June 20, 2019 in News
Ed Krassentein, one of the Krassentein brothers who were recently banned from Twitter made a Reddit statement where he noted, among other things, that they are financially independent because of their investment in Bitcoin.
Regardless of your political stance, it is illuminating how cryptocurrencies can lead to financial independence, which in turn creates freer and more politically engaged citizens. Without Bitcoin we would not have a chance to see the brothers’ epic Twitter battle against Trump.
Direct quote from the statement:
Don’t worry about us. We are just fine! Let’s just say that buying very large amounts of bitcoin 8 years ago was a good decision. We never had any motive to make money off of our tweeting. We sincerely did it for what we believe. There was no other motivation!
June 13, 2019 in News
Something interesting is going on in the global accounting world, which deserves attention of the crypto community.
International Financial Reporting Standards Interpretation Committee (IFRIC) have been considering what type of asset cryptocurrencies are. IFRIC published a consultation back in March, received over 20 responses from different professional organizations and recently issued the Staff Paper, which addresses the received comments and proposes the final wording for their decision.
You can read all the comments and interpretations using the links provided above – if you are interested in economics of cryptocurrencies it will be worth of your time. I would TL&DR this highlighting the following:
Definition of cryptocurrency:
For the purposes of its discussion, the Committee considered a subset of cryptoassets with all the following characteristics that this agenda decision refers to as a ‘cryptocurrency’:
a) A digital or virtual currency recorded on a distributed ledger and uses cryptography for security.
b) Not issued by a jurisdictional authority or other party.
c) Does not give rise to a contract between the holder and another party.
This is carefully worded and clearly excludes utility and security tokens from the definition of the cryptocurrency.
What kind of asset cryptocurrencies are?
The Committee concluded that IAS 2 Inventories applies to cryptocurrencies when they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38 to holdings of cryptocurrencies.
Put simply cryptocurrencies could be treated in two ways depending on whether holding entity intends to re-sell them or not:
- when they are intended to be sold, crypto should be treated as an inventory item (like stock in a store), and
- when they are not intended to be sold, crypto should be recognized as an intangible asset (like computer software).
So cryptocurrencies are not recognized as money or any other type of financial assets. Here is why:
The Committee concluded that a holding of cryptocurrency is not a financial asset. This is because a cryptocurrency is not cash (see below). Nor is it an equity instrument of another entity.
‘currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements.
Some cryptocurrencies can be used in exchange for particular good or services. However, the Committee noted that it is not aware of any cryptocurrency that is used as a medium of exchange and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements. Consequently, the Committee concluded that a holding of cryptocurrency is not cash because cryptocurrencies do not currently have the characteristics of cash.
In a nutshell, in order to be considered cash, cryptocurrencies should be used as medium of exchange and a unit of account. Since they do not have these characteristics, cryptocurrencies cannot be recognized as cash .
Some of the respondents noted that cryptocurrencies are already used as medium of exchange. For instance Brazil SEC pointed out that:
.. it must be taken into consideration that, in some transactions, cryptocurrencies are in fact a medium of exchange (e.g. used in exchange for goods or services) and may be used as the monetary unit when pricing goods or services.
However, the majority of respondents broadly agree with the Committee that:
- cryptocurrencies should act as medium of exchange to be treated as cash,
- they are not used as such yet, and
- this conclusion may need to be reassessed in the future, once cryptocurrencies are broadly accepted.
It is worth to stress, that Store of Value is not even mentioned by either the Committee or the Professional bodies responding to the consultation. Despite being so frequently uttered in the crypto world, this concept has absolutely no gravity in the professional circles.
Conclusion: Cryptocurrencies are seen as a speculative innovative class of assets that should be currently accounted as inventory bought for re-sale (i.e. presented like stock in warehouse with profits recognized only when it is sold). However, when they will become actively used as medium of exchange, cryptocurrencies could be recognized as cash and treated like foreign currencies (i.e. presented like cash holdings and revalued according to the prevailing exchange rate).
Adoption, adoption and adoption. That’s all we need.
October 1, 2018 in Opinion and Analysis
Sigmund Freud coined the term “collaterals”, which are superficial associations our unconscious mind uses to transform our real wishes into the acceptable dream-wish. If you want a violent revolution, your brain can transform it into the collateral and you can dream of an object fiercely revolving around its axis. “Collaterals” consists of allusions to the actual dream thoughts, which, considered schematically, correspond to displacements from the essential to the non-essential (S. Freud, The Interpretation of Dreams).
“Blockchain projects” predominantly are the very collaterals.
Blockchain is a technology utilized to make Bitcoin happen. It is a tool to create a decentralized community-driven cryptocurrency. If this technology is used for any other purposes, these other purposes have the collateralized, the non-essential association with Bitcoin. While it is a shop or a restaurant accepting Bitcoin that do have the essential link to Bitcoin as a currency.
Despite of this, almost all ICOs or other crypto related ventures are centered around “X on blockchain”. It seems that our real desire to transform the world is repressed and we have reduced ourselves to a dream-wish of a blockchain empowered ecosystem.
How many real life businesses ran a token sale to fund their operations? Virtually none. While they have considerably better use cases for tokenization. Businesses from all industries could raise money from token sales, fund their investment programs in a much more efficient way and pass their savings to tokenholders.
Tokens can be used as:
– Tickets, issued by transport companies,
– Store Cards, issued by retailers,
– Coupons, issued by restaurants,
– Prepaid cards, issued by telecom providers,
– And so on.
Raising funds directly from customers and having a non-financial liability, (i.e. an obligation to deliver goods or services rather than repay money with interest) would dramatically improve the financial position and operational capacity of the companies. Tokenholders, in their turn, will be able to get goods and services at a discount and store wealth in the real asset backed tokens, with liquid secondary markets.
This is where we should move on. This is a long run, but the first step is pretty easy. Let’s stop being focused on blockchain companies as somewhat “natural” for the crypto ecosystem. All businesses have to be looped in. Firstly in our mind. Then in the real world.
September 29, 2018 in Opinion and Analysis
It so happened that there is a bizarre competition in the crypto world on who is more “Austrian” and “Keynesian” is used as slur. I would call myself neither and I would like to look at the cryptocurrency economics from the mainstream economic view. When I say “mainstream”, I mean the economic concepts broadly considered as non-controversial and fairly common sense by the majority of economists, regardless of their political stance.
The classic economics teaches us that there are three factors of production:
- Land and other natural resources,
- Capital – machinery, equipment, technologies, goods etc and
- Labour – human talent, skills and work.
These three factors applied together create wealth. This is basic common sense. Everything we consume eventually stems from the nature and is processed by human labour using machinery and equipment.
Money is a tool used to serve this economic process but not a factor of production itself. Money does not have value on its own but it can derive its value from being inherent part of an effective economic system. Again, this is a common sense – you would not value gold, dollars or bitcoin on an inhabited island. You would prefer having food, clothes and shelter. But if you live in a civilized society, having a liquid, universally accepted asset which can be immediately converted into the real commodities gives you enormous benefits and this turns that super-liquid asset into the store of wealth.
Hence, strength of a currency depends on the economic and political strength of the nation which recognises it as medium of exchange. If the system which the money is looped in gets broken, the money devalues. This is what going on in Venezuela and what was going on in the Weimar Republic and post-Soviet countries – deep institutional, political and economic crises made their money worthless.
On the other hand, well-developed nations with sustainable political systems struggle to create inflation even when they want it in order to fight economic recessions. In the recessionary environment, people and companies crave for savings and would continue to absorb inflated money supply. The famous villain Paul Krugman even once argued that the Bank of Japan have to promise to be reckless, as credibility of this institution is a big obstacle in achieving its inflation targets.
Let’s move to cryptocurrencies now. What can make a digital currency valuable? Exactly the same thing: being linked to the economic process where land, capital and labour interact to create wealth. Cryptocurrencies will be more valuable when they will serve the global economy and more and more players will start accepting and using them across the globe. While the price is not the goal in itself. Cryptocurrencies can make us richer by revolutionising the wealth creation process by moving it from the bank/debt run economy to a freer decentralized economic system.
In money, the social relationships among human beings have been reduced to a thing, a mysterious, glittering thing the dazzling radiance of which has blinded the vision of so many economists when they have not taken the precaution of shielding their eyes against it. (Carruthers and Babb – American Journal of Sociology, vol 101, p. 1556)