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Jp Koning

Jp Koning

Working in the bowels of the finance industry. Blogging about monetary phenomena is my side gig.

Articles by Jp Koning

Programmable money isn’t new, we’ve had it for ages

4 days ago

I often hear that modern money just isn’t up to snuff because it isn’t programmable. That’s why we need Ethereum, stablecoins, and other exotica like central bank digital currencies. These platforms will provide the world with much needed programmability.Stablecoin issuer Circle is one of the bigger marketers of this idea, but it’s far from being the only one: "While value exchange may be the initial killer app, it’s the
programmability of digital money that will ultimately usher in business
model breakthroughs." [link]I disagree. We’ve had programmable money for ages. Let me offer a quick guide.Microsoft doesn’t have a bunch of employees who sit at desks and manually sign paper checks all day. No, it uses software that automates payments to its tens of thousands of suppliers,

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Why are so many Americans content to be unbanked?

13 days ago

SourceHere’s a surprising statistic: 5.4% of American households didn’t have a bank account in 2019. That’s 7.1 million households. Oddly, unbanked households seem fine with this state of affairs. More than 56% of unbanked households say they are "not at all interested" in owning a bank account.  For us non-Americans looking in, these numbers are very strange. I live in Canada, and bank accounts are pretty much universal here. If you don’t have one, you’d probably be quite interested in getting one. Ditto for other developed nations such as Australia, Japan, Sweden, France, and Germany. The banked rate in these countries lies between 99%-100%, much higher than the U.S.’s 94.4%.In this post I want to try and figure out why there are so many U.S. households without bank accounts, and why so

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How would Tony Soprano cope with a pandemic?

29 days ago

When The Sopranos was running I never watched it, but during the pandemic I finally had some extra time to give it a try. It was excellent. As I watched I kept wondering how Tony Soprano would have tried to pull his business through COVID-19. Below I’ve adapted two scenes from Season 4, Episode 1 to incorporate the problems a mob family might be experiencing in 2020. Before you read the adaptation, you may want to check out my blog post How the pandemic has clogged the global economy with paper currency. In short, there has been a huge buildup in cash in Europe, U.S., Canada, UK, Australia, Norway, and more. My hypothesis is that with money laundering avenues (i.e. casinos and restaurants) closing due to virus fears and lockdowns, criminals have no choice but to hoard huge amounts of

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A very very simple explanation of monetary policy

October 22, 2020

Scale & weights | Aylmer, Quebec | Canadian Museum of History This post is for my dad, who says he doesn’t understand my writing but remains a loyal reader nonetheless.I am going to try and explain one of the most important things that central banks do: monetary policy. We often see news clips in which bespectacled central bankers discuss their "inflation targets," or tell us that they are ratcheting interest rates up or down, or that they are engaging in "quantitative easing". The catch-all term that we use to describe what they are doing is monetary policy. But what does this mean? What is monetary policy?Central banking is confusing, so here’s what I propose. Let’s find something simple, something we all intuitively understand. And then I’ll show why monetary policy is like that simple

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The ECB’s digital euro: anonymous or not?

October 5, 2020

The European Central Bank (ECB) recently published a report that explores the idea of introducing a digital euro for use by the general public. This project is known as a central bank digital currency, or CBDC, and many other countries are exploring the same idea. John Kiff has a useful database here showing how far these projects have progressed.Will the ECB’s new euros-for-all be relatively open and anonymous like cash? Or will they require ID and permission like a bank account? In short, the report says that anonymity may have to be "ruled out." It says that regulations do not allow anonymity in electronic payments, and the ECB must comply with regulations. I quote the passage below:"While [anonymity] is currently the case for banknotes and coins, regulations do not allow anonymity in

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Adopting a clean gold standard

September 28, 2020

Last month I wrote an article about banning gold mining. It received plenty of feedback from different parts of the internet. Some loved it, some didn’t. [ GATA | Boing Boing | Hackernews ]In this follow-up post, I want to outline a less draconian and more market-friendly alternative to banning gold mining.But first, let me quickly reprise the original blog post. Unlike coal or oil or wheat, gold never gets consumed. We mostly "use" gold by holding it in vaults where it is kept safe from wear and tear. If people collectively want to hold more of the yellow metal, then a simple rise in price will suffice. After all, if the price of gold jumps to $4000/oz from $2000/oz then the world’s gold hoards will have doubled. Voila, demand satisfied.With price doing all the work of responding to

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Different bitcoins different prices

September 2, 2020

Not all bitcoins are the same. If someone steals 100 bitcoins from a cryptocurrency exchange and tries to sell them, they’ll have to price them at a discount to the market price in order to compensate the buyer for the risk of laundering them. Different bitcoins different prices.This isn’t just a bitcoin phenomenon. There are two wholesale markets for banknotes, too. The legitimate one is comprised of banks, retailers, and cash-in-transit companies like Brinks that exchange notes at par. And the illegitimate one is made up of mob lawyers, drug dealers, and note brokers exchanging dirty notes at 20 or 30 cents on the dollar. Different dollars different prices.You can find this same fractionalization everywhere: in electronics or prescription medicine or used cars. There is a licit and

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18 things about Tether stablecoins

August 26, 2020

Before I start my list, a bit of introduction.Tether is a stablecoin. It happens to be the most popular stablecoin in the world.A stablecoin is a digital IOU that is implemented on a blockchain. In Tether’s case, it takes the form of a U.S. dollar-denominated IOU implemented on the Ethereum blockchain. Tether holds U.S. dollars in a traditional bank account. It issues digital blockchain-based Tethers that are convertible into those bank account dollars at a 1:1 rate. This promise is what stabilizes them. And so a user can send some Tethers to another Tether user, say as payment, and neither party need worry about bitcoin-style price disruption. If you didn’t understand any of that, think of Tether as basically PayPal, except on a decentralized database instead of a centralized one.

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The case for banning gold mining

August 21, 2020

The Kalgoorlie Super Pit Mine in Australia
Does the world need gold mining?Let’s think about what a world without farming look like. If all farming came to a stop, we’d soon use up all of our inventories of wheat, soy, rice, and vegetables. Mass starvation would rapidly ensue. A world without crude oil production wouldn’t be much better. We have plenty of the stuff above-ground. But since oil products are destroyed in usage, we’d run out pretty quick. Society would grind to a halt.But if gold mining were to suddenly stop, nothing bad would happen. The unique thing about gold is that it doesn’t get used up. The main way we consume the yellow metal is by storing it, say in vaults or by wearing it as jewellery. Compared to how we use an industrial metal like copper, this sort of usage is

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Bitcoin is an account, not a token

August 18, 2020

When economists talk about payments, they often make a distinction between token-based and account-based payment systems. In a recent post at the New York Fed’s Liberty Street blog, Rodney Garratt & cowriters argue that new payments technologies like bitcoin and central bank digital currency may not fit into these traditional categories. Perhaps it’s time for a reorg? In an account-based system, some sort of database stores account information. For a payment to occur across this database the payer needs to prove that they own a spot in that database, and that this spot has sufficient funds. With a token-based system there is no database. Instead, objects are used to pay (say banknotes or gold coins). The key feature of a token-based system is that the recipient must verify that the

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How the pandemic has clogged the global economy with paper currency

August 1, 2020

The outbreak of Covid-19 has caused a global increase in the amount of cash in the economy. I think I’ve got a pretty neat explanation for why.But before I tell you what it is, let me show what the cash build-up looks like. Here’s what has happened to banknotes in circulation in Canada so far in 2020:

The quantity of Canadian banknotes in circulation keeps rising. 19 consecutive weeks without a decline. Unprecedented.Any theories? I have one—will write a blog post soon.(In a counterfactual world without COVID, we’d be at C$94 billion notes outstanding, not $101 billion.) pic.twitter.com/rIWyUqEPnx
— John Paul Koning (@jp_koning) July 27, 2020

Here is the US:

U.S. banknotes in circulation, by year. Usually so predictable, but not in 2020… pic.twitter.com/sdkBvorhtS
— John Paul

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Pennies as state failure

July 21, 2020

We can all think of examples of state failure. The most obvious include the inability to protect citizens from criminals, failure to provide drinkable water, and incapacity to cope with a public health crisis like COVID-19. I would argue that the ongoing existence of the penny within a nation’s borders is another example of state failure.The poster child for this particular example of state failure is the U.S. and its Lincoln penny. Many (though not all) developed nations have already rid themselves of their lowest denomination coin. (Well-run New Zealand has managed to cancel two of them, the penny in 1989 and the nickel in 2006!) My own country, Canada, was a disappointing failure on this front. But in 2012 we worked up our resolve and put an end to our orange one-cent discs. In this

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Bitcoin is more like ham radio than the early internet

July 10, 2020

People in the bitcoin community often make fun of me as a nocoiner. That is, I don’t have any bitcoins and am vocal about that fact. (Neither of which is true, by the way).The truth is that I have no problem with bitcoin. It is a solid protocol that has survived handily for eleven years. When I come off as being critical, it’s usually because I’m attacking the various narratives, or fan fictions, that have sprung up around bitcoin. Don’t get me wrong, all movements rely on some sort of internal mythology to help drive their progress. Bitcoin is no different in this respect. But there is a big difference between accurate self-perception and fantasy.Bitcoin’s wrongest narratives are its triumphal ones. Most of them paint bitcoin as some sort of heir apparent, waiting on the wings to

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Is fiat money to blame for the Iraq war, police brutality, and the war on drugs?

June 29, 2020

I often encounter memes claiming that fiat money is to blame for all sorts of government evils. Here is one example from Kraken spokesperson & bitcoin meme factory Pierre Rochard:

The military-industrial complex that deliberately creates wars is financed by inflationary State fiat currencies.
— Pierre Rochard (@pierre_rochard) January 8, 2020

The rough idea behind this family of memes is that the Federal Reserve, the world’s largest producer of "fiat" money (i.e. irredeemable banknotes), is responsible for financing all sorts of examples of government over-reach, say foreign invasions, police brutality, and the twin wars on terrorism and drugs. It does so by producing seigniorage, or profit, which it passes on to the state. Replace fiat-issuing central banks like the Fed with bitcoin or

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Banks are slow to increase rates on savings accounts, but quick to reduce them

June 24, 2020

Chase Sunset & Vine, 2012. Painting by Alex Schaefer
Banks don’t like to share higher interest rates with their customers. Case in point: let’s take a look at what happened as the Federal Reserve, the U.S.’s central bank, went through a long period of hiking interest rates from 2015 to 2019.The Federal Reserve’s first rate increase (from 0.25% to 0.5%) was in December 2015. It increased rates once more in 2016 and three times in 2017. But the interest rate on the average U.S. savings account and interest checking account didn’t start to rise till spring 2018, two and a half years after the Fed’s first rate hike (see chart a few paragraphs down).If you’re like me, you’d assume some sort of direct linkage between: 1) the interest rate that the Federal Reserve pays its customers (i.e. banks)

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Want to open an account at the central bank? I’ll pass, thanks

June 6, 2020

The only type of central bank-issued money that we hoi polloi can own are banknotes. But over the last few years, researchers at central banks have been increasingly toying with the idea of issuing digital money for public consumption. I count 380,000 search results on Google for the term "central bank digital currency," up from zero just a few years ago.There are two types of proposed central bank digital currencies, or CBDCs. The first, Fedcoin, is implemented on a blockchain. I wrote about it here. But the odds of Fedcoin happening are minuscule. This post will be about the second type.The second is a basic bank account, sort of like PayPal except run by a central bank like the Federal Reserve (or the European Central Bank or the Bank of England.) I’m not philosophically or

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How the Bank of Canada’s balance sheet went from $118 billion to $440 billion in eight weeks

May 30, 2020

Ever since the coronavirus hit, the Bank of Canada’s balance sheet has exploded. In late February its assets measured just $118 billion. Eight weeks later the Bank of Canada has $440 billion in assets. That’s a $320 billion jump! To put this in context, I’ve charted out the Bank of Canada’s assets going back to when it was founded in 1935. (Note: to make the distant past comparable to the present, the axis uses logarithmic scaling.)

The rate of increase in Bank of Canada assets far exceeds the 2008 credit crisis, the 1970s inflation, or World War II. Some Canadians may be wondering what is going on here. This blog post will offer a quick explanation. I will resist editorializing (you can poke me in the comments section for more colour) and limit myself to the facts.We can break the $320

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One country, two monetary systems

May 19, 2020

I often write about odd monetary phenomena on this blog. Here’s a new contender, Yemen’s dual banknote system. Yemen uses the Yemeni rial as a unit of account. As one of the poorest countries in the world, Yemen still relies mostly on banknotes to make transactions, which are issued by the Central Bank of Yemen, or CBY. One of the convenient features of banknotes is their fungibility. This means that one banknote is perfectly interchangeable with another. For a few months now, something strange has happened to Yemen’s banknotes. Old rials and new rials have ceased to be fungible. Any rial note that was printed prior to 2016 is now worth around 10% more than newer rial notes. More generally, the entire Yemeni monetary system has split on the basis of banknote age. From a Western

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Why Fedcoin

May 11, 2020

Six years ago I wrote a blog post about Fedcoin. Fedcoin is a type of central bank digital currency, or CBDC. (I called it Fedcoin at the time, but it could be any central bank that issues it, not just the Federal Reserve.)So why Fedcoin?The rough idea was that it might make sense for the Federal Reserve to create a digital version of the banknotes it issues. To do so it would use a blockchain, much like the blockchains that power Ethereum or Bitcoin. Anonymous users all over the world could download Fedcoin software and run it on their computers. In the same way that anyone can use a U.S. banknote (or bitcoin), anyone could get some Fedcoins and spend them. Why a blockchain?Public blockchains have many well-known problems. Because they are decentralized, they rely on work-intensive

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The best investment in the world

April 23, 2020

I’ve blogged about strange trades before. There’s Kyle Bass’s bet on 5-cent coins. The great Japanese gold trade of 1859. And the epic bull market in shares of the Swiss National Bank, Switzerland’s central bank.This post is about the best investment in the world. I won’t leave you hanging. It’s the U.S. "Series EE" savings bond. The coronavirus pandemic has led to a huge collapse in U.S. interest rates. As of April 21, the 30-year U.S. government bond rate was at 1.17%, down from 2.33% at the beginning of the year. The 20-year rate was at 0.98%, down from 2.19%.But there’s one corner of the U.S. government debt market where a a juicy 3.5% interest rate is still to be had: grandpa’s savings bond. Snap it up quick, because it may not last.Savings bonds have been around since 1935, when

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Stephen Poloz needs to be honest with Canadians about negative interest rates

April 19, 2020

To soften the blow of the COVID-19 pandemic, the Bank of Canada is running what it sees as an expansionary, or loose, monetary policy. I think an expansionary policy makes a lot of sense. The problem is this. The Bank of Canada has several tools it can use to loosen. Some are better than others. But it has stopped trying to use its best tool.What is its best tool? Well, there are three ways that the Bank of Canada can loosen monetary policy.Say interest rates are at 4%. Stephen Poloz, the Governor of the Bank of Canada, can either…1) Cut the interest rate, say to 3.75%
2) Keep rates at 4% but do $20 billion or so in quantitative easing. This is just a fancy term for buying up assets like government bonds.
3) Keep rates at 4%, but promise to maintain them at 4% for extra-long. This is

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Cash and COVID-19

April 6, 2020

"I work at a bank and some lady tried to microwave her money to clean it…….. 🤦🏼" from Twitter
I’ve written a series of posts and tweets over the last month about cash and COVID-19. The first set of posts has to do with the idea of banknote contamination.Banknote contamination In my research for BullionStar, I found that the odds of a banknote being contaminated by a virus depends to some degree on the type of banknote. Traditional paper banknotes like the U.S. dollar are probably a lot safer than plastic ones, since they have porous surfaces that are less welcoming to viruses. Polymer and coated banknotes, like what we have here in Canada, are non-porous and thus much more conducive to both virus survival and transferal to fingers.Funny enough, one of my references for the article was

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Alphabet soup

March 29, 2020

It’s that time of the economic cycle. Financial writers are flocking to the phrase alphabet soup again. This was a phrase we all adopted in 2008 to describe the hodge podge of credit facilities created by the Federal Reserve to deal with the credit crisis. Twelve years later, alphabet soup applies just as well to the Fed’s response to the coronavirus crisis.As in 2008 the Fed is currently trying to get funding into as many nooks & crannies of the credit system as it can. The easiest way to do this would be for the central bank to create a slew of new deposits and either lend them directly to corporations (and other counterparties like municipalities) or buy up already-issued corporate bonds and other debt instruments.But things aren’t that easy. The Fed’s money is taking a somewhat

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The bitcoin-to-salvia divinorum trade route

March 7, 2020

I am now writing editorial articles for Coindesk. In my first piece I explored Strike, a new app that intends to bring bitcoin payments to a mainstream audience. Coindesk allows me to repost articles after a delay. Rather than putting up the whole thing, I’m just going to take a few bits from it and try to create something new.We’ve been discussing bitcoin-as-money on this blog for almost eight years now. Since then the stuff has always been just one design flaw away from taking off as a way for regular folks to make payments. So when I heard about Strike, my curiosity was piqued. Is it bitcoin’s killer app, the one that that covers up enough of bitcoin’s nuisances that it brings bitcoin payments to a mainstream audience? Or is bitcoin so intrinsically awkward that it will always be

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Transferwise, why so fast?

February 26, 2020

This post explores some of the technological advancements that have allowed remittances to be completed in seconds rather than days.If you follow me on Twitter, you’ll often see me retweeting folks who have just made really fast remittances using Transferwise, a company that specializes in cross-border payments. Like this one:

Australia to Thailand, less than a minute.Remittance providers can achieve speeds like this by stitching together domestic 24×7 real-time payment systems, in this case Thailand’s PromptPay and/or Australia’s New Payments Platform. https://t.co/6UCdcVMFyO
— John Paul Koning (@jp_koning) February 17, 2020

No, I’m not a paid shill for Transferwise. I’m providing a public service. By shining a light on these quick remittances, I’m hoping to counteract two bad

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Cutting Martin Sellner off from the payments system

February 11, 2020

I few weeks back I learned who Martin Sellner is. If you haven’t heard of him, Sellner is a prominent Austrian populizer of remigration, the idea that non-whites living in Western nations should be sent back to where they come from.In a recent tweet from his wife, Brittany Sellner, we find out that Sellner has been kicked off of by a long list of banks and payments platforms.

List of all the banks/platforms Martin has been banned from. pic.twitter.com/FDNqjp7J21
— Brittany Sellner (@BrittPettibone) January 15, 2020

The companies that are accused of removing Sellner include German bitcoin exchange Bitpanda, a number of European banks, and payments processors PayPal and Stripe. Should we support efforts to stop prominent remigrationists from making payments? It’s a tricky question, one

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What happens when a 96 bitcoin ransom payment ends up on Bitfinex?

January 27, 2020

"Hello, to get your data back you have to pay for the decryption tool, the price is $1,200,000… You have to make the payment in Bitcoins."This is a snippet from a recent court case concerning ransomware that just crossed my desk. Companies that fall victim to ransom attacks fear the publicity it might attract, so the details of these attacks are usually swept under the table. But in this case, the ransom payer—a British insurer that traced the bitcoins to Bitfinex, a major bitcoin exchange—has appealed to the UK High Court for an injunction, thus providing us with a vivid peak into the inner workings of an actual attack.Ransomware is a big issue these days. A hacker maliciously installs software on a victim’s computers, encrypts various files, and then asks for a bitcoin ransom to fix

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Monetary policy is not a tightrope

January 26, 2020

[This is a guest post by Mike Sproul. Mike has posted a few times before to the Moneyess blog.]Here is a summary of the Federal Reserve’s Principles for the Conduct of Monetary Policy, which aims at “walking the tightrope” between inflation and unemployment:
…the central bank should provide monetary policy stimulus when economic activity is below the level associated with full resource utilization and inflation is below its stated goal. Conversely, the central bank should implement restrictive monetary policy when the economy is overheated and inflation is above its stated goal.
In contrast, here is the real bills doctrine:
Money should be issued in exchange for short-term real bills of adequate value.
The real bills doctrine was developed by practicing bankers over centuries of

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Flooding or marijuana? Two theories for falling cash demand

January 15, 2020

When Canada legalized marijuana in October 2018, the amount of banknotes in circulation took a sudden plunge. In a 2019 paper available here, economists Charles Goodhart & Jonathan Ashworth theorized that because the marijuana trade has always been conducted using anonymity-providing cash, legalization meant that Canadians could now buy pot with debit and credit cards. Thus the big drop in cash held that October.Here is one of the charts that the pair used:Source: Goodhart & Ashworth
Goodhart & Ashworth went on to suggest that October’s $1.5 billion decline in cash outstanding (1.4% of all banknotes!) provided early evidence that Canadian Prime Minister Trudeau’s 2015 promise to keep "profits out of the hands of criminals" had been successful.Hold on! said Bank of Canada researchers

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Cryptocurrency in a land of strict gambling laws

January 5, 2020

Kim Jin-Woo, K-pop star jailed for online gambling [source]
I recently read that South Korea will not be taxing capital gains on cryptocurrencies next year. Young Koreans who became paper multi-millionaires when XRP or some other cryptocurrency skyrocketed from 0.1 cents to 25 cents have reason to celebrate. They can sell without having to give up a single won of their winnings to the Korean tax authority. Letting off the crypto-rich may sound like a bad tax policy. In this post I’ll make the argument for why it isn’t. Cryptocurrency gains enjoyed by a retail clientele probably shouldn’t be taxed (nor should a big loss on their cryptocurrency holdings allow them to reduce their taxable income.) Few nations have taken to cryptocurrency with as much gusto as South Korea. In a study from

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