow or hold on to wealth in the short term, they do not keep a long-term perspective, and quickly dump their bags. Smart money buys the dips—and smart money does not invest their entire life savings in a volatile instrument. By wisely scaling into cryptocurrencies and Bitcoin, smart money makes a profit over time.
Invest in Bitcoin to grow wealth over time. To keep wealth stable over time, invest in gold.
Petraeus’ next argues that Bitcoin’s value cannot be stabilised.
Bitcoin — like other cryptocurrencies — does anything but store value. It can be treated as an investment or, more accurately, as a speculative gamble, as there really isn’t much that the currency is backed with other than prevailing demand.
Traditional currencies are currently supported by entire economies that the rest of the world is either engaging (or not) in trade with. This is additionally stabilised by central banks amassing foreign reserves and using their power to print additional currency as needed, to ensure the national currency remains stable and fulfils the four criteria.
Fiat money is backed by nothing.
The end of the gold standard meant that the US dollar, and currencies that take reference to is, is backed by nothing except the faith of those who use it, and the assurances of governments and the global banking system.
Over 35% of all US dollars ever printed were printed in 2020. This is a recipe for massive inflation. Fiat is only stable if governments take steps to stabilise it. In the cases of Venezuela, Zimbabwe, Weimar Germany or modern America, when the government does not or cannot ensure the stability of fiat, fiat is not stable. Being totally reliant on governments, it takes only a single administration to destroy the value of a fiat currency—and the people will have little say in it.
In contrast, Bitcoin is deflationary. There is a fixed number of Bitcoins that can ever exist. Mining rewards drop significantly over time. This creates and enforces scarcity, and with scarcity comes perception of value. Because scarcity is already hardcoded into Bitcoin, it will always have value. Contrast this to fiat, which can be printed on demand, with disastrous results.
Furthermore, Bitcoin has a huge market cap. This means that it takes a huge amount of money to significantly affect the price of Bitcoin. Small market cap altcoins are notorious for their extreme price volatility. Bitcoin is arguably a reasonably stable store of value in the crypto space, one that grows over time.
New technologies also make new kinds of digital currencies possible. The Ampleforth token uses a rebasing mechanism. The blockchain dynamically adjusts the supply of tokens in response to market conditions. When a rebase occurs, the number of tokens in every wallet will be adjusted, but holders will continue to own the same share of the network as they did before the rebase. As holders will benefit and profit from price stability, this natively encourages price stability over time. This contradicts Patraeus’ claim that achieving price stability with cryptocurrencies is ‘impossible’ due to ‘their built-in limitations and lack of outside control’.
The current ultimate in stability is, of course, stablecoins pegged to the US dollar, which will always be valued at 1 USD per token. Petraeus’ claims that “cryptocurrencies do not have any mechanisms that would stabilise their value in response to fluctuations, nor are they representing any particular market or country that the people would be willing to trade with” demonstrates ignorance of stablecoins.
Petraeus claims that cryptocurrencies are not necessary. To whit:
You can buy the same goods and services with dollars, pounds, euros. In fact, the only things that Bitcoin and other can open the doors for you is the illicit stuff, which you wouldn’t want to be seen or in any way tracked buying, like drugs.
This is incorrect. Bitcoin is not anonymous. Neither are the majority of other cryptocurrencies out there. Nor is their use case limited to illicit goods and services.
Cryptocurrencies have many exciting use cases which are impossible for fiat. VeChain can be used to track and secure global supply chains. Oracles like Augur and Chainlink manage real-world information on blockchains. Nonfungible tokens can be used in online gaming to transfer assets from one game to another. Cryptocurrencies, being digital, can do what physical goods like cash and gold cannot.
This also includes making transactions in economies shattered by hyperinflation. Adoption of Bitcoin and Dash soared in Venezuela in the wake of massive hyperinflation. Today, Venezuela ranks the third in the world for cryptocurrency adoption. The reason is simple: Bitcoin and Dash have value, Bolivars do not. As mainstream adoption grows, we can see digital currencies being used alongside traditional fiat currencies.
And in addition to all this, cryptocurrencies can be used to pay for any kind of good or service, the way fiat is used today.
Patraeus contrasts cryptocurrencies to the gold standard, claiming:
You can take gold or silver anywhere in the world and exchange it for money, as there’s always demand for it, but cryptocurrencies are based on nothing. If their value collapses to zero, the only thing you’re going to hold is a digital record you wouldn’t even be able to use as toilet paper.
This is only true in two events: a global disaster that wipes out the global Internet, or an extremely high risk altcoin.
In the former event, you’re going to have a lot more to worry about than simply buying and selling goods. In the latter, this is why you don’t use such cryptocurrencies for transactions.
Patraeus states that ‘the gold standard had the benefit of being based on a scarce metal that held intrinsic, practical value’, making it superior to cryptocurrency. As explained above, many cryptocurrencies like Bitcoin are either scarce or have intrinsic, practical value, or both. Where gold can be used to manufacture goods, cryptocurrency tokens can be used to fuel digital services. In an increasingly high-tech world, the utility of cryptocurrencies grants them value, as do their scarcity.
Petraeus further states:
Various applications of blockchain open up many possibilities outside of finance, but for it to enter widespread use, it has to be implemented in a controlled, regulated way that can be trusted by millions of ordinary people who don’t want to spend their lives tracking daily exchange rates of some imaginary digital coins.
For any currency to retain a stable value, it has to be managed by state authorities, setting realistic expectations and using tools of monetary policy to achieve them.
Stablecoins today already demonstrate that state authorities do not need to be involved to ensure stability. Other cryptocurrencies like Ampleforth show that the market is quite capable of taking care of itself without government intervention.
With today’s technology, people can price their goods and services in fiat, and conduct transactions in crypto. With an online storefront, for example, the exchange rates can be automatically calculated. Smart contracts can govern payment and delivery without the need for human interaction. Humans do not have to manually check exchange rates all the time.
Giving governments and banks the power to control fiat is extremely dangerous. Petraeus himself already described the dangers of hyperinflation, which is self-inflicted. Further, should the governments and banks decide that you are an undesirable, they can shut you out of life forever. Gab.ai, after being falsely accused of anti-Semitism, was banned by 3 banks in 3 weeks.
Anyone at risk of being cancelled, censored, or both, must have a means to ensure their continued survival even if the government turns on them and every bank shuts them out. Cryptocurrency is a powerful tool to ensure this, precisely because it is not controlled by the state.
Petraeus ought to recognize this as important, because he originally hailed from Poland, a nation that had suffered under a totalitarian government for 44 years. Then again, being more Singaporean than other Singaporeans, he is not presently at risk of government action—only corporate censorship. Which he routinely complains about on Facebook.
Under more mundane circumstances, cryptocurrencies also grant access to financial services. Cryptocurrencies allow the unbanked to quickly and easily save and preserve their wealth. Decentralised finance facilitate access to financial instruments without having to go through banks, and with reduced barriers to entry. Cryptocurrency mining is a hassle-free method of earning passive income. Fiat currencies cannot match these benefits.
Patraeus concludes his article by claiming that “the real revolution [in digital currencies] is going to happen when the governments begin to issue their own.”
He may be accurate here, but only up to a point. Governments will see digital currencies as an extension of fiat—with the bonus of being able to see and track every single transaction from every single wallet on the blockchain. From here, it is a small step to the government granting itself the power to shut down wallets belonging to known troublemakers.
Government-backed digital currencies may have their advantages. They may make day-to-day transactions more convenient. But I think one of the most significant ones will be driving the creation and adoption of next-generation privacy coins.
Cryptocurrencies show that a currency system can exist without the backing of governments or bankers. The technology is still in its early days, and naturally there will be many false starts and teething pains. Price volatility is among them, but already there are tokens that can address this problem without the need for central banks and governments. As technology improves, next-generation cryptocurrencies will spring up, solving other problems that fiat can’t touch.
Today, in 2021, cryptocurrencies may be the cutting edge, and still distrusted by people. But what about 2051? Or 2041? Or even 2031? Cryptocurrencies are poised to change the world forever—and they don’t need government backing to do that.
What would a future run on decentralised computing and cryptocurrencies look like? Check out my post-cyberpunk novel EDENET!