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Criminals Will Turn to 'Created' Alternative Cash Like Cryptocurrencies

Criminals Will Turn to 'Created' Alternative Cash Like Cryptocurrencies
(Mohamed Ahmed Soliman | Dreamstime)

Wednesday, 20 December 2017 08:21 AM Current | Bio | Archive

Looking at today’s longer-term questions, a legitimate question is without any doubt: “Who believes in Bitcoin?”

The boom in cryptocurrencies, which are digital or virtual currencies that use cryptography for security is built on blockchain, which is a digitized, decentralized, public ledger of all cryptocurrency transactions and that rests on the principle of “Don’t trust, verify!”

But, as with any bubble, the believe in cryptocurrencies requires a “blind faith” to rival any religion.

Cryptocurrencies can only have value if they become widely used as a medium of exchange. If they become currencies in short.

At the moment, no one, or better said practically no one, will sell things of value in exchange for Bitcoin or any other cryptocurrency. The price of everything is denominated in “fiat” currency or cash and converted at an approximate exchange rate.

The cryptocurrency user is effectively converting into fiat currency and then purchasing something of use. Cryptocurrency users have to believe the situation will change in the future.

So, who are the cryptocurrency faithful?

Many groups can be identified, but four groups stand out as demanders of the cryptocurrencies.

The first group, is people who lack confidence in their own fiat currency or cash.

The Chinese were big investors in Bitcoin as a way of evading capital controls and getting money out of the country. This is not a complete lack of faith in fiat currency, but a lack of faith in its future convertibility.

Then, there are countries like Zimbabwe where faith in fiat currency has been devastated by past hyperinflation. There is evidence that hyperinflation can change economic behavior, not just for years, but for generations.

These groups will stop demanding the cryptocurrency when the bubble bursts. If cryptocurrencies are showing to be a very weak store of value, then either local fiat currency will be embraced again or the more traditional alternatives generally dollar cash will be sought.

This group is likely to suffer most economic damage when the bubble bursts, at least relative to their ability to manage the damage.

The second group, demanding cryptocurrencies, are speculators.

This group may not necessarily be converts to the faith, but they pretend to follow the religion. Some may actually believe in cryptocurrencies. Most believe in making money in fiat currency terms and believe that they will get out before the bubble bursts.

This group can be a problem when the bubble bursts because they will be experiencing a negative wealth effect. Lots of speculators as bubble buyers will end up transferring the usual cash to a small number of bubble sellers.

The third group, demanding cryptocurrencies, are the digital anarchists.

These people believe in the republic of technology, but generally not fans of government or regulation. They see cryptocurrencies as a way of avoiding taxes or avoiding government. The vehemence with which this group embraces cryptocurrencies is perhaps in direct proportion to the increase in successful government intervention against and regulation of technology. It turns out that citizens of the republic of technology are subject to the same laws as everybody else.      

The final source of demand for cryptocurrencies is crime.

Interestingly, this is the most likely, logical and enduring source of demand for cryptocurrencies in the future. A case can be made that anti-money laundering regulation, stricter financial regulation and reduced global capital flow have conspired to reduce the supply of cash to the world’s illegal economy.

Money has not disappeared of course, but it is now scarcer.

This has happened in the past.

Medieval Europe suffered a lack of silver. Most European currencies were silver based. In this situation, alternative currencies were created.

The medieval Venetians adopted “mobilia”, physical objects that were used as a medium of exchange at a generally agreed value. Jewels, cloths and books were all used.

The English used “wooden sticks” and the more sophisticated form of credit.

It’s perfectly plausible to suggest that if cash is more difficult to obtain in the illegal economy, criminals will turn to created currencies like cryptocurrencies, just as the medieval Venetians did.

This is a demand that could well endure after the bubble bursts. 

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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It’s perfectly plausible to suggest that if cash is more difficult to obtain in the illegal economy, criminals will turn to created currencies like cryptocurrencies, just as the medieval Venetians did.
criminals, cryptocurrencies, cash, bitcoin
Wednesday, 20 December 2017 08:21 AM
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