September 19, 2017

Digital Currency Group forecasts war on physical cash

Source submitted by jeriaska on 2016-11-24
This month the Indian government banned 500 and 1,000 rupee notes in an effort to thwart counterfeiting, relegating 80% of India's physical cash supply to non-monetary status.

Disarray has ensued as lines formed around the block outside local banks to redeem the notes for acceptable fiat currency. The crisis has brought increased media attention to Bitcoin, whose market has price surged in recent weeks, first following the surprise presidential election results and now with the equally unanticipated rupee ban.

Eschewing reliance on government oversight or corporate intervention, Bitcoin's monetary policy is predetermined by the network protocol. Bitcoin issuance halves periodically to guarantee a deflationary economy, making it rare as precious metals like gold.

As Indian lawmakers eye a potential gold import ban, Bitcoin is selling at a 25% premium in the region. Against this backdrop, the games industry continues to make inroads into building more complex and immersive virtual environments. In the VR space, cryptocurrencies are poised to play a pivotal role.

At a recent meetup organized by Zach Piester of Blockchain Startups Singapore, Barry Silbert and Meltem Demirors of Digital Currency Group forecast these recent events as presaging a global war on physical cash.

High denomination physical bills as endangered, points out Silbert, part of a global effort to cut down on money laundering and tax evasion. There are proposals on the table to eliminate the United States $100 bill, while the Euro $500 bill is scheduled to go out of circulation by the end of 2018. The DCG Founder says he finds the trend "terrifying."

"I'm not a big believer in holding onto physical cash," Silbert says, "but I do believe in privacy. I can assure you that many countries around the world are looking at this experiment in India and, assuming it is successful, I believe they are going to follow suit."

Demirors joined DCG in 2015 when venture capital firms started taking interest in blockchain properties beyond Bitcoin. These include identity authentication and tracking digital tokens tied to physical goods. "Now we're at a stage where, particularly with protocols like Ethereum," she says, "people are building distributed computing applications and an exciting new field of emerging technologies."

This year, DCG became a public investor in the Zcash company, whose recently launched cryptocurrency allows for private transactions. For those worried about their financial privacy as lawmakers ban physical currency, Zcash promises a state-of-the-art solution. Much of the tech is open source, borrowed from Bitcoin's anonymous founder, dubbed Satoshi Nakamoto. The two cryptocurrencies share properties that set them apart from government issued fiat, such as finite supply and predictable issuance.

Rather than hold a public ICO (initial coin offering) like Ethereum's, the Zcash company established a "Founders Reward" model, in which 10% of the cryptocurrency tokens issued over the course of coming months will go to team members and initial investors like DCG. But because of its experimental and unproven status, Zcash only makes up a small percentage of DCG's overall portfolio. Despite participating in the Founders Reward, the group's interest in cryptocurrencies other than Bitcoin began only recently.

Over the summer, the Digital Currency Group made their first significant "altcoin" purchase, investing in a token called Ethereum Classic. Classic emerged unexpectedly when the Ethereum Foundation forked their public ledger to recoup investors of the DAO, a virtual investment platform compromised by a hacker.

"That to me was the final nail in the coffin of the Ethereum investment base," Silbert says. "You have to understand that I spend easily 25% of my time with institutional investors and hedge funds explaining to them the Bitcoin supply dynamic. Everybody knows it's 21 million and the growth is fixed. The idea that five individuals could unilaterally make a decision to fork Ethereum--in my opinion, out of self-interest--meant that we were never going to see Ethereum successful as an investment asset class."

Ethereum Classic was the result of a contentious hard fork, the crux of the argument centering on the Foundation's decision to modify the blockchain's transaction layer to effect a bailout. ETC supporters espouse a philosophy emphasizing decentralized governance and checks and balances, while ETC detractors accuse them of opportunistically siding with the DAO hacker.

Classic has proposed limiting their token supply to 200 million units, in a tip of the hat to Bitcoin's 21 million token cap. Silbert sees potential in both the Ethereum technology and the community forming around Classic, whose governance favors immutability of the blockchain and reining in the inflationary token issuance.

"I've become excited about the people focusing in on Ethereum Classic," says the DCG Founder. "You don't have this governance risk where someday someone's going to make a change that goes against the core tenets of investing in cryptocurrency."

Cryptocurrency is defining itself as a present-day technological breakthrough, as lawmakers set their sights on making physical cash a thing of the past.

Disclosure: the author of this post owns Bitcoin, Ethereum and Ethereum Classic tokens.