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We face complexity, ambiguity, and uncertainty about the future consequences of cryptocurrency use. There are doubts about the positive and negative impacts of the use of cryptocurrencies in the financial systems. In order to address better and deeper the contradictions and the consequences of the use of cryptocurrencies and also informing the key stakeholders about known and unknown emerging issues in new payment systems, we apply two helpful futures studies tools known as the “Future Wheel”, to identify the key factors, and “System Dynamics Conceptual Mapping”, to understand the relationships among such factors. Two key scenarios will be addressed. In on them, systemic feedback loops might be identified such as a) terrorism, the Achilles’ heel of the cryptocurrencies, b) hackers, the barrier against development, and c) information technology security professionals, a gap in the future job market. Also, in the other scenario, systemic feedback loops might be identified such as a) acceleration of technological entrepreneurship enabled by new payment systems, b) decentralization of financial ecosystem with some friction against it, c) blockchain and shift of banking business model, d) easy international payments triggering structural reforms, and e) the decline of the US and the end of dollar dominance in the global economy. In addition to the feedback loops, we can also identify chained links of consequences that impact productivity and economic growth on the one hand, and shift of energy sources and consumption on the other hand.

Watch the full length presentation at Victor V. Motti YouTube Channel

The title of this post is intentionally misleading. We frequently discuss the traits that lead to value here in the Lifeboat Blog. But today, I was asked a more nuanced question: “What things will hold their value?”

And there is a ulterior motive in being a columnist for Lifeboat. Analyzing the dynamics of durable value leads to some surprising conclusions about the money supply and what a society chooses to use as money. We’ll get to this at end of this post.

We know that value comes from supply and demand. There are no exceptions. But, we have not addressed the properties that make an asset hold value over the long haul. Let’s consider some examples…

Cars

In an affluent, mobile society, most people desire personal, point-to-point transportation — and so there is clearly a demand for automobiles.

But style & technology change rapidly and automobiles deteriorate with use and weather. After 8 to 10 years, their cost and maintenance rise dramatically, and owners lust for a new model. So cars don’t get our award for assets that hold value.*

Popular Toys

In the 1970s, the Cabbage Patch doll from Calico Industries, and later, Tickle Me Elmo in the 1990s created a buyer frenzy that rivaled a lemonade stand in the desert. Shoppers fought each other to grab a limited supply. Clearly, demand was very high. The one shown below is listed at Ebay this week with a starting bid of $5,000. Other, less popular styles can be found for $4.99.

At first, this demand was driven by clever marketing and crying children in the week before Christmas. Demand was driven by a parent’s love. But at the peak of frenzy, demand shifted to buyers without children who felt certain that they could profit from selling the dolls that they snatched up first.

But the demand was not durable. Fads driven by frenzy don’t hold value for the long haul—especially when a manufacturer can simply turn the spigot back on.

Stocks & Bonds

A share of stock represents ownership in a corporation. A municipal bond represents a lien against a city—or the fees generated by an infrastructure project.

In both cases—especially bonds, which are a limited promise—no one expects value to last forever. It is a time-sensitive bet with the intention of expiration, redemption or exchange. So, these things also fail our criteria for durable value.

Houses & Real Estate

Like cars, homes require ongoing maintenance. But, most people weigh the maintenance cost against the benefit of having shelter, rather than comparing it to their gain or loss in value.

On the other hand, real estate value fluctuates in the long run due to things that are difficult to predict — population density, demographics, and quality-of-life issues related to infrastructure: weather, seismic events, politics, and access to health care and education.

Some real estate rises enormously in value over 50 or 100 years. Yet, we have seen boom-and-bust cycles that wipe out substantial wealth. So, real estate does not cut it in our contest for durable value.

Gold

The allure of gold and other precious metals is that their supply is capped — or limited by slow and predictable growth. The asset is difficult to find. It is acquired only from natural phenomena.

So, if we can also make it fungible, divisible, portable and difficult to counterfeit, then it meets most of Aristotle’s requirements for a functional currency. Theoretically, this can lead to widespread demand.

Gold certainly has exhibited its ability to hold value throughout thousands of years. But it is not so easily tested and divided in the field, and the impression that it has intrinsic value is an illusion. That’s because the fraction of gold acquired by investors dwarfs the amount actually needed for dentistry, electronics and even jewelry. In this modern era, even gold is becoming a house of cards, because its value is built upon speculation and emotion.

Oil (aka “black gold”)

With the rise of the automobile and power plants that burn fossil fuel, oil became a reserve currency of the 19th and 20th centuries. But there are two problems with it holding value over the long haul.

First, unlike gold, oil is a consumable in every market. Therefore it is difficult to think of it as an asset. Also, we now live in a century in which energy and transportation is rapidly switching away from oil, while at the same time, new technology is making it cheap to acquire new oil. This (along with a history of violent political theater) dramatically deteriorates its potential as a store of value in coming years.

Money

The supply-demand dynamics of money is widely misunderstood. More than 2,300 years ago, Aristotle defined the properties of a functional currency.

Earlier, we stated that all value comes from supply and demand. But, it is fair to ask “What creates the demand?” or “What backs the expectation of future demand?” Surprisingly, even if we limit our scope to just one country (USA), the value of government-issued currency has been tied to different things over time:

  • Gold
  • Promise of redemption
  • Legal tender (public must accept it for all debts)
  • Settlement of taxes
  • The “good faith and credit” of workers

Ultimately, demand is influenced by oversupply and by public perception more than government promises or laws. The perception that the US dollar has no cap and that its supply can be inflated whenever a body of transient politicians decides to raise the debt ceiling may eventually cause its value to collapse. Although it has not happened yet, at some point consumers (or those holding our debt), will begin to question if Americans have the capacity and will to produce and export the goods & services necessary to balance their mass consumption of the past half-century.

And so, government-issued Fiat does not pass our smell test for durable value. Sooner or later, all national currencies collapse. On a personal level, the only question that matters is if you will be caught by surprise—with a fraction of wealth tied to your favored currency.

What has the potential to meet all requirements for holding value?

Wouldn’t it be fascinating if we could find an asset that is a product of pure mathematics? A perfect asset would be fair, fungible, immutable, and capped. It could never be inflated or manipulated by politicians. It would decouple governments from monetary policy. It would be politically agnostic.

If correctly designed, it would be capable of absorbing and incorporating improvements developed by any copycat or pretender nipping at its heels. Most important, it would be open source, peer-to-peer, massively distributed, redundant, and completely permissionless.

This perfect asset would derive trust from mathematics and crowd-sourced consensus. It would not require that anyone believe in a government, a bank, a land mass, or the uncertain supply of precious objects. Authenticity could tested easily and its value transmitted instantly. The history of each unit would be completely transparent. With free tools, anyone, anywhere could trace its history of moving from one owner to the next.

Ten years ago, such an asset was unleashed into the wild by a person or team of developers under the pseudonym, Satoshi Nakamoto. It not only meets all of these requirements, it has built-in immunity from competition. It even resolves a technical problem that troubled Aristotle more than two millennia ago.

I won’t name this radical yet natural evolutionary development in this answer—but, I can confidently state that it passes our test for an asset that will hold value over time. Despite a wildly fluctuating exchange rate with Fiat currency, its inherent value has never dropped. Ultimately, you will no longer asses value based on the exchange rate of an anachronistic currency that fails all of the other smell tests. Instead, you will assess value on how many heads of lettuce you can buy or how much that new sailboat costs.

* A classic car avoids the problems associated with use & maintenance—and it can hold value over a long period. But like a Picasso painting, the market for classic cars has a limited audience, especially for the florescent green ’63 Mustang that I found in in my great uncle’s garage. Additionally, it is subject to the whims of popular perception. Styles go in and out of vogue and so we cannot predict how long that car will hold value. (Please call me if you value my uncle’s Mustang at more than $150,000).

Philip Raymond co-chairs CRYPSA, hosts the Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He is a top writer at Quora.

A new section: Bitcoin ATM business model
has been added. Jump to “2019 Update”

The good news is that building a Bitcoin ATM is easy and less expensive than you might expect. But, offering or operating them engulfs the assembler in a regulatory minefield! It might just be worth sticking to selling bitcoin on PayPal (visit this website for more information on that). You might also wish to rethink your business model —especially user-demand. That’s the topic of our 2019 update at the bottom of this article.

A photo of various Bitcoin ATMs appears at the bottom of this article. My employer, Cryptocurrency Standards Association, shared start-up space at a New York incubator with the maker of a small, wall mounted ATM, like the models shown at top left.

What is Inside a Cryptocurrency ATM?

You could cobble together a Bitcoin ATM with just a cheap Android tablet, a camera, an internet connection, and [optional]: a secure cash drawer with a mechanism to count and dispense currency).* A receipt printer that can also generate a QR code is a nice touch, but you don’t really need one. You can use your screen for the coin transfer and email for a receipt.

Of course your programming and user interface makes all the difference in the world. And your ATM must interface with an exchange—yours or a 3rd party exchange.

If your plan is to sell Bitcoin and not exchange it for cash, then you don’t need a currency dispensing component at all. You only need a credit card swipe-reader and an RFI tap reader. Some models are smaller than a cookie and sell for under $30. They can be attractively embedded into your machine. In fact, some bank card processors offer them without cost.

I Have Built a Prototype. Now What?

Desktop ATM. No cash dispensed

Once you have a working prototype, you will need to test it with focus groups (alpha test) and at prospective public sites (beta test). You must also harden the production model against tamper and theft and find paying businesses or property owners, so that you can achieve economies of scale. (A reasonable business model requires that you produce dozens of devices each month).

Parts Cost: Bill of Materials

At scale, you can achieve a unit production cost of less than $200. But that’s for a desktop unit that does not accept or dispense cash. A high-quality and attractive machine that accepts cash and is free standing or ready for outdoor installation into a building exterior might cost you $650. You could sell these for $2,500 plus recurring fees to the property owner, depending on venue, or you might simply lease them, just as Xerox did in the early days of office copiers. (In a hotly competitive market, such as Las Vegas, you may need to pay a portion of your profits to the site, rather than profiting from ‘renting’ the ATM).

Regulations: A Threat to Your Business

But wait! Before you run off and create an ATM venture of your own, with visions of a 350% profit margin, all is not as easy as it seems!…

Cryptocurrency ATMs intersect with a minefield of regulatory licensing and compliance standards. In many regions, they are not even legal for placement in a public area.

In most countries (including all of USA), you must be a registered Money Transmitter. You will need separate state licensing and—since you are moving cash in or out of the banking system—you must be partnered with a federally chartered bank. You will also need to post a hefty insurance bond—perhaps even for each machine and each municipality in which it is placed! These laws convey liability to both your client (a property owner) and to you. Many courts will hold the manufacturer of financial or medical products accountable for ensuring that their customers are licensed and compliant with regulations. That is, you may not be able to legally sell your ATM to organizations that have not demonstrated that they qualify to operate one.

Why is There a Camera in my ATM?

In all cases, you must capture photographs of your user and their state-issued ID, because you are required to know your customer and adhere to a slew of anti-money laundering practices. For example, with transactions larger than $2,000 (from anyone who is not known to you and a regular client), you must generate a Suspicious Activity Report. For transactions larger than $10,000, you must comply with RICO (Racketeer Influenced and Corrupt Organizations Act). This requires a camera, interview, and reporting process. You will be generating forms with data supplied by your user and possibly even a real-time verification of the facts they provide.

If you wonder why you needn’t do these things this when buying or selling your own cryptocurrency, it is because: (a) You are trading your own assets and are not the custodian of customer accounts; and (b) You are a consumer. It is likely that the exchange is required to do all of these things.

With Regulations, Can Bitcoin ATMs Generate Profit?

For the reasons described above, the operational cost of deploying and operating an ATM network (or your equipment for sale or rent) is significantly higher than the up front hardware cost. When you add the need to protect your venture from legal claims arising from process glitches or users that claim they lost cash or Bitcoin, you may arrive at an operational cost that makes your business model unworkable.

Of course, Bitcoin ATMs are profitable in some cases. I have consulted with a few start ups that operate them successfully in Las Vegas casinos, a few airports and race tracks, and at large outdoor fairs. But, for everyday use, the heyday of ATMs is most likely 5 or 10 years off. Before this happens, we need a more uniform and functional regulatory & insurance framework, and a higher volume of users per ATM.

Check out various Bitcoin ATM models below. Few manufacturers turn a profit. In the end, it boils down to location (high volume sites with the right people) and location (legal jurisdiction).

* One ATM startup found inexpensive hardware for dispensing currency by recycling mechanisms from bill-change machines used in game arcades or in hotels next to vending machines. These machines are being discarded, because newer vending machines accept credit cards and smart phone payment. But again, if you only plan to accept a credit or debit instrument for Bitcoin, then you don’t need a cash counter or dispenser.

2019 UPDATE: ATM Business Model Requires Urgency

The economics of Bitcoin ATMs is thoroughly uncompelling, unless you own or administer a public area with high foot traffic. Even with lots of traffic, the business model has a problem…

Bitcoin is easily acquired and exchanged online—both legally and illegally. Often, I urgently need to find a bank ATM, especially when travelling. But, despite being an avid proponent and adopter of cryptocurrency, I can’t imagine needing a crypto ATM. Needing virtual exchange is rarely urgent, and there are better alternatives than standing in front of a machine. After all, we each have a better machine in our pockets.

Online trading is easier and safer than via ATM. Even user anonymity is better online than standing in a public place and using a kiosk equipped with a camera.

Therefore, an ATM placement business needs clients with urgent needs. In the internet era, urgency and expert installation are the values that support the bottom line. But again, there is a problem…

The problem with using urgency to build a local delivery model for ATMs, is that Bitcoin is a virtual product. Even a seller or exchange in China can deliver an online money exchange instantly.

Consider this reverse analogy…

Suppose that you are responsible for setting up a video projector in a hotel ball-room. The conference is already in progress and hundreds of people are looking toward a blank movie screen. You suddenly discover that your video cable is defective and wireless options will not work . You need an HDMI cable and a thunderbolt adapter immediately. It must be at least 18 feet long and be a recent model to support the audio channels and resolution of your presentation.

QUICK—Find an exact match!

The local Best Buy store has the cable in stock. It’s $89.99 and the store can have it at the front desk in the next 10 minutes. Your frugal partner finds the same cable online for $29.99 (2-day delivery) or $9.50 shipped from China (about 2 weeks).

Which do you choose? Is it just a cable that you need? No! The value that you require is a compatible cable in your hands within minutes — preferably from a local and experienced vendor, in case there is an installation or application problem.

In almost any scenario—even catering to impulse buyers—a Bitcoin ATM can’t match the value of someone delivering a compatible cable instantly. If it is a commodity that you are selling (Bitcoin is a commodity), then a profitable business model requires that you sell speed, convenience or privacy. Cryptocurrency ATMs lose on all three fronts.

That last paragraph above is my freebie to the next ATM vendor who seeks consulting services. Test your model, before seeking help in penetrating a market that is tough to define and defend.

Philip Raymond co-chairs CRYPSA, hosts the Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He is a top writer at Quora.

(Originally posted March 7, 2019, on the Crowdfunding Professional Association’s website.)

The purpose of this memo is two-fold:

  • To highlight the possibility of risks to banking and finance sectors arising from new financial instruments based on blockchain technology; primarily from novel financial accounting methods and products called “stablecoins,” digital tokens, and cryptocurrencies.
  • To encourage regulators and policymakers to engage blockchain thought leaders, product developers and the community in general to better understand the economic and policy implications of public, private and permissioned blockchains; their application to banking and finance regulations; and how innovation may be encouraged in a safe, sound and responsible manner.

Like any technology, blockchain can and may be used to improve a variety of operational, identity, security and technology challenges that the future of digital banking, business and society face. Blockchain technology is also poised to create new and increasingly clever methods and economies for value, commodities, assets, securities and a slew of yet-to-be discovered financial instruments and products. However, no leap in technology and finance is ever made without risk. As policymakers and stewards of the current and future digital economy and ecosystem, we have an obligation to our constituents and the global banking and finance community to guide the growth and adoption of emerging fintech technology in a safe and sound manner.

To that end, three areas that have the potential for regulatory and compliance issues as companies such as JP Morgan Chase, embrace and develop blockchain technologies to leverage digital tokens, cryptocurrencies and novel accounting systems such as the so called “JPMCoin,” are highlighted:

Stablecoin — The industry needs a common definition. There is presently not an industry definition of a stablecoin, digital token, or cryptocurrency. Before it is even possible for governmental agencies to draft useful regulations the industry must come up with common definitions. We believe that establishing a common definition is an important step to growing a rich and innovative framework and sandboxes for not only novel blockchain applications but other emerging fintech technologies.

Fractional Reserve Banking and Stablecoins — How will cryptocurrencies, digital tokens and stablecoins be treated in an ecosystem of fractional reserve banking? Much like the introduction of collateralized debt obligations, synthetic credit default options and other novel, complex financial instruments, the introduction of institutional “stablecoins” and digital tokens may present hereunto unknown risk. As technology evolves to facilitate machine learning, artificial intelligence, high speed frequency trading and novel blockchain applications such as “stablecoins,” careful consideration should be given to how these blockchain applications (and other emerging technology) may unintentionally encourage risky behavior that creates systemic financial risk and operational risk that undermines confidence in markets.

Operational Safety & Soundness — The creation of institutional stablecoins, digital tokens and cryptocurrencies poises new financial safety and compliance questions. From the basic, “How is the value of these stablecoins determined?” to: “What are the standards for digital token custody?”. To the more complex questions of: “Can the terms stablecoin, digital token and cryptocurrency be used interchangeably?” to: “How will these instruments be reflected on company balance sheets, managed day-to-day in accounting systems and taxed?”

Conclusion

Emerging technology such as blockchain promises great leaps in operations, transparency and accountability. However, as we prepare to leap headlong into these technologies we should also consider where we will land.

We encourage regulators and policymakers to engage banking, technology and compliance leaders to better understand the implications of private-permissioned decentralized ledger technology (aka blockchain) and what steps we can take now to encourage and enable innovation, while also landing safely in the future of banking, finance and an electronic cash-less ecosystem.

Authors:

Grant Gulovsen, Esq., Attorney at Law, Gulovsen Law Office, [email protected]

Maureen Murat, Esq., Of Counsel, Cogent Law Group, [email protected]

Samson Williams, Adjunct Professor, UNH School of Law, [email protected]

Supporters:

Wesley Williams, Attorney at Law & Consultant

Olta Andoni, Esq, Attorney and Adjunct Professor at Chicago-Kent College of Law

Roxana Nasoi, Co-Host, The CryptoLawPodcast

Crowdfunding Professional Association Legislative & Regulatory Affairs division

I owe Jack Shaw a favor. It’s one of those, “This one time in Cambodia…” type of favors. We won’t speak of it beyond perhaps a nod and wink. It’s not written down anywhere; the details of such are so vague as to be almost non existent, while encompassing the known universe. It expires upon death, of the sun; and can be redeemed whenever and by another person who need only walk up to me and say, “Jack Shaw sent me. He says to tell you ________”. And tada, that favor has been redeemed for value.

Jack would call this favor a “marker.” It’s more valuable than your house, the Empire State Building & 100k Bitcoins combined. It can even be redeemed for something even more precious, my time or an opportunity or access to my network. You know, those things that money can’t buy. Well, you can lease my time from time to time.

Favors, markers and promises are humanities’ first virtual currencies.

They’ve gone digital recently, as Jack might redeem his marker via a WhatsApp or WeChat text message.

Favors and promises aren’t financial obligations per-say. They’re moral debts that can be redeemed for things of intrinsic, monetary, social and/or actual value. Now, here is where things get a little weird. The thing about “money” is that it doesn’t have any value. It’s actually a reflection of a moral debt. Hence why the US dollar is backed by the “Full Faith and Credit of the US Government” and not say, gold or wheat. You believe…that people will feel obligated to pay taxes and in turn the government will collect these social obligations (aka favors) for the good and benefit of The People. This moral obligation is part of that “Debt to Society” you’ve heard so much about, are obligated to pay, but don’t recall actually signing up for.

Long ago, these virtual currencies of favors, promises, social obligations and credits were turned into what we now regard as money. Not because paper money or coins had or have any intrinsic value, but because for trade beyond one’s family or clan, it’s easier to convey/store and document the value of Sam owing you two chickens, using cash as that documentation (or store of value). As you extended to him a two chicken line of credit.

“Credit” is just another favor or marker with terms.

Coins and “Banknotes” (because people wrote down how much credit they gave you) were just the earliest form of noting and coming to consensus on how to document these virtual currencies of favors, markers, promises and credit.

Overtime, what favor or credit money represents has been lost. We’ve been conditioned to simply believing (Full Faith and Credit) that paper money has intrinsic value, when it simply doesn’t.

Paper money isn’t backed backed by anything other than your faith.

Hence why inflation is such a troublesome concept for most. It challenges the fundamental principles of your faith — every time the government prints more paper money. It extends to itself (and then to you, via banks) made up and virtual favors by the billions. They are favors and markers with no value behind them; lines of credit with no chickens attached. So when these virtual chickens come home to roost, as actual value, guess what? There aren’t any chickens, just a whole lotta hungry believers.

Everybody believes in this system of virtual currencies of credit, favor and marker collection, except the banks and the corporations who effectively pay zero in taxes, while simultaneously collecting trillions in credits from people and then turning those virtual dollars into “real wealth.” Think real estate.

Fun fact/Tangent: Why is real estate called “real?” Hint: It has something to do with the fact that money has no value (isn’t real) but shelter/housing does. We’ll talk about how banks and corporations got out of their social contract at your expense later.

In conclusion, as we’ve a lot to consider now, virtual currencies aren’t anything new. They’re as old as favors and promises. Digital money (much like paper money) doesn’t actually exist. It’s actually easier to “print” digital dollars than paper dollars. One requires paper and ink. The other? Well, just add another few zeros and tada! #InstantCash!

So do me a favor…next time someone tells you that Cryptocurrencies are a sham, smile at them because you now know that money has no value and the government can make as much money up out of thin air (with a side of faith) as it can add zeros to a ledger. Then, ask him/her if you can borrow two live chickens. You promise to pay them back. 😉

My name is Samson. I’m a Professor of Blockchain at Univ of New Hampshire School of Law, human and an anthropologist at Axes and Eggs, a Washington, DC based Think Tank and digital advisor who answers your questions when Google can’t. If you like what you read, share it! If you disagree, share what you know or how you feel in the comment section below. Feel free to hit me up on Twitter or Instagram @HustleFundBaby or follow me on LinkedIn. Finally, I would say thoughts are my own but I probably stole them from a woman.

The question asked in the title has been edited from what was asked today at Quora, the Q&A forum at which I participate as expert columnist. The original question was a bit more ambiguous: “Which is better? — a digital bitcoin wallet or a physical one?” I have included the original question, to better distinguish products and terms. All bitcoin wallets are all digital—even a paper wallet, whether a character string or a QR code. Conversely, an exchange may use “physical” wallets to host client assets, individual application wallets, or they may simply keep records of client assets that are stored, collectively, in their own master wallet. To complicate matters, Bitcoin is never really “stored” by you or an exchange service. It is stored on a public blockchain, where assets and transaction history can be traced through time by anyone. Therefore, all forms of user access are “digital”. What the reader really wants to know is “Which form of access control is better? — custodial or personal?” Type 1: Custodial Wallets are Managed by a Trusted Party They hold your assets. You view a statement balance—just like a bank account.

The reader uses the term “digital wallet” to mean a hosted wallet in which a trusted 3rd party holds the private keys, or aggregates the assets of many customers and tracks their individual ownership in their own accounting system, like a traditional bank or broker. In this case, the 3rd party is trusted to maintain security, privacy, and constant, robust user access.

It is possible that the reader may have used the term “digital wallet” to additionally refer to PC and smartphone applications, such as Bitcoin Core, Armory or Electrum. But, these are really personal and private wallets — because they are created and configured by the owner, and only the owner has the private keys. And so, we classify device wallet applications as “personal/private” along with hardware or paper wallets. Type 2: Personal Wallets are Private —but with privacy comes risk!

Wallets are personal if the private keys are generated and stored by the user, either on paper, in their PC or smart phone, on a thumbdrive, in a hardware wallet, or even uploaded to cloud storage. As long as the asset owner holds the keys and securely encrypted any uploaded file that contains the keys, the assets are accessible only with his consent.

So, which wallet class is better for securing cryptocurrency access credentials? Custodial or Personal? Which of these models best fits your needs?
  • A custodial wallet is like a bank a statement. Your assets are maintained by an exchange, rather than tucked into your mattress. The wallet and keys are not under your control, but the process that governs backup and security is rigorous & standardized. Availability to your heirs is governed by documents and laws.
—OR—
  • A personal wallet is completely controlled by you. The private keys must be stored where you will always find them (in your head, a lock box or an encrypted file that is distributed to family in a way that they will always be able to unlock it!). Ensuring future availability, swift transactions or passing wealth after death requires careful attention to tools, process and a secret.
A crypto purist or Libertarian might insist on taking full control of the assets. That is, storing them locally and with only the owner having the private keys. This is analogous to storing bars of gold in a safe and then burying the safe in a deep, covered hole in your yard—and in a spot that only you can find. Even if your children can find the safe after you die, it is equipped with explosives that will completely obliterate the gold, if it is unearthed without the correct password. I am privacy zealot. And yet, to the dismay of some followers, I believe that—for most cryptocoin owners—a hosted, custodial wallet is better than taking possession of a hardware wallet, paper wallet or digital wallet (anything that the user personally stores in a PC, phone, on paper or in a personally encrypted cloud account). To explain, I shall call out [1] a critical requirement, and [2] the deciding factor in determining this advice applies to you. 1. Critical Requirement The host must have impeccable credentials, a solid and ongoing regimen of security reviews and unscheduled audits — and they must be sufficiently capitalized by large, respected organizations, such that widely recognized individuals and organizations are at substantial risk if anything were to go wrong. Trust among strangers is easily scammed. So let me be clear. Regarding the investors, board, executives and security auditors of a custodial wallet service, both their reputations must be at risk as well as their worldwide assets across other business areas. Coinbase in San Francisco is such an exchange and hosting service. Currently, there are only two others that meet this extreme level of vetting. If Fidelity Investments enters the market as a crypto-hosting service, they would likely meet this bar. 2. Deciding Factor There are few individuals for whom direct and private ownership makes sense. In fact, until this month, it did not make sense for me. I am only now configuring my first hardware wallet. I still trust Coinbase to host and control most of my assets. The reasons boil down to security, forgetfulness, errors, legacy ownership and instant access. The ONLY factor that is arguably better with personal custody & control is privacy. Due to a lack of education, standards, and definitive best practices, this option makes sense for fewer than 5% of Bitcoin owners. Take me, for example… I have been involved with Bitcoin since the first years of its existence, and have been a Bitcoin educator since shortly after Satoshi’s original bombshell. Today, I am a keynote presenter at blockchain and cryptocurrency conferences. I teach blockchain seminars, design courseware for colleges, and am co-chair of the Cryptocurrency Standards Association and partner in Blockchain Research Council. Yet, I am only now configuring my first hardware wallet. I still trust Coinbase to host and control most of my cryptocurrency. How do I know if I am a candidate for full / private control? Using an exchange hosted wallet service is best for most individuals. But, for some, it makes sense to maintain private, local control of blockchain assets. If all criteria in the bulleted list below applies to you, then local and private ownership might make sense. But if you fail even one criteria, then WAIT! Wait until multisig becomes uniform and ubiquitous — and wait until a larger fraction of society is comfortable with the concept and practice of managing private keys. These are gradually becoming new norms. But, it will take a few more years for the world to become comfortable with an unfamiliar concept: personal control of a decentralized asset. You are a candidate for using a personal wallet if you plan to control and secure your own private keys, and if you meet all conditions listed below. The technical criteria will not be requisite in the future—but they are necessary today, because the market currently lacks simple, standardized, widespread tools and uniform practices for safely securing, accessing and passing on these credentials to your heirs. Do all of these criteria apply to you?
  • You have a comprehensive understanding of cryptography, including the principals of RSA public-key crypto.
  • You have practiced multisig decryption for at least a year. For now, you will need to roll-your-own multisig, to ensure that your heirs or executor can access your wealth in the event of death, forgetfulness or incapacitation.
  • You have experience and a clear, documented and standardized plan for separately encrypting and distributing your private keys.
  • You understand how to implement a hard fork and have the time to do it after any hard fork split.
  • You have an exceptional need for privacy or anonymity, and you feel that a custodian is more likely to “sing” in the event of an audit or court order.
  • You have a rehearsal plan for testing your multisig recovery and a willing group of trusted friends (most of them younger than you) who can combine their keys to access your wealth.
  • After ensuring that encrypted wallet works, is completely secure and is accessible to your heirs, you have replicated it in a sufficient number of places, that you are certain that your heirs will find it after you die, even if it is 90 years in the future.It must not only survive your lifetime, but the knowledge of where to look and *IF* to look, must be certain, even if your home burns down, your cloud accounts have been deleted and/or Google, Amazon, Microsoft & Apple are no longer in business.
If all conditions apply to you (and only if they apply), then you may be among the 5% of enthusiasts for whom a personal hardware wallet makes sense. At some time in the next few years, it will make sense for a far greater fraction of cryptocurrency holders, rather than just the most disciplined and knowledgeable Geek-enthusiasts.

Philip Raymond co-chairs CRYPSA, hosts the Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He advises The Disruption Experience in Singapore, sits on the New Money Systems board of Lifeboat Foundation and is a top writer at Quora. Book a presentation or consulting engagement.

At Quora.com, I respond to quetions on Bitcoin and Cryptocurrency. Today, a reader asked “Will we all be using a blockchain-based currency some day?”.

This is an easy question to answer, but not for usual Geeky reasons: A capped supply, redundant bookkeeping, privacy & liberty or blind passion. No, these are all tangential reasons. But first, let’s be clear about the answer:

Yes, Virginia. We are all destined to move,
eventually, to a blockchain based currency.

I am confident of this because of one enormous benefit that trumps all other considerations. Also, because of flawed arguments behind perceived negatives.

Let’s start by considering the list of reasons why many analysts and individuals expect cryptocurrencies to fail widespread adoption—especially as a currency:

  • It lacks ‘intrinsic value’, government backing or a promise of redemption
  • It facilitates crime
  • Privacy options interfere with legitimate tax enforcement
  • It is susceptible to hacks, scams, forgery, etc
  • It is inherently deflationary, and thus retards economic growth
  • It subverts a government’s right to control its own monetary policy

All statements are untrue, except the last two. My thoughts on each point are explained and justified in other articles—but let’s look at the two points that are partially true:

  1. Indeed, a capped blockchain-based cryptocurrency is deflationary, but this will not necessarily inhibit economic growth. In fact, it will greatly spur commerce, jobs and international trade.
  2. Yes, widespread adoption of a permissionless, open source, p2p cryptocurrency (not just as a payment instrument, but as the money itself), will decouple a government from its money supply, interest rates, and more. This independence combined with immutable trust is a very good thing for everyone, especially for government.

How so?…

Legislators, treasuries and reserve boards will lose their ability to manipulate the supply and demand of money. That’s because the biggest spender of all no longer gets to define “What is money?” Each dollar spent must be collected from taxpayers or borrowed from creditors who honestly believe in a nation’s ability to repay. Ultimately, Money out = Money in. This is what balancing the books requires in every organization.

This last point leads to certainty that we will all be using a blockchain based cryptocurrency—and not one that is issued by a government, nor one that is backed by gold, the dollar, a redemption promise—or some other thing of value.

Just like the dollar today, the value arises from trust and a robust two sided network. So, which of these things would you rather trust?

a) The honesty, fiscal restraint and transparency of transient politicians beholden to their political base?

b) The honesty, fiscal restraint and transparency of an asset which is capped, immutable, auditable? —One that has a robust two sided network and is not gated by any authority or sanctioned banking infrastructure

Today, with the exception of the United States Congress, everyone must ultimately balance their books: Individuals, households, corporations, NGOs, churches, charities, clubs, cities, states and even other national governments. Put another way: Only the United States can create money without a requirement to honor, repay or demonstrate equivalency. This remarkable exclusion was made possible by the post World War II evolution of the dollar as a “reserve currency” and the fractional reserve method by which US banks create money out of thin air and then lend it with the illusion of government insurance as backing. (A risky pyramid scheme that is gradually unravelling).

But, imagine a nation that agrees upon a form of cash that arises from a “perfect” and fair natural resource. Imagine a future where no one—not even governments—can game the system. Imagine a future where creditors know that a debtor cannot print paper currency to settle debts. Imagine what can be accomplished if citizens truly respect their government because the government lives by the same accounting rules as everyone else.

A fair cryptocurrency (based on Satoshi’s open-source code and free for anyone to use, mine, or trade) is gold for the modern age. But unlike gold, the total quantity is clearly understood. It is portable, electronically transmittable (instant settlement without a clearing house), immutable—and it needn’t be assayed in the field with each transaction.

And the biggest benefit arises as a byproduct directly of these properties: Cryptocurrency (and Bitcoin in particular) is remarkably good for government. All it takes for eventual success is an understanding of the mechanism, incremental improvement to safety and security practices and widespread trust that others will continue to value/covet your coins in the future. These are all achievable waypoints along the way to universal adoption.

Philip Raymond co-chairs CRYPSA, hosts the Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He advises The Disruption Experience in Singapore, sits on the New Money Systems board of Lifeboat Foundation and is a top writer at Quora. Book a presentation or consulting engagement.

Kudos to WallStreet analyst and advisor, Ric Edelman. He drank the Kool-Aid, he understands a profound sea change, and he sees the ducks starting to line up.

Check out the clearly articulated interview, below, with Bob Pisani at the New York Stock Exchange and legendary Wall Street advisor, Ric Edelman, (Not my term…That’s what CNBC anchor, Melissa Lee, calls him). Read between the lines, especially the last words in the video, below.

Ric Edleman has just joined Bitwise as both investor and advisor. This lends credibility and gravitas to the organization that created the world’s first cryptocurrency index fund. Bitwise benefits from Edelman’s affiliation, because the US has been slow (some would say “cautious”) in recognizing the facts on the ground: Cryptocurrency is already an asset class.

Edelman fully embraces a strong future for Bitcoin—not just as a currency or payment instrument, but as a legal and recognized asset class; one that is at the starting line of a wide open racetrack. He explains that the SEC sets a high bar for offering a Bitcoin ETF, but that this will be achieved. It will pave the way for large institutions, pension funds, etc to allocate a portion of money under management for blockchain products.

At timestamp 3:39, Melissa asks Edelman “Why wait for an ETF?” and “If you believe this strongly, why not advise clients to invest a portion of assets into Bitcoin right now?”

Edelman’s response is stunning. He explains that he is frustrated, because this is what he wants to advise. But, his firm is bound by the Investment Act of 1940—and so, they cannot tell a client “Go to Coinbase” or “Invest in a private fund such as Bitwise—that I am such a big fan of. We don’t have that ability in our practice.” [i.e. until the SEC recognizes Bitcoin as an asset].

In my opinion (and in the opinion of Edleman), SEC recognition of Bitcoin as an asset can’t be far off…

  • It’s already happening in other countries. Reputable exchanges and index funds exist today.
  • Unlike a traveler’s check or Amazon gift card, it is inherently a store of value, whether or not you believe that its value is intrinsic;
  • The IRS already considers it an asset for tax purposes (What an odd schism in definition & treatment!)
  • It is legal to pay staff in Bitcoin and use it to settle debts, for any recipient that accepts it. For employees and consultants, it is a wage or stipend, just like FIAT. They can convert into cash immediately—or retain crypto it to pay their own bills)

It’s not difficult to read between the lines. Edleman makes a clear recommendation, although he can not yet advise this—certainly not on the record. His personal forecast for long term adoption and appreciation, especially of Bitcoin, matches my own analysis. His new affiliation with Bitwise (a pretty bold move) demonstrates certain commitment.

This ends my analysis of Edelman’s strong endorsement. But it raises another important question:

If large financial institutions are likely to offer Bitcoin products
and services—and if credible analysts & advisors are chomping
at the bit to recommend this new asset class—shouldn’t we
invest in Bitcoin now?!

Ironically, I do not recommend hording or investing in cryptocurrency, even as a collectable. Why?! Because of the big “Investment Catch-22”. I don’t discourage investing in Bitcoin because I fear that its value will lessen. It is for a completely different reason. And so, my advice against investing is half-hearted.

Currently, Bitcoin and altcoins are widely misunderstood. Many people have these false impressions…

  • It is not backed by anything
  • It interferes with tax collection
  • Cryptocurrency facilitates crime
  • Governments will never allow it
  • They do not convey compelling benefits over government-issued currency
  • They water down the overall money supply
  • Their deflationary nature threatens economic growth
  • They are easier to lose and subject to scams & hacking
  • They do not facilitate refunds, rescission, recourse and customer claims
  • They interfere with a government’s ability to control its monetary supply

All of this is untrue, except the last item—and that one is a tremendous benefit.

Additionally, blockchain currencies fluctuate widely in real market purchasing power, many altcoins and all ICOs are scams, and acceptance is far from being ubiquitous. Clearly, widespread adoption requires stability, infrastructure, trust and ubiquity.

This cannot happen until two things occur:

  1. The fraction of transactions in normal business and retail commerce (purchases, salaries, debt payment and settlement) must significantly dwarf the fraction that is driven by investors, hoarders and speculators.
  2. A significant number of established brands, services or retailers must begin publishing prices in Bitcoin and honoring those prices throughout a defined sale period (e.g. until the next catalog is published or until the next production run).

Things are beginning to change, but for such a positive and transormative mechanism, that change is frustratingly gradual.

A series of falling dominos is already in process. But, the end game is retarded by those of us who invest in Bitcoin, because we are removing a limited resource from circulation and contributing to volatility. We do this, because we realize that—in the long run—Bitcoin can only go up in value. Yet, our investment at such an early stage (before consumer adoption) makes the infant sick.

Philip Raymond co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He advises The Disruption Experience in Singapore, sits on the New Money Systems board of Lifeboat Foundation and is a top Bitcoin writer at Quora. Book a presentation or consulting engagement.

Early adopters, speculators and Geeks are never sufficient to bring a new paradigm to market. Mass appeal and adoption of a mechanism that requires education and a change of behavior is never ‘fait accompli’—until it reaches a tipping point. Once at the tipping point, it can go viral without a structured PR campaign and with risks tied only to technology and scalability.

What about early adopters? Can they drive mass adoption?

Somewhat, but not much beyond market awareness. Generally, early adopters drive mass adoption only for evolutionary inventions. For example:

  • The automobile was an evolutionary change to transportation. Although it changed our behavior (maintenance procedures and frequency / distance of travel), it did not require an educational seminar to ride in a car. You either had access to a horse or a car.
  • Likewise, the audio CD and DVD improved media acquisition and enjoyment. But books and seminars were not needed to understand these inventions. Their purpose and use was very similar to the preceding technology: audio tape, records and video recorders.

But some inventions are different. Their use requires that users become acquainted with a technology or process that they didn’t realize they needed! [continue below image]…

The telephone and the Internet led to radical changes in the way we work and interact. You might think that the benefits of a telephone were obvious, even in 1876—and that adoption was driven only by cost and speed-to-market. But this is not the case. When the phone was demonstrated between two cities in Massachusetts, everyone was already aware of Alexander Graham Bell’s clever new gadget. But few people wanted one. A New York Times reporter scoffed that investors were wasting money, because the invention would be of little use to consumers and businesses. It didn’t occur to him that instant, ubiquitous communication (using a device that requires only a voice) would change the face of emergency services or allow close relatives to live far apart without wondering what happened to each other. He wrote that it was a rich man’s toy, useful only for hearing a voice from down the street.

What is required to shift Bitcoin into the mainstream?

Right now, only a small fraction of individuals believe that cryptocurrency presents an improvement over fiat (money issued by a government or bank). Most people don’t yet understand (or accept) that it is backed by something far more tangible than Dollars or Euros—or that it is more fair, or less susceptible to theft and manipulation. And because of spectacular press coverage, many people believe that it facilitates tax evasion, drug deals or worse. There are more misconceptions. For example, realizing that Bitcoin is open source, some individuals feel that other cryptocurrencies could improve on it, and displace it without recognizing the equity of past stakeholders. And finally, many individuals suspect that governments will ban it or issue their own crypto, making the whole issue moot.

Everything in the above paragraph—except the first sentence—is a false perception. But mass appeal and adoption is greatly retarded by false perception.

The adoption of cryptocurrency by mainstream businesses and consumers (not just as a payment instrument, but as the money itself) requires a series of events that are largely predicated on a recent past event. Think of this process as a row of dominos tumbling down—each one falling into the next domino.

The dominos have already started to fall. The process is slow, and it requires a few technical fixes related to cost, scalability, and ease of use. But they are falling and it is becoming clear that secure, decentralized, transparent cryptocurrency will replace nationally minted currencies all over the world. For some influential individuals, this is frightening, impossible or too radical. But this change is inevitable, because the cat is already out of the box and because the benefits to consumers, business and government are almost overwhelming

What are the ‘falling domino’ events and will they occur?

They are listed in the first article below—and, Yes—they are already occuring.

Philip Raymond co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He sits on the New Money Systems board of Lifeboat Foundation. Book a presentation or consulting engagement.

The question was asked of me as columnist at Quora.com: Will governments eventually ‘approve’ of cryptocurrency? First let’s agree on terminology…

  1. By “approve”, I assume that you are asking if governments will adopt or at least tolerate the use of crypto as legal tender in commerce. That is, not just as a payment instrument, but as the money itself—perhaps even accepting tax payments in cryptocurrency.
  2. The word “cryptocurrency” is sometimes applied to altcoins and even to ICOs. These are not the same. Many altcoins meet the criteria of the next paragraph, but none of the ICOs measure up (ICOs are scams). I assume that your question applies to Bitcoin or to a fair and transparent altcoin forked from the original code, such as Bitcoin Cash or Litecoin.

A blockchain-based cryptocurrency that is open source, permissionless, capped, fast, frictionless, with a transparent history—and without proprietary or licensing restrictions is good for everyone. It is good for consumers; good for business; and it is even good for government.

Of course, politicians around the world are not quick to realize this. It will take years of experience, education, and policy experimentation.

Many pundits and analysts have the impression that shifting to cryptocurrency—not just as a payment instrument, but as the money itself—will never be supported by national governments. A popular misconception suggests that a cryptocurrency based economy has these undesirable traits:

  • it is deflationary (i.e. that inflation is necessary to promote spending or to accommodate a growing economy)
  • it facilitates crime
  • it interferes with tax collection
  • It interferes with national sovereignty, which leads to “world government”
  • It is not backed by anything, or at least not by anything substantial, like the Dollar, Euro, Pound, Yuan or Yen
  • it interferes with a government’s ability to control its own monetary policy

Over time, perceptions will change, because only the last entry is true. Adoption of cryptocurrency puts trust into math rather than the whims of transient politicians. It helps governments avoid the trap of hoisting debt on future generations or making promises to creditors that they cannot keep—Yet, it does not lead to the maladies on this list.

But, what about that last item? Does an open source currency cause a nation to lose control over its own monetary policy? Yes! But it is not bad! Crypto cannot be printed, gamed or manipulated. Despite perception, it is remarkably resistant to loss or theft. Early hacks and fiascos were enabled by a lack of standards, tools and education. As with any new technology—especially one that changes practices or institutions—adoption of radical processes goes hand-in-hand with gradual understanding and acceptance of benefits.

How Does Crypto Help Governments?

Adopting/accepting a national (or international) cryptocurrency is a terrific way for governments to earn the respect and trust of citizens, businesses, consumers and especially creditors. There is no more reason for governments to control their money supply than there is for them to control communication networks, space travel or package delivery services.

You may not agree that cryptocurrency is good for government, and so I expand on the topic here. But your question doesn’t ask if it is good, it asks if governments are likely to approve.

Yes. Eventually…

First, a few forward thinking countries like Iceland, Japan or UAE will spearhead adoption of a true, permissionless cryptocurrency (or at least recognize it as legal tender) . Later, ‘stress-economies’ will join the party: These are countries that need to control either rampant inflation, a reluctance to tax citizens, treasury mismanagement or massive international debt. A solution to these problems requires restoration of public trust. I wouldn’t be surprised to see Greece, Zimbabwe, Venezuela or Argentina in the mix.*

Eventually, G7 countries will tread into a growing ocean. Not now; but in 5 or 8 years. The conditions are not yet right. It requires further vetting by early adopters, continued development, education and then popular consumer adoption. But all of these things are inevitable. Eventually, governments will recognize that a capped, trusted, transparent, math-based money is far better for all stakeholders than money based on intrinsic value, promise-of-redemption or force.

* We are not discussing countries that plan to create their own cryptocurrency. None of these plans involve a coin that is open source, permissionless, decentralized and capped. They are simply replacing paper with a national debit card. But it is not crypto.

Philip Raymond co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He sits on the New Money Systems board of Lifeboat Foundation. Book a presentation or consulting engagement.