Bitcoins and Seignorage

At the same time, the FinTech industry in Silicon Valley is experiencing a boom and investor interest. Disruption in the financial sector is about the virtual financial sector and applications for payment transfers, commerce platforms and more complex financial products.

Bitcoin seeks to create a new type of money. “Bitcoin breaks the national state’s monopoly on printing money and thus their power to define the value of money”, according to bitcoinpenge.dk. By issuing bitcoins, the issuer obtains seignorage – a gain in the form of the value of the money with marginal costs deduced. The state and the central banks won’t let private companies have this gain in the long run. That would equal privatizing the American central bank and let private companies handle the value of newly minted dollars.

What’s seignorage?

To issue/create new money is a process which has been shrouded in mystery throughout history. The first actual money was issued by princes in the antiquity. Back then the value of coins was usually determined through their value in precious metals, such as gold and silver. A coin was worth its content of metal. The Roman dinar consisted of ca. 4.5 grams of silver and had the value of the silver. An aureus was a gold coin, which had a value of 25 dinars.

Seignorage comes from the word seignor – prince/ruler – and comes from the medieval European princes. The original type of seignorage was formed when they first started to mix small portions of older metals in, and making the gold- and silver ratio smaller. The coin still had full value, but demanded less value in the total amount of metal in the coin.

The modern seignorage

The modern version of seignorage was formed when they, in recent times, stopped using gold by repealing the convertibility of banknotes into gold coins. That happened in England in the time between the two world wars and in the USA in 1971.

The Fed can issue dollars without having gold values behind the currency. The same is true for Kroner and Euro and practically every other currency in the world. That puts the central banks in a favorable position. They can issue money and pay with them – electronic money too – without any value behind it. Figuratively speaking you can buy a castle for 50 million kr. by paying with money the central bank has conjured up out of thin air. There are however limits in the shape of inflation when you issue money, so the printing presses can’t run amok like it did in Germany during the hyperinflation of the 1920s.

Inflation secured or a pyramid scheme?

In addition is the possibility of buying interest-bearing loans without having to go into debt. You just make the money buy shares or you take over some debt and earn money on the interest rates.

In other words, creating money is pretty smart. That’s also why only states are allowed to create money today. Right up until bitcoin. If bitcoins become widely accepted as a means of payment on an equal footing with kroner, dollar or peso, then the creators of bitcoins will stand to gain massively off of it. All in all, only 21 million bitcoins can be created. Bitcoin uses that as an argument for bitcoins being inflation-secure. Probably true, but it also means that bitcoins through their use will rise to a very high value. That’s also why Bitcoins are accused of being a pyramid scheme, even though it’s not.

If bitcoins become a success

If bitcoins become really successful, international regulation will bring this type of payment method under the reigns of national states and the international monetary organizations.

You might as well give up on the thought of a completely free currency outside of state control. It creates a lot of problems for states, which are already connected to bitcoins, such as money laundering, organized crime and stateless money that would be perfect for financing terrorism and rebel groups.

A global, encrypted currency

Bitcoins are however also built on a very interesting technology called Block chains, where you can track a bitcoin through a public and a private encryption key, all the way back to the first transaction and thereby protection against creating fake bitcoins.

It’ll be an essential part of the FinTech industry and new financial services and disruption in the financial sector. Payments, clearing and transactions can become far easier with the technology and it could be the foundation for a global currency based on IMF’s SDR (Special Drawing Rights) or a similar global standard. It would make sense to create a global, digital currency.

Published here 2017