Cryptocurrency versus the Dollar

The first question to Fed Chairman Powell today in his meeting with congress was about a new cryptocurrency called “Libra” and its possible impact on monetary policy. Also, President Trump invited all but one leader of Silicon Valley tech companies to meet with him today.  That leader was Zuckerberg of Facebook. My response to these developments begins with a quote from Ahamed Liaquat’s, “Lords of Finance: The Bankers Who Broke the World”. Penguin Publishing Group. Kindle Edition.

“Before WW I Britain was the world’s banker. No other financial center—neither Berlin nor Paris, certainly not New York—came close to matching London’s standing as the hub of international finance.

The war had changed the balance of financial power, and the New York Times correspondent in Paris reported that “ninety out of a hundred regard Uncle Sam as selfish, as heartless, as grasping. The great majority of the British people have made up their minds that American policy is selfish, sordid and contemptible.”

The consequences were: the British pound was replaced as the exchange currency of the world by the dollar and London was replaced by New York as the hub of international finance. Now, America is engaged in a trade war to keep that position of world dominance and it is America calling China, selfish, sordid and contemptible as they threaten to replace us. The major factor cited by Ahamed in “Lords of Finance” for England’s decline was the decision to go on the Gold Standard. America had more gold than all the allies put together.

The major factor regarding the outcome of America’s Trade Wars may also involve money. Only this time, it may be a Cryptocurrency that changes the world order financially. I encourage everyone to read a white paper by Facebook at this link Libra Association website. Click on White Paper. The following is my interpretation of a few of the claims in this white paper:

  1. Libra is fully funded by multiple marketable assets denominated in multiple currencies. This should provide a relatively stable price.
  2. It operates on a blockchain system that could provide control over funds. being siphoned of to a hacker rather than the intended receiver.
  3. Libra uses a new programing language that also enhances security.
  4. It is governed by a group of expert IT firms, not just Facebook.
  5. It could provide more than a 2% return on assets to founding members and investors according to a Fortune magazine article.
  6. Allows for cross-border transfers of funds at much lower costs than currently available.
  7. All the user needs is a cell phone.
  8. It could dramatically reduce the ability of drug traffickers to move money.

The following is a well-reasoned opposing point of view by a respected source:

Hello Frank,

I think the position of the dollar as the reserve currency has only strengthened over time, particularly in recent years.  A currency functions as a medium of exchange and a store of value.  Over the years, the dollar has overtaken every government currency in the world and gold too in both functions.  It is the preferred reserve holding by central banks around the world.  It engenders confidence around the world through the two main institutions of the US Federal Reserve and the US Treasury (which issues default free debt-by definition).  We may criticize these two institutions domestically, and accuse them of political expediency and other things, but they remain the most solid institutions of their kind in the world – by far.  The ability of any cryptocurrency to dethrone the dollar, due to technological advances, is highly improbable in my opinion.

About Frank Sortino

Frank Sortino is finance professor emeritus from San Francisco State University and Director of the Pension Research Institute which he founded in 1981. For 10 years he wrote a quarterly analysis of mutual funds for Pensions and Investments Magazine and he has written two books on the subject of Post Modern Portfolio Theory. He has been a featured speaker at many conferences in the U.S., Europe, South Africa, and the Pacific Basin. Dr. Sortino received his Ph.D in Finance from the University of Oregon and has carried out research projects with many institutions like Shell Oil, Netherlands and The City and County of San Francisco Retirement System.
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