The Hidden Cryptocurrency Revolution

We all know that cryptocurrencies are not money. Regulators, the IRS and pundits have told us so. Even the average Joe would have a hard time thinking of bitcoins as money if what they had to fork over for a Big Mac (using The Economist’s Big Mac Index) ranged between $5.06 and $316.21 equivalent over the past 48 months.

No, a currency is used for transactions, not a speculative asset (by the average Joe). A currency used for transactions has high turnover, not high volatility, even a digital currency. Take a look at the difference in transaction volume growth between M-Pesa and bitcoin.

M-Pesa vs bitcoin

Yes, there is the beauty of the technology and the ability to make a payment instantaneously to another bitcoin account, but this doesn’t seem to be the hook. The inconvenience of bitcoin as a transaction medium is ignored by two segments, those that want anonymity of their payment and those holding it for a speculative increase in price. This is OK, its just not a mainstream transaction medium. It is unlikely that it will ever be that in a private form despite the dreams of anti fiat currency enthusiasts and technologists who marvel at the underlying technology.

Instead, what is emerging is a powerful combination of two new technologies that will revolutionize funding for technology start-ups. It is the combination of cryptocurrency and crowdfunding. I had an inkling of this in 2015 and wrote about it in my book published last year. An excerpt:

“Now here is a prediction that is a bit more far out, but that I see as inevitable.

The form of company ownership will change. Publicly traded shares as we know them today will gradually fade in importance. What will emerge to replace them is company issued “cryptocurrency”. The company crypto will be traded via the Blockchain as is Bitcoin and many other, smaller cryptocurrencies today. The value of the company’s crypto will reflect the market’s view of their future. And like Bitcoin and other cryptocurrencies, the integrity of the settlement is built on the distributed ledger of the Blockchain.

There will be no shareholder meetings, nor annual reports, etc. The information of what is going on in the “private” company will be available real time, the same as the owners and managers see. Fraud will be hard to perpetrate with the extensive data being pored over by interested online reviewers. I’m sure whole new businesses will be developed that gather and package information on a companies’ crypto outlook from all the data that is available, sort of a Business Yelp.

This will confuse authorities like the SEC, Federal Reserve, etc., but there will be no need for central watchdog authorities that are understaffed and lead to reams and reams of boilerplate corporate legal protection and reporting that no one looks at. The power of the Internet supporting distributed authentication and instant data availability is much better than a false sense of security from a central authority. The market is already learning how to deal with Micro lending, crowd funding, and some 500 cryptocurrencies.

The employees could be paid in the company’s crypto which will give them an economic interest in the success of the company. I guess this is a bit like the old time “company store” where employees could shop at the company store without cash and have it deducted from their wages because the company was so remotely located. However, this time it is a global company store and the receivers of the company’s crypto could be anyplace in the world. Large groups may have multiple subsidiaries with their own cryptocurrency that allow the market to participate in their fortunes without a spin off or reorganization. With this flexible form of capital, companies and their “crypto” could rise and fade much more frequently than publicly listed companies do today.

You may not be aware of it, but banks used to print and issue their own money up until 1862. By the 1850s, there were over 10,000 varieties of bank notes and counterfeiting was rampant. Of course, the Blockchain was not available for untrusted settlement.

You might think the view I am expressing of company issued cryptocurrencies replacing company issued stock is farfetched. It has already happened. I mentioned Ethereum above as one of the new open source software platforms. Earlier this year, Ethereum has done just what I described. An excerpt from Wikipedia:

The currency unit of Ethereum is the Ether, used to pay for computational services on the network. To finance development, Ethereum distributed the initial allocation of Ethers via a 42-day public crowd sale, netting 31,591 Bitcoins, worth $18,439,086 at that time, in exchange for about 60,102,216 Ethers.

Ether is divided into smaller units of currency called finney, szabo, shannon, babbage, lovelace, and wei (named after Wei Dai, the creator of b-money). Each larger unit is equal to 1000 of the next lower unit.  In practice, however, the developers encourage the use of ether and wei. Wei is the base unit of implementation and cannot be further divided.”

Fast forward a year. You might have missed this event yesterday, but the announcement on EconoTimes was “Blockchain startup Bancor Protocol has raised over $150 million in its Token Generation Event which took place on June 12.” And a new form of speculative investment is born, a “Token Generation Event”. Bancor Protocol tokens denominated in Ethers (ETH).

It didn’t hurt to have a recognized venture investor like Tim Draper as a participant and advisor. His comments tell it all, “We are beginning to explore the possibility of issuing a VC Token for our diverse network of investors, entrepreneurs, local and global businesses. We’d like for this to be a Smart Token, so it can benefit from continuous liquidity from day 1.”

The BNT tokens will trade based on investor’s view of their future and the scarcity/surplus of buyers or sellers at a given price just like a stock. Now all we need is for liquidity and Charles Schwab to offer check writing against the asset. But wait, there’s more to the announcement.

“We are thrilled to announce a unique partnership between Gnosis and Bancor to create a joint GNO BNT Token Changer — a decentralized liquidity pool of GNO and BNT, encapsulated in a Smart Token. 4,000 GNO and 400,000 BNT (~$1,000,000 value each) tokens will be deposited in a Gnosis-Bancor multisig wallet following the token allocation event on June 12 at 2pm GMT.
The funds will be progressively deposited in a token changer that will provide a decentralized and automated solution for exchanging GNO to BNT, with no (human) counter-party. Since BNT holds an ETH reserve, two-way ETH-GNO conversions will be possible as well.”

There you go. The cryptocurrency has found its true purpose in our society. An asset ownership vehicle that can be anonymous, instantaneously transacted across borders, with liquidity. There will be kinks to work out, but the DAO fiasco didn’t seem to stop Rancor’s success in just 3 hours.

No its not a currency for buying a Big Mac, but then did you really believe that was where bitcoin was headed? Mark my words, this will be big.

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