Bitcoin Series 22: Bitcoin Valuation for Dummies

A market in Tengeru, Tanzania.  Source: Wikimedia commons

[updated: Some people apparently not familiar with the "For Dummies" reference - it was/is a popular series of reference books in the US - not pejorative. :) ]

Sorry to disappoint both bulls and bears but there will be no price targets here, just the theory about when and why bitcoin has a non-zero price.

Three steps to a bitcoin price:

1.  Imagine any usage case (international peer-to-peer remittances, micropayments, machine-to-machine transactions, holding some value outside of the existing financial system, etc) where BTC turns out to be useful.   It does not matter what the usage cases are at this stage - for the basic analysis to hold there just has to be at least one usage case that sticks.  

2.  Please note that (a) you need bitcoins to engage in these usage cases, (b) you don't have any bitcoins, (c) other people do have bitcoins and (d) the supply of bitcoins is mathematically limited.

Moreover:  If an application works in bitcoin, the fact that you own, say, litecoins or dogecoins is not necessarily helpful because most apps will support 1 or 2 'coins' at most.   So competition between alt-coins has very little do with minor differences in their implementation algorithms, but with how many applications are built on top of each one.   Though this could change, bitcoin has a tremendous head start in this regard.

3.  Given #2, you need to go buy bitcoins from others.   At this point, we have a buyer, a seller and market and, since there is no holding cost to a BTC, a price definitionally above $0.00.

Three basic conclusions:

4. The only thing that matters to BTC's valuation is how many real-world usage cases emerge for BTC.   If there are dozens, it will fulfill the dreams of its evangelists.   Conversely, the bear/ponzi case that value is $0, is another way of saying "there is no context anywhere on the planet that BTC will be useful" because there is no other scenario in which price hits $0.

5. Bitcoin is an open system so every developer/VC on the planet has the economic incentive and ability to discover real-world usage cases for it.

6. To conclude that the current financial and payments system (that still has us using plastic credit cards and banking phone apps that *have us take pictures of a paper check* to deposit it) has exhausted all financial innovation possibilities for our online, robotic software-eats-the-world of 2025 is a profound lack of imagination, in my humble opinion.

Unknowns

Of course, there are many unknowns in the above:

7.  If and when the usage cases will develop

8.  If they will be hindered by governmental regulation and competitive lobbying from the current payment processors 

9.  If superior forms of bitcoin will emerge.   One form that might be theoretically better (but a long way from being imminent) would be a FedCoin.

Bulls and Bears
In the context of the above, you can see why very smart people have such wildly divergent reactions to bitcoin:

10.  If you are a traditional consumer financial services executive (or reporter) where innovation has been measured over the scale of decades, a new currency that seems a bit shadowy, risky, volatile, and not clearly cheaper to use for domestic transactions sounds like a loser.

And so the fact that this loser thing has a $5-$10B 'market capitalization' or 'money supply,' sounds like the very essence of mass delusion and a 'bubble'.   Someone, somewhere must be tricking someone with a ponzi scheme for this to be happening!

One might kindly argue to you that this view is too focused on a specific point in time (today!) rather than the rate of change.

11. If you are VC/developer/futurist whose business is focused on successfully extrapolating trend lines, then bitcoin looks exactly like the type of thing that leads to epic riches: 

(a) It has an extraordinary rate of growth on every dimension - in four years, it has gone from a 'white paper' for the love of god to millions of users and better-than-price-competitive merchant processing (even with volatility hedged out) than merchant processing platforms that have taken decades to built.  

(b) It is an open protocol with no central point of failure.  Protocols of this type have historically been huge wins in technology because they foster innovation that was completely unimaginable to their inventors (aka TCP/IP).

(c) It is completely consistent with general tech trends - more economic activity is moving to online, machine intermediated, global and decentralized modes of delivery.   Bitcoin and the like are very well suited to that environment.

So, to a tech brain, the concept that bitcoin or other cryptocurrencies might facilitate 1% of global transactions in 2025, including whole classes of transactions that don't exist today like machine-to-machine payments, seems perfectly plausible.    In that model, bitcoin today is vastly undervalued.

Summary

Most of the online discussion about the valuation of bitcoin is misguided.   If you are using any of these phrases in your argument, you are doing it wrong:  "ponzi scheme", "the evils of paper fiat currency," "did the price move today?," "going to the moon,"  "is bitcoin dead?" 

Bears of the 'going to $0' variety should make the case that 'BTC will have no applications' and that the current system will fill in the gaps just fine.   That is a pretty confident statement...and usually an intellectually lazy statement.

Bears of the 'going to $50' variety should explain their thought process about what applications they are assuming, what market share gains they are assuming and so on.     

Bulls of the 'going to $50,000' variety should making a case about exactly what applications of the financial system BTC will be able to take over and be better than the current system (on a fully loaded cost basis, including consumer friendliness, security, etc).

And even when all that is done, you will realize that a large part, if not the majority of bitcoin's current valuation, is based on 'potential applications that have not yet fully developed' as opposed to 'activity occurring today.'

In this regard, it trades exactly like any mid-stage VC-backed company that has super-duper growth rates, with the difference that you are making a bet that 'someone, somewhere will invent good usage cases' as opposed to betting on a single management team (this is deeply underappreciated).   In other words, the currency is, in some ways, an ETF on the entire field.

Disclaimer

And because people are silly, our usual disclaimer applies:

(1) We do not care if you buy bitcoins (2) We are not a broker-dealer, broker, financial advisor or licensed in any way to give you financial advice (3) This is most certainly not a recommendation to buy, sell, short, trade bitcoins, litecoins, bbqcoins or StalwartBucks – you could lose all your money in one of many ways including, but not limited to: your incompetence, poor security, poor backups, software bugs, counterparty risk, exchange rate risk, liquidity risk , regulatory risk,  and more! You are 100% buying bitcoins at your own risk and on your own initiative. (4) Bitcoins are not anonymous and exchanges and online wallets even less so.   If you are going to use bitcoins to try to cheat on your taxes / divorce settlement / child support, you are a moron. (5) These are not the only ways to buy bitcoins (just some of the more popular ones) nor are we endorsing these companies – any of them theoretically could be hacked, run away with your money or be shut down by regulators / coopted by the ‘system’. (4) Ledra Capital, our affiliates and our principals might hold any number of old-timey or digital currencies at any time long, short or falling out of our wallet all crumpled up after a long night of drinking.   If we knew how they would trade against each other in the future, we would be having umbrella drinks on our private islands, not tweeting about bitcoin.

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Bitcoin Series 21: BTC, Retirement Plans and IRAs

Louisiana Baby Bonds, circa 1880.  Source: Wikimedia Commons

Today I was invited to help give a Continuing Legal Education presentation on "Retirement Plan and IRA Investment in Bitcoin and other Cryptocurrencies" for the Practicing Law Institute being taught by two of the top benefits lawyers in the US,  Arthur Kohn of Cleary Gottlieb and Howard Pianko of Seyfarth Shaw.  Amusing tidbit: Howard wrote the "Pianko Letter" that generated the guidance for futures contracts under ERISA back in 1982.

Some observations from the call:

1.  There are plenty of regulations across all parts of the financial systems that already apply to bitcoin.   Just like with AML/KYC laws for money service businesses, if cryptocurrencies are to interact with retirement plans, there is a whole set of regulatory issues that must be thought through.  As was said in the Senate hearings last year relating to AML and KYC regulation, it makes a lot of sense to see if the existing legislation can be interpreted in order to adequately manage cryptocurrencies before worrying about adding new legislation.

Bitcoin is an incredible technical breakthrough, but in many financial and economic domains, there are already frameworks, laws and principles that can be used to think about it.   

2.  This is a complex and subtle topic.  We spent hours before and during the call trying to see which framework (currency, commodity money, intangible, contract, collectible) fits different aspects of each regulation as it applies to bitcoin.   We definitely made some progress, but even with two very knowledgeable experts in the room, there was still room for disagreement and spirited debate. 

3.  The thorniest topic actually falls under ERISA and has to with the 'indicia of ownership' standard aka how do you prove you own the bitcoins and they have nexus to the US (a requirement under the regulations).  

Certainly you can demonstrate that you have the private key (that part is easy), but how do you demonstrate that nobody else does?  You might consider that bearer instruments are a good analogy but there the indicia are clear -- whoever physically holds the bearer bond owns it.   By contrast, any number of people can have a copy of the private key without that being obvious.   I personally suspect the answer lies somewhere in the direction of multi-signature transactions and formal custodians, but this needs work and, ultimately, some standardization.  

This is a question that will come up again and again.   For example:  how does a hedge fund undergoing its annual audit prove to its accounting firm that it is, in fact, the *sole* owner of 53,432 bitcoins?

4.  The registration attendee list was something like 40% big name law firms, 40% FT 500 firms, 20% regulators.  There was only one BTC firm listening in. 

I believe there is absolutely a need for BTC firms to be reaching out more aggressively to the existing financial services field and, IMO, forming a cross-disciplinary group (BTC technical experts, financial services executives, lawyers, accountants) to be working on these issues and providing best practice recommendations and guidelines to regulators and other related parties (aka auditors).  

Each side needs expertise from the other side in order to get to the right answer and, without everyone in the room, silly mistakes will be made and/or poorly drafted regulations will be written.

I am including the presentation in case you are interested.   The written material is a bit dry and just used to frame the issues - the interesting part was the debate and discussion it stimulated.

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Bitcoin Series 20: The Fool-Proof Bitcoin Press Release Kit for [Fill In Your Country Here]

Bitcoin Series 20:  The Fool-Proof Bitcoin Press Release Kit for [Fill In Your Country Here]

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Last week, we discussed that cash also presents challenges that society was able to handle, so perhaps cryptocurrencies won’t be so unmanageable after all.   This week, I am happy to announce our effort to lighten the research burden of harried public administrators worldwide regarding bitcoin and other cryptocurrencies  with this Fool-Proof Bitcoin Press Release Kit – Sovereign Nation Edition.

Use of this kit will generate the following benefits for Your Country:

(1)    Attract innovative technology businesses to implement a ‘tech hub’ strategy

(2)    Give consumers the benefit of increased competition while protecting them from fraud

(3)    Focus law enforcement resources efficiently on the biggest risks to Your Country

(4)    Avoid embarrassing gaffes that your robotic overlords (aka: your grandchildren) will snicker at

(5)    Procure interviews for your previously unknown Finance Minister with Bloomberg, the Wall Street Journal, Reuters and Reddit

(6)    Finally get that long-deserved invitation to Davos to discuss ‘innovation’

Even better, you can capture all these benefits without ever having to look up or know what a “dogecoin” is – simply fill-in-the-blanks on our handy kit below.

Note:  This strategy might be somewhat less effective if you have a centrally managed economy that jails people for moving capital across borders.

While you can pick and choose from any of the five templates below, for maximum effectiveness, release all five at the same time in a coordinated assault against your [regional competitors] [Switzerland] [Singapore] [Mountain View][those guys that invaded you 400 years ago].

Part 1:  Trade Minister press release
Part 2:  Central Bank press release
Part 3:   Financial regulator press release
Part 4:   Tax authority press release
Part 5:   Law-enforcement agency press release
****************************************************************
Part 6:   BONUS Tourism Board press release (for small island nations only; use with care)

Note: Start now!  If you do this after 75 other countries implement the kit, it might be too late to convert your empty warehouses into a ‘FinTech’ hub.

Concerned citizens:  Please feel free to forward this template to your local authorities.  The material below is licensed for use by public entities as donation-ware; optional donations from National Treasuries or patriotic citizens (bitcoin only please) are always appreciated at:

17LBdguZxFuAyDYtqu2Y3USSQBtjFTosVK

Improvements/suggestions/translations to other languages are welcome in the comments.

Part 1: Minister of [Trade] [Economy] [Development] of [Our Country] Press Release

[Our Country] believes in free markets and innovation and welcomes entrepreneurs from around the world.   We want to be the preferred jurisdiction in [our region][the world] for the innovators building the [tech][financial services][fintech] companies of the future.

In this regard, we are excited to be announcing a comprehensive and coordinated regulatory and policy framework for cryptocurrencies such as Bitcoin and other related currencies.   These private currencies are an interesting new form of decentralized digital currencies that many believe will lead to significant technical innovation in financial services.   We would be thrilled if these innovators chose [Our Country] as their base of operations and believe our framework is among the best in [our currency zone][our continent][the world] in this regard.

This framework is designed:

(1)    To be consistent with our existing regulatory and tax principles

(2)   To provide appropriate consumer and law-enforcement protections

(3)    To provide a predictable and rational environment for entrepreneurs

We think the combination of our advanced financial and professional services industry, well-educated workforce, investor-friendly policies and [low tax rates] [nice climate] [convenient location] [fast broadband] [good-looking population] [great restaurants] make [Our Country] the perfect destination for the financial services firms of tomorrow.

Part 2: Central Bank of [Our Country] Press Release

We have followed the emergence of decentralized [digital currencies] [private money][commodity money] (also known as ‘cryptocurrencies) with some interest.   The best known currency of this type is Bitcoin but there are hundreds of other currencies organized along similar principles.

Our assessment is as follows:

1.       Cryptocurrencies, as currently structured, do not fall under the remit of the Central Bank of [Our Country].   

2.       The Central Bank of [Our Country] will not (and cannot, according to its Charter) provide “Lender-of-Last-Resort” support to financial institutions denominated in cryptocurrencies.

3.       Cryptocurrencies, in aggregrate, represent less than 0.03% of global money supply and present no systemic risks to our monetary and banking system at this time.

4.       We remind users of and investors in cryptocurrencies that they are not legal tender in any nation, that no merchant is required to accept them and that their value historically has been volatile.    Detailed guidance on this topic, as with all investment topics, is best addressed by [Financial Services Regulator of Our Country].

This is the last statement we will be making on this topic unless circumstances change.

Part 3: Financial Regulator of [Our Country] Press Release

Cryptocurrencies, a new form of digital currencies, have taken the media by storm in the last year, as they potentially herald an opportunity for innovation in financial, contractual and asset registration services.   We want [Our Country] to be a leader in this field, so we are highlighting our guidance to consumers, businesses and financial services firms, in an effort to balance the needs of consumers, businesses and law enforcement.

1.       Ownership and use of digital currency by individuals or business is legal.   Individuals should note that cryptocurrencies have no guaranteed value, have historically been very volatile in price and, if lost or stolen, provide no recourse to the owner.

2.       Businesses that use digital currency to accept payments or make payments do not require any special registration.    This includes buying, selling, investing, hedging or related activities that are in support of their operating business.

3.       We are happy to announce a voluntary industry initiative for cryptocurrency custodial services.   These are services that hold digital currency ‘wallets’ on behalf of customers.   This voluntary certification includes a commitment: (a) to maintain segregated consumer funds, auditable on the ‘block chain’ in the case of bitcoin and with a bank in the case of cash, (b) follow a set of standardized security practices and (c) offer a $50,000 insurance policy that is funded by fees from the industry and underwritten by Lloyd's of London.

While this initiative is voluntary, we do believe many consumers will choose services that undergo this certification.

4.       “Exchanges” or “Money Transmission” businesses (in other words, businesses that convert cryptocurrencies to traditional currencies or vice-versa) will be subject to the same Anti-Money-Laundering, Know Your Customer and Suspicious Transactions Reporting requirements as traditional financial institutions.   

More specifically

a. Each of these businesses must register by [date] with [relevant regulator]

b.   Each of these businesses must have implemented the relevant requirements by [date]

c. We have certified several third party KYC and AML services as ‘pre-approved’ for meeting our guidelines in this regard, though their use is not required

d.   We will not prosecute businesses that did not register before we had issued guidance, so long as there is no evidence of willful attempts to facilitate money laundering

e.   We are also implementing a ‘safe harbor’ rule for startups in this space to allow business model experiments to flourish.   For the next three years, startups of this type that conduct less than [$1][$3][$5] million per month in transaction volume, need only register with [relevant regulator] but do not have to implement the full suite of KYC/AML activities for the first [12][24][36] months of their operation.

f.        Exchanges or other services that work solely with cryptocurrencies and do not facilitate conversion to and from traditional currencies are currently exempt from this regulation.   We will review this topic again in 24 months.

We are also excited to announce that we are in the process of discussions with [our main stock market][our main commodities exchange] about the possibility of it providing exchange services to exchanges operating in [Our Country].    Their [25][50][100] years of experience in this area and high liquidity could be very valuable on the wholesale side.

5.       Many cryptocurrency firms will still require traditional banking services.  

Given this, it is important that our existing banks serve these firms while, while knowing what is required from them in terms of compliance.   We see tremendous value in these businesses having strong local banking relationships with our safest banks rather than having to pursue awkward work-arounds for integration to the existing financial system.

We have issued a set of guidelines in this regard and the first five banks have completed their training.    We are happy to announce that:  Bank of [Our Country], Bank of [Our Capital City], Cooperative Bank of [Our Country], International Bank of [Our Country] and Royal Bank of [Our Country] are ready to provide banking services to businesses and consumers operating in the cryptocurrency area.   Other banks will be completing the training over the upcoming months.

6.       One of the more interesting developments in cryptocurrencies has been the development of stock exchanges and other markets based solely on cryptocurrencies.    Our initial assessment is that these exchanges are best addressed by our existing frameworks relating to crowd-funding.  As they are still in a rudimentary stage, we will be studying them further and releasing guidance by [some date later this year], noting that we recognize the opportunity for greater efficiency in this sector.

7.       We have established a commission to further study the concept of ‘Digital Autonomous Corporation’, a form of distributed cooperative without central leadership.   The commission will be making recommendations about the correct legal structure, if any, for such entities.  I look forward to their findings.

Overall, we are excited and intrigued by the possibilities offered by cryptocurrencies.    We note that the field is still in its early days and not all service providers in this field are ready for the average consumer.    We believe and hope that with the appropriate frameworks, we can help businesses in this arena mature, develop new, cost-effective services to market and drive innovation worldwide.

Part 4: Tax Authority of [Our Country] Press Release

We have conducted our initial review of cryptocurrencies (a new form of digital currencies) and are offering the following tax guidance, consistent with the general principles underlying our system of taxation.   As a general rule, transactions using digital currencies should be treated in the same way as transactions using foreign currencies, including, but not limited to, the principles delineated by IAS 21 – The Effects of Changes in Foreign Exchange Rates (IFRS).

(1)    Payments received with cryptocurrencies will be treated as ordinary income or revenue as appropriate

(2)    Business expenses paid with cryptocurrencies will be treated as expenses

(3)    Purchases of cryptocurrencies with traditional currencies are not taxable and not VAT-able

(4)    Changes in currency rates (between the cryptocurrency and your presentation currency) in non-trading operating businesses should be treated as exchange rate gains/losses (ordinary income and ordinary losses)

(5)    Trading/investing gains or losses from realizations (sales) of cryptocurrencies shall be treated as capital gains or losses.

We remind all taxpayers that [Our Country] has a principles-based* accounting and taxation system and their individual circumstances should be taken into account when assessing their tax liabilities.  

* IFRS countries only.  Special GAAP template available on request.

[Optional bonus section for low-tax jurisdictions]

In order to stimulate the development of cryptocurrency-based businesses and demonstrate our superiority as a jurisdiction to [our regional competitors] [Switzerland] [Singapore] [New York] [London], we are implementing a five year special tax holiday (2014-2019) during which capital gain rates on the trading of cryptocurrencies will be [5.0%] [2.5%] [0%].

Part 5: Law Enforcement Agency of [Our Country] Press Release

We have a long-standing commitment in [Our Country] to fighting money laundering, terrorism financing, and other financial crimes and this commitment extends to new innovations such as cryptocurrencies.  

Our long-standing principle in these matters is to use a standard of risk-weighted enforcement by which we target our efforts against the highest-risk situations.   According to the United Nations, over $1 trillion is currently laundered through the traditional financial system, a value that is 100 times higher than the total money supply of cryptocurrencies.   This means that the bulk of our enforcement efforts must stay focused on the traditional banking sector, where our main exposure and risk lies.

That said, we have developed a Cryptocurrency Task Force with a team of agents well-versed in these matters that will be responsible for law enforcement relating to cryptocurrency.  Criminals, money launderers and terrorists should understand that cryptocurrencies are not a safe haven for them and we intend to prosecute them to the fullest extent of the law.    Our agents are already infiltrating cryptocurrency money laundering networks and establishing undercover positions in this domain.

We do not intend to prosecute entrepreneurs who might have inadvertently violated compliance-oriented banking regulations during the period before it was clear how cryptocurrencies would be regulated, unless there is clear evidence that they were turning a blind eye to criminal activity.  

We will be working closely going forward with the [Financial Regulator of Our Country] to help ensure every firm is in compliance with their obligations.   We recognize that this is a complex topic and even the largest banks, with decades of experience and large compliance teams, have room for improvement in this regard.   It is only by working together that we will best ensure that we win the fight against criminals and terrorists.

Part 6:  BONUS – Tourism Board Press Release (not suitable for all countries)

This release should only be used if (a) you are very small island country that (b) could plausibly have a tourism industry.   Use with great care! 

You will need to first visit all 500 of your merchants to explain to them what a “bitcoin” is, namely that it is a way for rich tourists to pay for painted conch shells with their cell phones, so long as the WiFi is working and their battery hasn’t died.  Then proceed as follows.

Title: Bitcoin now legal tender in [Our Country]

Text: [Our Country] is happy to announce that Bitcoin is now legal tender in [Our Country] for any purchases and is also accepted for any and all payments toward governmental services, including taxes.   While nothing will replace the warm hospitality, coconut daiquiris and crystalline beaches that are the heart of our nation and economy, we welcome [Bitcoiners][Litecoiners][Dogecoiners] of all nations to visit, move to or invest in the most Bitcoin-friendly country in the world.

1 week vacation packages to [Our Country] from New York, Silicon Valley and London are available, on an all-inclusive basis, for only $3,995 (payable in Bitcoins).   1 week vacation packages and a puppy are available for only $4,300 (payable in Dogecoin).  Permanent residency in [Our Country] is available to anyone who purchases at least $300,000 in real estate (payable in Bitcoins).   Citizenship in [Our Country] is available to anyone who invests at least $2,000,000 in a new business (again, payable in Bitcoins).

Good luck regulators - see you in the Wall Street Journal soon!  

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Bitcoin Series 19: Bizarre Shadowy Paper-Based Payment System Being Rolled Out Worldwide

A so-called "Dollar Bill" or "Note" as it is formally known.  Credit: Wikimedia Commons

Or how cash would be described in the press if invented today.   Full bitcoin series here: 

Bizarre Shadowy Paper-Based Payment System Being Rolled Out Worldwide

New York, February 17, 2014

World governments announced a plan today to allow citizens to anonymously carry parts of their wealth on their person and exchange it with others using small pieces of colorful paper printed with nationalistic and Masonic imagery along with numbers that purportedly represent the amount of wealth each piece of paper represents (if the paper is not a counterfeit). These pieces of paper are formally a "note" from each nation's central bank, but they are also called "cash" by many - this is a technical matter that is too complex to cover in our basic primer; Suffice it to say, that it is representative of the complexity and user-unfriendliness of this new system.

‘Bills’ – A complex construct

These pieces of papers (also known as “bills”, "dollar bills", "George Washingtons" or "Dead Presidents" among the shadowy community of anti-banking libertarians who have been the primary users of cash to date) will differ from country to country and are not redeemable outside national borders.    

In what will come as a surprise to generations who have grown up with calculators and computers, ‘bills’ only come in fixed denominations, requiring users to maintain a large number of these pieces of paper that must be aggregated to execute a transaction and then re-aggregated to ‘make change,’ a complex process of returning to the payee the excess of the payment using yet other bills.  (Don’t worry if this sounds complex, we had trouble understanding it ourselves at first and it is certainly not ready for the average consumer in its current form.)  

Mike Smith, VP of Employee Training at Sears has said: “I cannot imagine training tens of thousands of our employees to use cash, verify that it is genuine and learn to ‘make change’ without making errors.   This is going to require a wholesale installation of special change-making hardware – the so-called ‘cash registers’ –  and millions of dollars of employee training, while creating long lines and delays for consumers.   Furthermore, we would need to adopt new security procedures and armed guards to avoid theft of the physical bills while in the store or during transport to our bank.    We can’t see ourselves adopting cash under these conditions.”
 
Perfect for Criminals

The launch of cash has provoked an immediate reaction from law-enforcement agencies worldwide that universally condemned the development.

“Cash is a 100% anonymous and untraceable payments technology.   It is like a weapon of mass destruction launched against law enforcement,” said Mike Smith, the recently confirmed FBI Director.  “It is the perfect payment mechanism for criminals, drug cartels, terrorists, prostitution rings and money launderers.   We don’t know how we will be able to combat such a technology and fully expect that a new generation of super-criminals will emerge, working in the shadows of a world where they can conduct their illicit affairs without leaving a trace.” 

Banking Superintendent of New York State, Mike Smith had the following to say: “I can’t think of any reason that a law-abiding individual would want to use cash. At a bare minimum, we believe there should be a licensing procedure for individuals or businesses that plan to use cash, a ‘Cash-License’ as it were.   This license will limit ‘cash’ to trust-worthy individuals who keep detailed auditable records of all their cash transactions in order to keep New York safe from criminals.”

Others have concerns about forgery and counterfeiting.  “Ultimately, even with all the fancy inks, cash is just a piece of paper.   We fully expect criminal groups and rogue nation states to print fake cash in order to profit or to disrupt the economies of their enemies,” said Mike Smith, an analyst at Stratfor.  “In the interim, we are certain that cash will trade a discount in the real-world, given the risk to a counterparty of accepting a forged piece of paper; no doubt cash is a huge step back from the modern cryptography in place throughout our current financial system.”

No Consumer Protection

Though hard to imagine, cash operates with no consumer protection at all.   If your ‘bills’ are stolen or lost, they are gone forever.

“I just don’t understand why there is nobody that I can call to reinstate my cash if I lose it,” says Mike Smith, a businessman from Toledo.  “What type of idiotic wealth and payment system doesn’t maintain transaction and ownership records?” 

Moreover, there appears to be no authentication mechanism associated with cash payments or transfers, let alone one that matches modern security standards.   Once someone has gained physical control of your ‘bills’, they are free to spend or use them as they wish and there is no way to reverse the transaction, stop them or even identify who has stolen them.

Even simple destruction of the bill, which, as you recall, is just a piece of paper, could result in losses.   According to the Director of the newly founded “Bureau of Engraving and Printing,” mutilated ‘bills’ that are more than 51% destroyed must be mailed in for a special investigation that will determine if they will be replaced or not.

Recommended 'Hardware Wallets' Found To Have Security Flaws

Proponents of cash have dismissed these concerns saying that various hardware manufacturers such as “Coach” and “Gucci” will shortly be releasing “hardware wallets” in leather and suede.   These wallets are meant to hold the bills and fit into a pants pocket or purse.

“Once your bills are safely ensconced in your Gucci wallet and securely placed in your pants pocket [the front pocket is recommended as a ‘best practice’ for security], it is almost impossible for them to be stolen, lost or destroyed” said Mike Smith, VP of Communications for Gucci NA.

But some early adopters have reported that the hardware wallets have security flaws.   “I was out in Bangkok two weeks ago at a bar and I forgot my Gucci wallet there,” said Mike Smith, a visiting tourist.    “When I returned the next morning, my wallet was there but my cash was gone!”  We contacted Gucci regarding this hacking attack, but a spokesperson would not comment “about confidential customer financial matters.”

Even criminals have not been immune to the risks of cash.   The notorious “Silk Road” drug-dealing marketplace, where vendors and customers left envelopes full of cash (on which they had very clearly written their names) in an anonymous drop-box that managed the exchange, mysteriously closed last week, citing ‘theft of the cash due to a bug in the envelope sealing process.’   While technical experts believe that might be possible that the glue on the envelope was not correctly applied, they also warn that a ‘bill’ is basically a private and public key at the same time and note that there might be dangers involved in letting anonymous criminals hold the private keys to your wealth.

Requires Physical Presence

In what might be most unusual limitation on cash, it only works for payments within 36 inches or less (or the so-called “arm’s length transaction” as hackers in the community have colorfully titled it) as it has to be handed from one (human) party to another to execute the transaction.

This requirement is widely thought to be a fatal flaw of cash by traditionalists.

Mike Smith, VP of Retail Banking at Chase said: “A form of payment that cannot be used at a distance, cannot be used for e-commerce, cannot be used by mobile devices, cannot be used for machine based transactions, cannot be scripted or programmed, cannot be thought of as a payment system.   I will admit, as a form of performance art, cash transactions are an amusing experiment, but this has no applicability in the real world of banking, finance or commerce.  

Furthermore, given cash’s association with criminal activities, we will be refusing to offer banking services and terminating the accounts of any customer that uses ‘cash’ in a business or personal capacity.   It is the only way we can ensure we remain compliant with our regulatory obligations.”

Remarkably, if you attempt to use cash in a different country from the one that issued it, it will categorically be rejected.   In order to use cash abroad, you will have to go to designated points, usually in airports or certain banks, with limited hours of operation, that will “exchange” your bills for bills of the country that you are visiting.   These exchanges have high fees – usually 2-3% for each exchange, meaning that tourist will lose 5% of their cash or more on a typical trip just in these ‘exchange’ costs, which seems extraordinarily high for what is, ultimately, an exercise in multiplication or division.

A Step Backward For Economics

Economists are flabbergasted that lawmakers have allowed cash to be adopted, despite their strong objections.   A key policy tool of Central Banks has been the use of positive and negative interest rates to manage economic growth.   It appears that this will not be possible with cash.

Mike Smith, a leading economics blogger for the NY Times said “This is a sad day for macro-economics.  If cash ever catches on in any meaningful sense, it will reduce our control over the levers of the economy significantly by providing a mechanism for depositors to opt out of negative interest rates.  Given the fact that it might keep us from preventing the next depression and will definitely reduce tax collections, one could even consider it ‘evil.’”

Environment and Health Impacts

Environmentalists expressed concerns about the impact of cash on the environment.  “You would have thought that in 2014, we would have moved beyond pesticide and water intensive cotton farming [retracted: cutting down trees], treating the cotton with dangerous inks and transporting it with fossil fuels, only to represent a value like “20” that can be represented electronically at effectively no cost.   When will we ever learn?” said Mike Smith, recently appointed Executive Director of the Sierra Club.

Public health officials also warned that cash could be an excellent vector for disease transmission.  “We tested several ‘bills’ in our labs recently and discovered that the average bill has 20x more bacteria than a toilet seat,” said Mike Smith, a VP of Research at the Mayo Clinic.  “Our advice is that people should avoid cash in general and only handle it if absolutely necessary.   Children, the elderly and immuno-compromised individuals should not handle cash under any circumstances.”

What’s Comes Next?

Proponents of ‘cash’ think it will ultimately be a widely adopted technology that will spread around the world, enabling in-person mid-tier transactions (not micro-payments, but not mega-payments either) in a manner that is invulnerable to electric or internet outages and that will usher in a new era of more ‘human’ commerce.

We try to keep an open mind at this publication toward new technology, but, to date, we have a hard time seeing the positive case for cash.  Certainly criminal groups will take advantage of cash’s perfect anonymity to wreak havoc on law enforcement and tax collection, something that is deeply undesirable.  Among law-abiding citizens, we can envision some possible adoption in dense urban hipster communities like Williamsburg where ‘wallets’, ‘cash’ and ‘making change’ could be yet another reflection of their tongue-in-cheek view of modern societal systems.

Other than that, it would be hard to recommend that the average consumer or merchant becomes involved in what is still today a very buggy system, filled with risk, inconvenience, high transaction costs, and possible disease transmission.   Even if handled perfectly, cash will certainly tar your business and personal life with the seedy reputation of the drug dealers, terrorists, money launderers and anti-establishment anarchists who use it today, threatening business and banking relationships and raising eyebrows among law enforcement and your community.

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