Blockchain + Gold

Blockchain Gold, bitcoin, gold, blockchain, ethereum, gold standard
https://www.shutterstock.com/image-photo/golden-bitcoin-coin-mound-gold-cryptocurrency-679712407?src=xLRkpGrveJw1B2iqSB5Fxw-1-1

gold, bitcoin, blockchain, gold standard, ethereum, Blockchain GoldThe Bitcoin system has the great virtue of securely sending value directly from stranger to stranger. It is open to anyone, anywhere in the world. The sender does not need to trust the recipient, nor any bank or other institution, to accurately record the transfer. The Bitcoin “blockchain” provides a readily consulted online public ledger with immutable records. Transfers are indelibly captured, like flies in amber, and made tamperproof by massive duplication and reconciliation of the ledger over thousands of nodes.

Bitcoin also has well-known limitations as a currency, however. First, it doesn’t scale well. The Bitcoin blockchain can process about four transactions per second, whereas Paypal does hundreds, Visa or Mastercard thousands. The blockchain has become congested as the number of transactions has grown. (Reducing the congestion was the motivation for the proposals to enlarge the block size that recently roiled the bitcoin world.) Validation takes at least ten minutes, longer for more secure validation, and even longer when the system is congested.

Cryptocurrency pioneer Nick Szabo has clearly explained that this tradeoff — high security at the cost of slow transaction speed and low capacity for transaction validations per second — is built into Bitcoin’s massive-duplication design:

Bitcoin's automated integrity comes at high costs in its performance and resource usage. Nobody has discovered any way to greatly increase the computational scalability of the Bitcoin blockchain, for example its transaction throughput, and demonstrated that this improvement does not compromise Bitcoin’s security. … Compared to existing financial IT, Satoshi [Bitcoin’s pseudonymous designer] made radical tradeoffs in favor of security and against performance.

Thus a blockchain system like Bitcoin is not itself capable of quickly processing large numbers of retail payments.

Second, there is the network property of a monetary standard: each of us prefers to be paid in the currency accepted by the largest number of our potential trading partners. This property favors the incumbent standard (the fiat dollar in the US) over both bitcoin and gold. It reinforces the volatility drawback: when your rent and utility bills are denominated in dollars, it is risky to hold a bitcoin balance for the purpose of paying them.

Third, bitcoin’s purchasing power is for now highly volatile.  Broader holding of bitcoin as a medium of exchange would reduce volatility, but all three problems impede that.

These drawbacks have inspired initiatives to combine the benefits of blockchain technology with the use of gold-denominated tokens in place of bitcoin. Gold as a potential medium of exchange arguably has lesser limitations than bitcoin on all three scores. First, its payment processes scale well. Second, its value (in dollars or in purchasing power) is somewhat less volatile over daily to monthly horizons, and is much less volatile over longer horizons. Third, its popularity as an asset in private hands is greater. As of 15 October, 2017, total bitcoin balances are worth $92 billion, whereas worldwide private investment holdings of gold coins, bullion, and ETFs are estimated at $1.7 trillion. Gold holdings are more than 18 times larger; bitcoin holdings are less than 6% of gold in private hands.

Initial popularity matters for gaining widespread use in the face of an incumbent currency. Popular dollarization in Latin America and elsewhere gives us a model of how a non-incumbent currency gains a toehold and then spreads. Popular dollarization typically begins with the dollarization of savings, when the local peso becomes a less reliable long-term store of value than the dollar. Dollarization of pricing and payments spread when the peso inflation rate rises to double digits, requiring more frequent revision of peso prices, and imposing a high cost of holding pesos even from paycheck to paycheck.

Several about-to-launch new projects, described below, hope to create gold-based payment systems, while using some form of blockchain technology to enhance the security of holdings and transfers. If gold-backed accounts or digital gold currency tokens with cryptographically secured transfers are successfully launched, users will be able to adopt a modern gold standard as easily as they can now adopt the bitcoin standard.

Gold holding is already widespread as an investment (a saving and tail-risk-hedging) vehicle, as noted, but convenient gold payment mechanisms have been lacking. The enterprise called E-gold was a prototype — a service for individuals to buy, hold, and easily transfer gold account balances — until it was shut down by US authorities in 2005 for nonconformity with US Treasury “anti-money-laundering” and “know your customer” rules. The upcoming new enterprises all promise to comply with AML and KYC requirements for money service businesses.

A gold-denominated digital payment system will have to operate very differently from bitcoin (or any other cryptocurrency). For this reason it is highly misleading to call it “Cryptocurrency backed by gold” as one promotional article has.

A gold-backed account or digital token rests on a commitment to redemption at par, or a price commitment, by contrast to bitcoin’s commitment to the quantity in circulation. The payment processing system will also be different. It cannot be purely peer-to-peer because it requires a gold vault-keeper or equivalent trusted intermediary to maintain the price commitment. But the use of a single trusted limited-access ledger, rather than Bitcoin’s distributed trustless open ledger with its massive duplication in record-keeping, brings a large advantage in the speed and cheapness of payment processing.

Investment Platforms

The first three projects I will describe do not aim at providing a payment system so much as a low-cost platform for investing in gold. Think of them as would-be competitors to gold ETFs or to bullion warehousing services with easy conversions from and into US dollars, like GoldMoney. I will then turn to projects with more potential to generate a sizable payment system.

1. Royal Mint Gold

On its website, Royal Mint Gold (RMG®) calls itself “The New Digital Gold Standard.” This is misleading because, unlike a gold standard in the usual sense, it isn’t a payment system. It elsewhere more accurately calls itself “an investment product” and “a new, cost-effective, convenient and secure way to trade physical gold” with online access and distributed-ledger transparency.

RMG, which promises to come online before the end of 2017, offers much to interest gold investors. It partners The Royal Mint (hereafter TRM), owned by the UK government, with the Chicago Mercantile Exchange (CME). Both are venerable and credible. (There was talk about privatizing TRM in 2011, but it didn’t happen. As a state-owned enterprise, does TRM enjoy sovereign immunity against lawsuits? I don’t know.) TRM will manage the gold vault, and the CME Group will provide the trading platform for electronic warehouse claims to allocated gold in the vault. The RMG system promises that “For every RMG that’s on the network, there’s one gram of gold that’s sitting in our vault.” A proprietary blockchain will be used to record and track whose gold is in the Royal Mint vault. There will be “live, transparent pricing” on the CME trading platform.

To attract gold investors, RMG promises zero “ongoing” management and storage costs. The RMG webpage compares how value grows with the price of gold under its 0% fees, “giving an investment in RMG a projected higher return than physical gold” held in “a traditional gold ETF [that] is assumed to charge an average 0.4% annual storage and management fee.” But where, you might cynically wonder, do the revenues come from to cover TRM’s vault costs?

Here: You buy in at a premium over the spot price of gold (how high is not yet revealed), so TRM gets some float. (They promise to maintain the premium by buying back unwanted RMG as necessary.) You sell out for a transaction fee. You can cash out, and take physical delivery of gold, only in the form of “physical gold bars and coins produced by The Royal Mint,” for which there is a “fabrication and delivery” fee that is presumably large (not yet specified, and it is not clear whether it will be contractually fixed in advance.)

A system that runs on transaction fees even for internal transfers among account-holders discourages using its accounts as checking accounts.

How big does RMG hope to be? “The initial amount of RMG at launch could be up to $1 billion worth of gold. It will be offered through investment providers. Further RMG will then be issued based on market demand.” For perspective, gold ETFs added $2.3 billion on net in the second quarter of 2017.

To summarize, RMG is not a payment system or a currency, much less a cryptocurrency. It is a warehouse claim to gold in a specific vault. It will be salable to the extent that there are many bidders for claims to gold in that vault, but you can’t transfer it to another RMG holder at a zero transaction fee, like writing a check, the way you could with E-gold.

Incidentally, there are two London wholesale payment systems marrying gold to blockchain. A Bloomberg Markets article explains the business case:

About $27 billion of gold changes hands every day in over-the-counter markets where settlements can sometimes take days, leaving price risk for buyers and sellers. Using blockchain promises more transparency, security and speedier deals.

One project to provide this service is called Tradewind, supposed to launch in early 2018. Another is Bankchain Precious Metals. Tradewind promises to provide “a distributed ledger that will handle trade settlement, account management and record-keeping.” Bankchain Precious Metals promises “the instantaneous transfer of payments and ownership of the bullion stored in various vaults in London.”

2. OneGram

Launched in Dubai, OneGram offers a gold-backed (and Sharia-compliant) cryptoasset with blockchain features. Investors in OneGram will be shareholders in a vault full of gold, and will profit as and when the vault accumulates more gold per share.

Its white paper explains:

OneGram aims [at] using blockchain technology to create a new kind of cryptocurrency, where each coin is backed by one gram of gold at launch. In addition, each transaction of OneGram Coin (OGC) generates a small transaction fee which is reinvested in more gold (net of admin costs), thus increasing the amount of gold that backs each OneGram. Therefore, each OGC increases in real value over time, making OneGram unique among cryptocurrencies.

The vault will be located in the Dubai Airport Free Zone. OneGram promises that it will be audited by PricewaterhouseCoopers.

OneGram promotes its cryptoasset as a payment medium, declaring that the “payment institution license is already in place.” But transfers of OGC will be subject to a transaction fee of 1%. The promoters call the fee “small,” but it is high enough compared to ordinary deposit transfer to discourage using OGC as a payment medium.

How the price of gold will be continuously transmitted to the OGC cryptocoin is unclear, because it isn’t clear how the cryptocoin can be converted into the quantity of gold that it is supposed to represent. OneGram promises to have a “payment gateway” for OGC in Dubai and Abu Dhabi, “with fiat conversion.” But how conversion to fiat will be priced is not specified.

OneGram’s ICO (initial coin offering) ran from May 21 through September 4, 2017. It offered 12,400,786 coins, priced at the spot price of one gram of gold (which averaged around $41 during the period) plus 10%, for total revenue of about $550 million if all the coins sold. A  September 6 press release, which announced that the initial coin sale had ended, curiously omitted mention of the quantity of coins actually sold. It also announced that launch of the cryptocoin has been pushed back from October 2017 to “the first quarter of 2018 to ensure that we launch a solid and secure technology solution.”

Critically limiting the potential of OGC to become an important medium of exchange is the feature that no more OGC will be created even if new adopters want in: “100% of total coin supply is pre-mined.” This means that the size of OneGram payment community in value terms will at most grow only slowly with transaction fees, assuming that the price of OGC remains tied to the value of the gold in the vault.

3. OzCoinGold

Much like OneGram, the Australian/American project OzCoinGold promises a limited issue (in this case 100,000 troy ounces maximum, giving a potential market cap of only $128 million at the recent gold price of $1280 per ounce). As with OneGram, the quantity limit prevents widespread use as a medium of exchange. Each cryptoasset token, labelled OzGLD, will be “100% backed” by gold, but with two catches: only one-third of the gold reserves will be above ground as bullion (the other two-thirds will be the proven reserves of a gold mining company), and the tokens can be redeemed for gold only after five years. Audit reports will be uploaded to a blockchain. Accordingly the main sales pitch is as an investment vehicle: it hopes to be “the easiest, most effective and cheapest way to own or invest in gold.”

Payments Platforms

Moving on to gold-blockchain combinations better designed to be payment services, I consider four, beginning with those farthest from launch.

1. Digix Gold Tokens

Although its software is not yet fully coded, the developers of Digix gold tokens have at least spelled out their concept in detail. Digix is headquartered in London. As explained in a press release on Medium, Digix aims at “tokenizing valuable real-world assets” on the Ethereum blockchain. It “intends to be the first to launch a fully trackable and auditable crypto gold token.” A DGX 1 token “contains the right to 1 gram of gold that is stored in an audited vault.” As a claim to gold, like a transferable warehouse receipt, the token “can be easily traded or pledged against a loan without moving the physical gold” from its vault. Validity of ownership is certified through a “Proof of Asset protocol.”

What exactly does it mean to “tokenize” gold? Consider a universal open shared ledger, running on top of the Ethereum blockchain, that records ownership, and transfers of ownership, of a numbered 10g gold bar stored in a known vault. The gold bar has been “tokenized.” As with a unit of bitcoin, once I record a transfer of ownership to you on the blockchain, you can now further pass on the token, or redeem it, and I no longer can.

In other words, DGX is a spendable digital warehouse claim for gold, with ownership validation on the Ethereum blockchain. Of course, payment by transferring claims to vault gold without moving the gold is pretty old hat. Italian banks were doing it around 1200 AD. What’s new is that these claims are warehouse rather than debt claims, and transfers take place in currency-like fashion on the blockchain rather than by use of named account balances on the books of the depository.

The Digix sales pitch is both to gold investors, and to transactors who want to hold purchasing power in spendable cryptoasset form at least temporarily. Unlike unbacked IOU-nothing cryptocurrencies, DGX tokens are claims to physical gold expected to trade at a price tied to the price of physical gold. Gold exhibits less purchasing power volatility than BTC or ETH.

But if reduced volatility of purchasing power is what you want, why not hold the cryptoasset Tether, the price of which has been held fairly steady (so far) at $1? Some people don’t trust Tether. Tether claims to have 100% dollar reserves parked in audited accounts in licensed banks, but it lacks full transparency and there has been controversy over its terms of service. Digix promises greater transparency: warehousing of gold in vaults that are certified members of LMBA, the London Metal Bullion Association, with “Realtime Transparency; immutable on-chain auditing records for your viewing from Inspectorate and PWC; accessible at anytime, anywhere.”

To warehouse your gold, whether purely for storage or (combined with a transfer mechanism) for use as a payment medium, requires you to pay a fee to cover the cost of storage. A typical arrangement is for the warehouse to deduct a percentage storage fee periodically from each account. Gold ETFs typically charge around 0.4% per year. If there is a transfer mechanism, the warehouse may also charge a transaction fee when fulfilling a transfer request. The planned Digix fees appear to be similar to ETF fees. Storage fees will be 0.4% per year to the vault owner. In addition, an Administration fee of 0.2% per year will be charged by the Digix organization, making total annual fees 0.6%. Transaction fees will be 0.1% of transacted amount.

The medieval Italian banks already mentioned introduced the option of accounts with lower fees for customers who wanted not pure storage but rather transaction services, a way to pay people without lugging gold coins around. Such customers brought in loose rather than bagged coins, and consented to fractional reserves, allowing the bank to cover its (reduced) storage costs by interest earned in lending out most of the gold. The advantage for the bank was of course the interest income on the coins lent out. The advantage to the customer was lower storage and transaction fees. Competition among fractional-reserve banks soon reduced storage fees to zero, and even led banks to pay interest on transaction accounts.

Digix promises to tie the price of DGX to the price of gold the old-fashioned way, by redeemability: “Physical Gold Redeemable at any time at our partnering custodial vaults.” The holder of DGX can “Redeem 100 DGX tokens for 100g of physical gold” in person or by mail. However it has not yet specified whether redemption will be at a zero or a positive price. In traditional banking the redemption fee is zero, but it can be zero in this warehousing system only if storage fees are high enough.

The most impressive evidence that Digix intends to promote DGX as a widely used medium of exchange is that they have partnered with a payment card provider (Monolith Studio, whose platform is called TokenCard) to provide an “Ethereum powered” gold-backed debit card. The announced aim is “to ensure gold tokens can be spent efficiently at minimal cost.”

The intriguing vision of Digix and TokenCard is that people will put themselves on a new digital gold standard. A news account quotes Monolith’s co-founder as saying: “Together with Digix, we will be able to offer one of the only true commodity backed debit cards, and bring back the gold standard in a meaningful way.”

2. Glint

The Glint webpage describes its project as a “new global currency, account and app.” Although it says that the project is "Launching in Q4 2017," no specific roll-out date is offered. Headquartered in London, Glint Pay Services Ltd claims “permission to issue electronic money and provide payment services” from the Financial Conduct Authority under the Bank of England. Its co-founder is CEO of GoldMadeSimple.com, an online bullion dealer.

The project has curiously little press coverage online, only a single article which reads like a paid press-release placement. It is very sketchy on details. “Glint is a stealthy London fintech startup that promises to turn gold into a ‘new global currency’. … Glint will offer a frictionless way to both store and spend your money in gold, including at the point of sale, just like a regular local currency. The bigger picture is that gold historically has been a better storage of value than any government-created currency, and therefore — with the aid of technology — is (arguably) a good candidate for an alternative global currency.”

Obviously more details are needed.

3. DinarCoin (DNC)

Despite “dinar” being the Arabic name for a gold coin (derived from the Roman denarius), DinarCoin (DNC) is not linked to Islamic finance. The parent firm DinarDirham is registered in Hong Kong, with offices in Singapore and Kuala Lumpur. It describes the DNC as a “unique digital currency created … on the Ethereum blockchain. The value of each DNC is based on the worldwide gold spot price. DNC can be used for trading, investment and also to make payments.”

Here’s the sales pitch:

If you’re a person that’s interested in precious metals, but are concerned with storage, security, and actually being able to use your metals as cash for purchases, then DinarDirham is for you. You can actually store, secure, and use your gold on the blockchain, and have the ease and convenience of not needing to have it on your person, and accessing it worldwide in minutes.

It will be

a simpler way to transfer gold, as akin to PayPal with dollars. The aim of the DinarDirham is not only to provide additional value and stability to the coin but also to perpetuate the use of bullion as an accepted form of digital currency.

Of course, physical gold isn’t stored on the blockchain. But the record of a contractual claim to gold can be. The promoters promise that “For the lifetime of a DNC a corresponding value of XAU [physical gold] will be held in escrow.  … [W]hen DNC is created it is registered on the Ethereum Blockchain and the Bitcoin Blockchain. The total amount of DNC in circulation can be verified on either Blockchain, and audited against the total XAU held in escrow … by DinarDirham.” Of course, the accuracy of such a comparison is only as great as the accuracy of the reports of the “total XAU held in escrow.” Unlike consensus-validated bitcoin ledger changes, the accuracy of unilaterally altered ledger entries relating to external facts, like the volume of vaulted gold held by DinarDirham, is not ensured by the blockchain.

Unlike OneGram, the volume of DNC payments has the capacity to grow should it catch on as a medium of exchange. If demand growth begins to push the bid price of DNC slightly above the spot price of gold, either the parent firm or one of its “liquidity providers” stands to make an arbitrage profit by buying physical gold, putting it in an escrow vault, and selling additional DNC into the market, until the premium subsides. The vaults are associated with Associated Bullion Exchange, an electronic exchange for allocated precious metals in storage.

The “redemption” mechanism is not straightforward. DNC “can be redeemed for physical gold,” the website says, via a DinarDirham blockchain-recorded digital asset called a Gold Smart Contract (GSC). Unless 1 DNC can always procure 1 GSC, however, “used to purchase” would be more accurate than “redeemed for.” Another account does say that a DNC holder can “purchase” a GSC and then use it “to collect gold from one of many available vaults.” If in fact 1 DNC trades at a variable price for 1 GSC, which is redeemable for 1 gram of gold, it isn’t clear how the price of DNC is supposed to be pegged to the price of gold.

The announced payment-system plans are ambitious. The CEO says:

We are building an entire ecosystem around DinarCoin — exchange, DinarCoin ATM, merchant gateway and debit cards to allow our users to use their digital assets anywhere in the world. Also, physical Dinar Gold Coin (4.25 grams) is already available to order in South East Asia.

How far along is the project right now? Unclear. It hasn’t posted much lately. DNC isn’t listed on CoinMarketCap. I could not find any report on the value of DNC coins currently in circulation.

4. GoldMint

GoldMint is based in Russia. Surf to its webpage from a US location, and you are immediately confronted by a black drop-down box that declares that you may not invest in its ICO if you are domiciled in the US, Canada, China, or Singapore. Its first phase is an ICO ending this month (hoped-for sales, $49 million) for a token called MNTP. A “prelaunch” coin running on the Ethereum blockchain, MNTP will migrate in Q2 2018 to become MNT — the “stake” in the proof-of-stake GoldMint blockchain — which will process transactions in a gold-backed cryptoasset confusingly named GOLD (all caps).

What is most novel and remarkable about GoldMint is that the parent firm claims to be developing hardware called “Custody Bot automated storage facilities,” which it plans to deploy at pawn shops and shopping centers worldwide. Custody Bots will be “programmed to automatically identify and store gold jewelry, small ingots (up to 100 grams) and coins, without human intervention,” taking escrow custody of them for people who want to take out loans collateralized by the gold. (Loans collateralized by gold jewelry are already popular in India, by the way.) Through the spread of Custody Bot automated storage facilities, according to the GoldMint white paper, the firm hopes eventually to handle the storage of gold reserves worth, in US dollars, tens of billions.

More importantly for currency purposes, Bot-stored gold can alternatively be tokenized and traded as the cryptoasset GOLD, which “will become the trading unit for these operations.” GoldMint promises that units of GOLD will always be “100% backed by physical gold and ETF” that the firm holds.

Because the price of gold is less volatile than the price of bitcoin, the firm’s pitch goes, “Crypto traders and enthusiasts can hedge the risks of storing their assets in [a] highly volatile crypto market environment by transferring their savings to cryptoassets GOLD. [Also:] Low volatile GOLD cryptoassets can be used as a payment unit both for companies and individuals.”

GoldMint will not redeem GOLD for gold at par, but it promises to sell you 1 GOLD cryptoasset for a 5% premium over the London spot price of one ounce of gold, and to buy it back at a 3% premium. Thus the total fee for making the round-trip fiat-GOLD-fiat will be 2%. In addition it will assess an “On-Chain transaction fee” of 0.3%, three-fourths of which will go to the miners on the GoldMint blockchain. These seem like fairly competitive fees.

The most important questions about the potential of GoldMint as an important gold-backed currency are about the trustworthiness of its buyback promise, and the reliability of its blockchain for payment validation.

Conclusion

I am not endorsing or recommending investment in any of these projects. Caveat emptor. But I think the last four listed warrant our attention as attempts, in the spirit of E-gold, to provide modern gold-based payment systems with online access. All four explicitly promise not to hold fractional reserves, and say that you can track the volume of cryptoasset on their ledger to see that it matches the number of gold grams or ounces held in their vaults. But if one of them becomes popular as a one-hundred-percent-reserved  gold payment system, perhaps a subsequent innovator will offer zero storage fees and interest on account balances by re-introducing gold-denominated fractional reserve banking. Such a bank, supposing that it surmounts legal obstacles but lacks government deposit insurance, would have to provide as much transparency as potential clients demand to show that it has enough gold and other liquid assets available to redeem promptly all claims that are likely to be presented.

Stay tuned.

  • Mattyoung

    Give me the general purpose debit card, a card that can be configured for multiple coin standards.

    I noticed the hardware wallet vendors partnering up with an asset exchange web sites for seamless investing in asset tokens in various sorts. The next Apple will be making the general purpose intelligent cash card. Look at two of these companies, Trezor and Ledger.

    • Mattyoung

      I should also mention that we have an alternative to block chain called the Intel SGX standard. It is a verifiable protected space guarded by microprocessor instructions and not memory capable so the protected data is managed by protected and verifiable code. We can show equivalence, protected, verifiable protocols are just as secure as block chain, thus this system can clear thousands of accounts as fast as the processor speed with direct IOU swaps between to=wo protected clearing houses.

  • M. Camp

    Excellent review of the projects, thanks.

  • Hu McCulloch

    Thanks for the great overview, Larry!

    Question on Bitcoin — What incentive does anyone have to maintain a Bitcoin blockchain node? Are all would-be miners required to provide nodes? Or is it just a bunch of hobbyists who foot the bill on a lark (or at their university's or firm's or parents expense)? I have read that a stupendous amount of KWH are used to "mine" one Bitcoin. If every transaction is recorded on every node, there must be a lot of power consumed there as well, at someone's expense. Is there any estimate of this transaction cost?

    • Wes

      Quite right indeed! That's the Achilles' Heel, the fatal flaw of the model. See my comment below – or take a look at https://digiconomist.net/bitcoin-energy-consumption. The implications of the system's (BTC) functioning, surviving on only transaction fees, after the last BTC is mined are also worth pondering.

      • Hu McCulloch

        I gather from your webpage that verifying the transactions in a new block is the "work" that is required of miners in order to receive their new bitcoins and transaction fees, so that it is indeed the miners who maintain the system. Correct? If so, the limit on BTC would pose a problem for its survival.

        • Wes

          Technically, it may take over 100+ years for the last BTC to be "mined". I believe fundamental exponential energy growth dynamics (inter alia) will be hit long before…

    • If a miner wants to collect a fee for competing a transaction, he will need to make sure he has access to the required parts of the blockchain. That's the incentive.

  • Wes

    You say "the Bitcoin system has the great virtue of securely sending value directly from stranger to stranger." Well, if we can agree that "value" is in the eye of the beholder (or the possession of the BTC holder?), you will understand that my view of BTC is substantially different. All that this uniquely disruptive digital ledger does is securely (cryptographically) transfer, in a publicly auditable way, a unit of information from one to another in a trustless manner. The number of those tokens available to be held in the ledger will be limited to 21 million units (massively sub-dividable into smaller units). We will likely, I believe, one day look back and laugh, that the market-capitalization of a mechanism for securely transferring a message from one to another (not even anonymously!) reached into the 10s of Billions of Dollars (or whatever money-of-account you'd like to use) – and does so at an unsustainable energy cost of over 200 kilowatt-hours per transaction (63,000,000 kWh per day; 23 terawatt-hours per year – see https://digiconomist.net/bitcoin-energy-consumption).

    So the Bitcoin protocol is working wonderfully, and messages are being transferred, slowly (you say) from one to another. However, your discussion of transaction throughput (and Szabo has addressed this) does NOT take into account irreversibility! Visa may process transactions more quickly, but contractual parties have a VERY long time to wait before such transactions may be considered final. And how long does it take for VISA to actually move the funds (bank-credit) from their account to the sellers'? Transferring faux "money" (bank-credit) through the ACH, or SWIFT, or other messaging protocols takes FAR longer than does a BTC transaction. Comparing the proverbial "apples with apples" when examining the actual nature of the transfer (and what exactly is being transferred) is more difficult from this perspective. I should add, that we in America are still on a T+3 (trade date plus 3 days) for settlement of securities transactions – a ludicrously slow mechanism for the transfer of value as compared to Bitcoin transfers. Given that a "trusted" intermediary must still be used when making all of these said transfers, still makes for an uneven comparison.

    So, you might say, demand-desposits issued ex-nihilo and denominated in "dollars" (what is a "dollar" by the way?) by private commercial banks in the Federal Reserve System are no more than ledger entries too! And you would be right – even worse, there is no limit to the amount of these ledger entries our legally cartelized banking system can make (or destroy). YES – I find our existing mechanism for the ex-nihilo issuance of an undefined currency (our money-of-account – the "dollar" – lacks a legal definition) even more ludicrous than Bitcoin as "money". And VERY slow.

    What you will learn from a more careful read of the original Nakamoto white paper, is that his system was designed as a payments mechanism, NOT a currency. That would be akin to likening the communications layer associated with the secure messaging protocol that we all use (hypertext transfer protocol – secure; "https") as being "money". It's not money. It's a secure messaging protocol, carrying information from one to another. HTTPS carries huge amounts of financial transactions. Do you think the inventor of HTTPS (not Al Gore) sees this inter-networking protocol as a currency? I should think not.

    None of the "bit-gold" solutions proffered thus far have solved the real problem – a mechanism for associating a cryptographically secure messaging protocol (the token – the "coin") indelibly yet transferable, publicly, auditably, and anonymously, in a widely distributed, low-energy-cost, trust-free way with a physical unit of value (eg, a gram of gold or 100 shares of Intel). And a universal method for valuing said assets (a money-of-account) that is independent of any medium of exchange. That's the golden ring. We're not there yet.

    In the meantime, I'm thrilled to see efforts headed in that direction. I have hinted at the problems with our unit-of-account ("money-of-account") in one or more twitter "moments" (@wesfree). Take a look!
    https://twitter.com/wesfree/moments

    • Mattyoung

      "And a universal method for valuing said assets (a money-of-account) that is independent of any medium of exchange. That's the golden ring. We're not there yet."
      —–
      I think we can auto-price based upon queues of buyers and sellers. Last I heard, the mathematicians claim we solved this This is what the AI excitement is all about these days.

  • Michael Kendall

    It's the wild west in cryptocurrencies and the blockchain. You can count on government eventually attempting to control it because cryptocurrencies represent a real threat to government fiat currency. While the blockchain is brilliant, understanding of the most important role of currency–a unit of account–was unfortunately not understood by Satoshi. It's the problem with bitcoin.
    http://manonthemargin.com/the-problem-with-bitcoin/

    • Wes

      I completely agree. What you may have overlooked is the fact that the world's primary reserve currency (the "dollar") since in or about 1968 (when the gold "cover" was removed from the dollar – or if you prefer, in 1971, when Nixon/US defaulted to the world on dollar-gold redeemability) – the "dollar" (now an undefined legal fiction) also lacks a unit of account specification. That currency which is used to measure value in more transactions worldwide than any other, is missing a definition! While I agree with you that gold fulfilled that function (as Unit-of-Account used to be defined as 1 Dollar = approx 11 1/3 grains of fine gold) far better than that which we have now – which is NO DEFINITION, using gold as a Unit-of-Account is also deeply flawed. You correctly point to the International System of Units (SI) when discussing measurement. If you consider the methodology carefully, you will come to note that measurement is merely a specification (an agreement) of a quantity. The quantity (the "unit") must be of the same nature as that being measured. For example, length is measured with a quantity of length (called the "meter"). This is defined by the distance travelled by light in a given amount of time. Time is measured with a quantity of time (called the "second"). The second is defined by the duration of a given number (periods of radiation) of lightwaves to pass. And so on. By 2018, all of the base units of measure will be based upon natural measurable, phenomenon ("natural units").

      The mistake you're making in your otherwise insightful comments, is to use a commodity (a thing) to measure a non-thing. As you yourself argue, a unit of measurement cannot work if it is affected by such things as suppy and demand (or worse still – the whims of the banking cartel). Gold is such a thing. The best illustration of this is to examine the gold-silver ratio over recorded time. While I've seen convincing evidence for the existence of a parity (1:1) ratio at some points in history, it's well documented that the Silver:Gold ratio has swung from 8:1 in biblical days to 82:1 recently. While gold fulfills other functions of money admirably as a store of value, and a medium of exchange, it has failed as a unit-of-account. Bitcoin fails both as a unit-of-account AND as a store of value.

      I have proposed an addition be made to the International Standards of Measurement to specify what I have named the "Quanta" as the standard of value. Value is an abstraction. Only an abstraction can be used to measure an abstraction. Don't confuse the term "abstraction" with something loosey-goosey, though. Mathematics are abstractions – used to measure things in real life. Given that all life on the planet depends upon the stock and flow of energy to function, I have defined the Quanta as one-tenth of the reduced Planck Energy Constant. In physics, Planck units are a unified system of natural units. Putting aside the math, I've defined the Quanta, specifically, therefore, as 39 megajoules of energy (about the amount of energy needed to power eleven 100-watt light bulbs for one hour). No, the Quanta is NOT electricity, or oil, or gasoline or food. The Quanta is merely a measurement – a specific quantity of value. Using Quanta to express price, and to compare the value of currencies, facilitates the definition of a Unit-of-Account ("money-of-account") that is UNCHANGING throughout the world – unaffected by supply or demand, or the whims of humankind and his misguided laws.

      Said differently, ALL humans consume about 2500 calories a day. It takes 9.8 joules to lift one kilogram one meter against gravity at all (sea-level) places on the planet. It takes exactly 4.186 joules to raise the temperature of 1 gram of water one degree Celsius at all (sea-level) places on the planet. It takes exactly the same number of watts per second to light a 100 watt light-bulb at all places on the planet. Value is in the eye of the beholder. Value cannot be measured directly. But value may be expressed as a universal measurement – and I'm proposing the Quanta as that unit. Quanta are not "things" (commodities) that one may hold in one's hand. Like a meter, or a second, it is a unit of value that is unchanging. You may one day have an ounce of gold for sale – and the price, expressed in Quanta (let's say 1,500 Quanta) would be understood worldwide. To transact, the medium of exchange need only be agreed – "how do you wish to pay?". You might accept "dollars" or BTC or oil. But all these media of exchange lack a universal system of value measurement – they all are UNDEFINED. All the world's currencies (which "prices" are always expressed in terms of another constantly fluctuating currency – or commodity) are in a constant flux. The business calculus cannot be efficiently or accurately made without a money-of-account that is separated from the media of exchange. Once you've learned to separate the two and settle on the correct Unit of Account (the Quanta), you will be well on your way to a better solution!
      https://twitter.com/i/moments/879149801962696705
      @wesfree

  • Katy Delay

    Wonderful article, and so thorough. Thank you, Larry. What about the taxation angle? (Sales tax and capital gains tax, at least in the US)

  • Mattheus von Guttenberg

    These are different technologies.

    Bitcoin was designed to be a peer-to-peer currency system where one does not need to rely on trusted intermediaries.

    Creating gold-backed cards or digital payment systems are reintroducing the trusted intermediaries. There is no way to combine the two without sacrificing the other's cardinal virtue.

  • Bitcoin transactions are very competitive with digital base money USD transactions (like wire transfers) in both time and fees. Yes, credit transfers (credit cards, Paypal, etc.) are much faster (though not necessarily cheaper), but so too would credit transfers based upon Bitcoin.

    If Bitcoin base money transactions could be made to be as (lightning) fast as credit transactions, that would be a tremendous advance. But mainstreaming Bitcoin–making BTC an actual money–will have to incorporate both credits and trusted third parties to a large degree, regardless of the principles of many Bitcoin enthusiasts.

  • Swag Valance

    You have to be fucking kidding. Gold? It's not 1860 anymore. Anybody who wants to see the gold standard back is living in a decrepit era of days gone by when humans believed in the falsehood of intrinsic value over market economics.

    • Mattyoung

      One of the best monetary standards pegs to shoe prices, since we all buy shoes about every six months. How can one pick a better consumer index?

      • Warren

        That wouldn't be my sole investment.

  • dede

    "As of 15 October, 2017, total bitcoin balances are worth $92 billion"

    Sorry, there are no balances. The blockchain sum of "bookings" is a credit (i.e. a liability that no one owes to anybody). There is no debit (i.e. no asset to cover the liability).

    I shall let you draw your own conclusion on the scheme then.

    • George Selgin

      Bitcoin holdings are no one's liabilities; but they certainly are financial assets. Nor is much harm done by referring to them as "balances." Economists often speak of "cash-," "currency-," and 'money-" balances often, without insisting on the balances in question being liabilities of any financial firm ("Gold balances" is an especially obvious case.) So the usage here is standard.

      • dede

        "without insisting on the balances in question being liabilities of any financial firm"

        With all due respect, I beg to differ. Economists may not insist that the balance is a liability of a financial firm but the term balance is an accounting term that reflects the fact that the sum of debits in a balance sheet equals the sum of credits. Money is systematically on both sides of the banks balance sheets (even banknotes are considered as an asset against their issuer, be it a Commercial – seen in Hong Kong – or a Central bank).

        Gold is a sort of exception indeed although most of it is in the safe of central banks who book the safe holdings on the debit side and lots of other central banks on the credit side.

        The beauty of the bitcoin fraud is that it looks a lot like gold (and other money attributes) but it does not shine as much as it, apart on the pictures of inexistant shiny B coins.

  • Warren

    If we wanted a trusted intermediary and a place to store physical metal how about Wal-Mart?

    They're open 24 hours, are located almost everywhere, have a reputation to maintain and have locations big enough to hold a nice big vault in the store.

    You deposit your assayed gold, they give a you card with your balance that can be used anywhere (though if used at Wal-Mart you'd get a discount or cash back).

    Maybe you pay a fee, maybe they run it as a loss leader to ensure they get people coming into the store. Maybe some other way to make it pay for them.

    They use their incredible logistics system to balance the deposits as needed. And you can withdraw your gold from any Wal-Mart that participates in the program.

    Though getting gold out of the vault should be a difficult and and somewhat long process to deter thieves. That is it should take longer than the average response time for the police.

    Of course you could transfer gold from your balance to another's easily either in the store or online.

    This would make a gold-backed currency available to everybody without any need to be technologically savvy beyond knowing how to use a phone app. And even that would not be strictly necessary. No need to understand blockchains, tokens, wallets or any of that.

  • Larry, what about a gold price standard, like the one Steve Forbes prefers for the Fed/USD? Could a cryptocurrency be built on a gold price standard, instead of mucking around with physical gold storage, security, and redemption? (And the considerable trust issues that arise from such schemes.)

    Let's say we have a cryptocurrency named Selgin, and we define it such that 1,000 Selgins = the price of 1 troy oz. of gold. The price of gold could be expressed in USD, Euro, Yuan, whatever.

    Even more interesting would be to define 1,000 Selgins as the 200 day moving average price of 1 oz. of gold. That smooths things out quite a bit, allows for a lot more planning and easier settlement and redemption. And it still retains the valuable property that Selgins will retain their value over the long term like no other currency. When gold settles in at $2,000 USD in a couple of years, then $3,000 USD some years later, Selgins will hold fast and are worth more dollars over time.

    The challenges are:

    1) How to bootstrap the new currency up to that price ballpark, where 1,000 of them equal the price of 1 oz. of gold, which would make a Selgin worth $1.25 or so right now. A number of cryptocurrencies have "bootstrapped" their way into very high valuations, but I'm not sure how they did it.

    2) Once the currency arrives at the intended gold-based value, how do we keep it there? In Forbes' vision for a government gold price standard, the Fed would use open market operations to maintain a fixed price of gold (he should probably modify it to a 200 day MA instead of a forever fixed single integer price). Managing the price of a currency seems to come down to manipulating the supply of that currency. I'm not sure how to do that in this case.

    It's easier to imagine if it were launched by a private bank of the sort Thomas Hogan described in his Cato paper: https://www.cato.org/publications/policy-analysis/competition-currency-potential-private-money

    As a gold price standard, Selgins would be redeemed for other currencies, not bullion. Instead of an ounce of physical gold, you'd get the cash equivalent in dollars or whatever you wanted or agreed to.

    It's trickier if they're not private banknotes, but freestanding cryptocurrencies.

    Lastly, the gold-backed currencies you mentioned don't seem to scale to widespread use. They can't displace dollars and Euro if they're fully backed by gold, since there isn't enough gold for economies of the size we now have. Only a fractional reserve approach could scale to multi-trillion dollar money supplies. But then I'm left wondering how a fractional reserve beats a gold price standard.

    I'm also intrigued by commodity baskets like Jim Rogers' international commodities index: https://en.wikipedia.org/wiki/Rogers_International_Commodity_Index

  • My comment from a few days ago appears to have been deleted. It was several paragraphs long, mostly asking about the potential for a gold price standard, like Forbes favors, but using a 200 day MA or similar for the price. Can the deletion be fixed – rewriting it will be a waste of time.