Will Bitcoin crash and resurrect?

NOT BITCOIN but better.

One use of Bitcoin is for anonymous transactions, i.e., as a substitute for ordinary cash or bank notes.

The problem is that the currently available bitcoins fluctuate in value. The ideal is a bitcoin that is stable for at least a certain determinate or even indefinite time against a major currency, such as the US dollar. In short, we want or need an alternative bitcoin that is like a dollar banknote. We imagine this alternative works better than keeping banknotes under the mattress or in a safe deposit box, because it avoids thievery and the transaction costs of going to the safe deposit box.

It can be done. The easiest is for the US Fed to do it. It would allow anyone to buy something we might call the official bitcoin dollar in exchange for a guarantee that bitcoin dollars are exchangeable into US banknotes. If this works, it will be because it would reduce the costs now paid by the central bank for printing currency and going after counterfeits. In this scenario, the blockchain ensures that counterfeit official bitcoins cannot exist.

Another way is for a major private bank to ‘create’ its bitcoin dollar. Imagine that Chase does it, and calls it the Chase bitcoin dollar. All it is is a special debit card account where Chase guarantees to make the Chase bitcoin dollar exchangeable for cash. The guarantee is in effect a promise that Chase will honor Chase bitcoin dollar liabilities ahead of its any other liabilities. To ensure such a guarantee, Chase would enter into a ‘currency board’ arrangement with the US Fed by maintaining Fed fund balances in a separate special account solely for the purpose of redeeming Chase bitcoin dollars. In short, the fractional nature of the private banking system will not apply to bitcoin dollars.  

The blockchain also allows Chase to ensure that no other entity can create Chase bitcoin dollars. The ‘supply’ of Chase bitcoin dollars will always be the same as the demand for such dollars.

Any other private bank would be allowed to participate in a ‘branded’ bitcoin currency. I can imagine HSBC issuing special debit cards for HSBC bitcoin dollars, HSBC bitcoin euros, or HSBC bitcoin yen. They may be allowed to compete through enhancements on convenience of use, allowing for fee-free global transfers, or even the payment of interest.  

One important enhancement would be US consumer protections against fraud now being given to users of credit cards. Any merchant declining to honor a bitcoin debit card would be presumed to be up to no good.

The similarity with bank notes will have to be carried to an extreme that meets certain anonymity and privacy standards. The issuer of a bitcoin dollar will have to honor the bearer of the account provided that said bearer satisfies identity requirements. 

At the same time, the use of such accounts will have to be protected by bank secrecy rules, but subject to money-laundering limits. For example, bitcoin dollar transactions in a particular account cannot exceed $10,000 per day, and a bank cannot allow a depositor more than one bitcoin dollar account. A maximum-balance limit of, say, $100,000 per account, could be imposed, in parallel with limits now applied under existing deposit insurance schemes.
Central banks could also impose limits on how many bitcoin dollar accounts an individual can have. To protect banks from money-laundering, bitcoin dollar accounts would not be available to corporations.

Will the advent of such official or private bitcoin dollars kill the existing bitcoins? It could, especially if bitcoins continue to be more attractive as speculation vehicles than as means of payment.

But bitcoin exchanges could create ‘hybrid’ bitcoins whose ‘mining’ or supply-side arrangements are fully transparent, and whose value could be stabilized in some fashion desired by the bitcoin holder. In short, there could be different bitcoins for different purposes. Caveat emptor and ‘know your customer’ rules would still be needed. However, such bitcoins would remain without guarantees similar to deposit insurance, and they may still be vehicles for speculation.

My best guess: Bitcoins will evolve, i.e., the fittest will survive. The Dutch tulip variety will become extinct. As of now, they’re pretty much as primitive as Dutch tulips.

Where is the Philippine peso going? Up and away? Up and down?

There has been some recent wrangling over the plight of OFW families because the peso has risen. One foreign bank active in local financial markets has predicted a P40 to US$ exchange rate for 2013-14. In an academic paper, Prof. Gerardo Sicat of the University of the Philippines has raised the issue of whether the economic managers, mainly the central bank (the BSP) and the fiscal authorities, should do something about the matter. Sicat’s main beef is that the government has adopted a very conservative fiscal policy that has contributed to the peso appreciation.

The conventional wisdom is that the peso has strengthened because foreigners are optimistic about the domestic economy, and they have been a major factor behind the recent stock market gains. The peso rise has hurt the families receiving dollar remittances as well as our local exporters and the call center-BPO sector, but then at the same time it benefits those who own peso assets. This piece of arithmetic is also a given, although some people seem to focus more on the supposed ill effects of peso appreciation. The latest IMF report considered the peso ‘not overvalued’ in 2011 and early 2012 when the US$ rate was P43.3. Observers like Prof. Sicat are right to ask whether a P40 rate might be overvalued.

Continue reading “Where is the Philippine peso going? Up and away? Up and down?”

Thinking of foreign exchange risk – or why I don’t believe the PH peso will go to P40/USD

Hedging hogs - Is it spring yet?

The IMF is famous for having the best brains on tap to think about the most important economic issues.

One issue is whether and how one should hedge against foreign exchange risk.

Continue reading “Thinking of foreign exchange risk – or why I don’t believe the PH peso will go to P40/USD”

Chinese New Year special – Where is the U.S. dollar going?

Back in August 2009, I thought that Buffett and PIMCO set up a herd play to weaken the U.S. dollar.  And they succeeded, though only for a short while.

With the benefit of hindsight, it seems reasonable to say that the “dollar weakness” tale of Buffett-PIMCO ended around end-Nov. 2009. Since then the dollar has markedly and consistently strengthened against the euro; the dollar had also risen from lows around 87 yen to 93 yen at year-end, but then it gave up some of its gains to the low 90 yen level.

Here’s my Chinese New Year fortune-cookie special:

Continue reading “Chinese New Year special – Where is the U.S. dollar going?”

The (encrypted) lessons from Venezuela

Venezuela is a country blessed with oil reserves like Saudi Arabia, but with a “failed” political system.  One symptom of this failure is the reasonable suspicion that elections have not been for real.  This was probably the case long before Hugo Chavez came on the political scene.  But more importantly, the economy has also been in bad shape, and Venezuela does not attract foreign investment the way other better-managed economies in Latin America (such as Colombia, Chile, Brazil, or Mexico) have.  However, Venezuela has the saving grace of producing world-class competitors within Donald Trump’s empire. Continue reading “The (encrypted) lessons from Venezuela”

How to firewall the Philippine economy (update)

This is a somewhat perplexing question (see my earlier article in the Philippine Daily Tribune  of December 6, 2008).

The short answer is that we cannot firewall an open economy. We can do some things to make it resilient, as discussed in the Tribune piece, but these are long-term fixes. But short-run policy mistakes, such as an overly tight monetary policy and an overvalued exchange rate, will weaken the economy.  Short run Keynesian policies may or may not work, depending on how they are designed.  I believe that tax cuts are preferable to public works expenditures (also in the Daily Tribune, February 12, 2009).

We might try to turn inward, taking the protectionist path of Myanmar, North Korea, and Cuba. But this is not a serious option. It would simply keep us forever poor.