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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

The life and death of an internet monetary meme

3 days ago

Over the last few years I’ve increasingly crossed paths with the following claim on the internet: "The average life expectancy for a fiat currency is 27 years." Is this claim true? What definitions are being used? I mean, are we talking about inconvertible paper money here, or currency that was convertible into gold, too? I finally got curious enough that I decided to chase down the source of this meme. After all, without knowing what data it is based on, it’s hard to evaluate the claim’s truthfulness. Below I give a description of my trek through internet history.The average-life-of-fiat meme has become particularly popular among cryptocurrency types. For instance, here is Jimmy Song, a popular bitcoin educator/developer, confidently invoking the slogan back in 2017:
"When a society

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Why the discrepancy?

21 days ago

Vitalik Buterin had a thought-provoking tweet a few days back about interest rates.

Lending DAI to Compound offers 11.5% annual interest. US 10 year treasuries offer 1.5%. Why the discrepancy?
— Vitalik Non-giver of Ether (@VitalikButerin) August 23, 2019
Today’s post explores what goes into determining interest rates, not blockchain stuff. So for those who don’t follow the blockchain world, let me get you up to speed by decoding some of the technical-ese in Buterin’s tweet.DAI is a version of the U.S. dollar. There are many versions of the dollar. The Fed issues both a paper and an electronic version, Wells Fargo issues its own account-based version, and PayPal does too. But whereas Wells Fargo and PayPal dollars are digital entries in company databases, and Fed paper dollars are

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Starbucks, monetary superpower

August 22, 2019

I recently spent some time on Twitter musing about the monetary wonders of Starbucks:

Wow Starbucks, what a great gig. Starbucks has ~$1.6 billion in ‘stored value card liabilities’ i.e. the Starbucks Card. So ~6% of the firm’s liabilities are comprised of coffee addicts paying 0% for the privilege of lending to their supplier.
Source: https://t.co/nGH2arujYz pic.twitter.com/cGcSW3L4MM
— JP Koning (@jp_koning) August 11, 2019
Starbucks has around $1.6 billion in stored value card liabilities outstanding. This represents the sum of all physical gift cards held in customer’s wallets as well as the digital value of electronic balances held in the Starbucks Mobile App.* It amounts to ~6% of all of the company’s liabilities. This is a pretty incredible number. Stored value card liabilities

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Stigmatized money

August 5, 2019

Some payments systems are so awkward they scare away the average user. The only people with the patience to stick around must have a motivation for doing so. These include ideologues with an ax to grind, hobbyists who happily embrace complicated features, and criminals/weirdos who are shut out of everything else. Here are a few examples of awkward payments systems:-Local Exchange Trading Systems, or LETS
-Bitcoin/Dogecoin
-Labor notes
-Stamp scrip When usage of a payments system is confined to a narrow group of like-minded individuals, this may stigmatize these systems, scaring away mainstream users. Stigmatization only compounds the initial awkwardness. After all, if fewer venues accept the stigmatized payments option then it becomes harder for the small band of users to make

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Classifying cryptocurrencies

July 5, 2019

Whenever biologists stumble on a strange specimen, they first try to see if it fits into the existing taxonomy. If it doesn’t fall within any of the pre-existing categories, they sketch out a new one for it.For people like myself who are interested in monetary phenomena and finance, Bitcoin and other cryptocurrencies like Dogecoin and Litecoin have presented us with the same challenge. How can we classify these strange new instruments?Because they have the word ‘currency’ in them, the knee-jerk reaction has been to put cryptocurrencies in the same bucket as so-called fiat money, i.e. instruments like bank deposits and banknotes. But this is wrong. Bitcoin, Dogecoin, and other cryptocurrencies are fundamentally different from $100 bills or Citibank deposits.  To see why, here is a chart

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Esperanto, money’s interval of certainty, and how this applies to Facebook’s Libra

June 25, 2019

Facebook recently announced a new cryptocurrency, Libra. I had earlier speculated about what a Facebook cryptocurrency might look like here for Breakermag. I think this is great news. MasterCard, Visa, and the various national banking systems (many of which are oligopolies) need more competition. With a big player like Facebook entering the market, prices should fall and service improve, making consumers better off. The most interesting thing to me about Facebook’s move into payments is that rather than indexing Libras to an existing unit of account, the system will be based on an entirely new unit of account. When you owe your friend 5 Libras, or ≋5, that will be different from owing her $5 or ¥5 or £5.  Here is what the white paper has to say:
"As the value of Libra is effectively

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Is bitcoin getting less volatile?

June 13, 2019

I’m going to make the following claim. The price of bitcoin is inherently volatile. Even if bitcoin gets bigger, its core level of volatility is never going to fall. Bitcoin’s hyperactive price movements prevent it from becoming a popular medium of exchange. Merchants are too afraid to accept bitcoins. If they do, they could experience large losses. Consumers who hold bitcoins are loath to spend them. Many of these hodlers are trying to change their financial lives by getting exposure to the very same roller-coaster ride that merchants are trying to avoid. If they use their bitcoin to buy stuff, they risk losing out on the opportunity for life-changing returns.Why is bitcoin’s high volatility intrinsic to its nature? Bitcoin is a rare example of a pure Keynesian beauty contest. Players

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Revisiting stablecoins

May 28, 2019

Source: Gravity Glue (2014)
Cryptocurrencies were supposed to destroy the traditional monetary system. Ten years on, where are we?Bitcoin has been wildly successful, but as a financial game–not as a medium of exchange. It’s a fun (and potentially profitable) way to gamble on what Keynes once described as what "average opinion expects the average opinion to be." But no one really uses it to pay for stuff. It’s nature as a gambling token makes it too awkward to serve as a true substitute for banknotes and credit cards.A number of stablecoins have emerged over the last five or six years. (I first wrote about stablecoins four years ago). Like bitcoin, stablecoins exist on a blockchain. But unlike bitcoin, these tokens have a mechanism for ensuring their stability. Stablecoin owners can

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Kyle Bass’s big nickel bet

May 10, 2019

In 2011, hedge fund manager Kyle Bass reportedly bought $1 million worth of nickels. Why on earth would anyone want to own 20 million nickels? Let’s work out the underlying logic of this trade. A nickel weighs five grams, 75% of which is copper and the rest is nickel. At the time that Bass bought his nickels, the actual metal content of each coin was worth around 6.8 cents. So Bass was buying 6.8 cents for 5 cents, or $1.36 million worth of base metals for just $1 million. To realize this 6.8 cents, Bass would have to sell the copper and nickel as metal, not coin. But liberating the actual metal from each token isn’t so easy. Since 2006 it’s been illegal to melt pennies and nickels down. As a regulated hedge fund manager, Bass probably isn’t willing to break the law. Which means he’d

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The difference between two colourful bits of rectangular paper

April 29, 2019

David Andolfatto had a provocative and open-ended tweet a few days back:

The difference between money and debt. pic.twitter.com/CSQuLzUJPU
— David Andolfatto (@dandolfa) April 26, 2019

We see two coloured pieces of paper, both with an old dead President on it. They each have a face value of $500. Both are issued by a branch of the government, the $500 McKinley banknote (at right) by the Federal Reserve while the $500 Treasury bond (at left) by the Treasury. Both are bearer instrument: anyone can use them.So why do we bestow one of them the special term "money" while the other is "credit"? I mean, they seem to be pretty much the same, right?The word money is an awful word. It means so many different things to different people that any debate invoking the term is destined to go off-track

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Supernotes

April 17, 2019

The U.S. $10,000 was available till Nixon nixed it in 1969
For the last few years the conversation about cash has been dominated by Ken Rogoff’s proposal to remove high-denomination banknotes. In an effort to broaden the discussion, last year I wrote an essay for Cato Unbound about introducing a new U.S. supernote. The value of the current highest denomination note–the $100 bill–has deteriorated over the decades thanks to inflation. Is it time to restore the purchasing power of U.S. cash by bringing out a $1,000 note?In the same essay I also floated the idea of taxing the supernote. Why a tax? A new $1,000 bill could be used for both good and nefarious purposes. Given that nefarious supernote usage (tax evasion and crime) could impose costs on society, a tax would make up for this by

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Banknotes in bottles in coal mines

April 4, 2019

[This is a guest post by Mike Sproul. Here are a few previous posts by Mike that I’ve posted to the Moneyess blog.]“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principles of Laissez Faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical

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Prepaid debit cards. The other anonymous payments method

April 1, 2019

When it comes to financial privacy, good old fashioned banknotes and privacy cryptocurrencies like Zcash & Monero get all the attention. But as I recently wrote for the Sound Money Project, let’s not forget about prepaid debit cards.Having written a bunch of posts over the last two years about financial privacy, I recently decided that it was time to step up my own personal financial privacy game. A few months ago I walked into my local pharmacy and bought my first non-reloadable prepaid debit card (i.e. gift card), a Vanilla card. You’ve probably seen the rack of prepaid cards near the front of pharmacies and department stores. Some of them are closed-loop cards. They can only be used to buy things at the issuer, say Tim Horton’s or Starbucks. But some of them, like my new Vanilla

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Should governments finance themselves through their central bank?

March 28, 2019

In places like the U.S. and Europe, it is actually difficult—if not impossible—for a government to have its central bank pay for government programs. All government spending must be financed by issuing bonds to the public or collecting taxes. Canada, my home country, is an interesting counter-example. The financial relationship between the Federal government and the Bank of Canada—our central bank—is fairly permeable. The government has the authority to ask the Bank of Canada to directly fund a portion of its spending.This avenue is rarely taken, however. Justin Trudeau, our current Prime Minister, currently uses bonds and taxes to fund almost all of the Federal government’s spending. Just one small and unknown government program is directly funded by the Bank of Canada: the prudential

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Swish > cash and bitcoin

March 4, 2019

Ok, another Sweden post. I keep returning to Sweden because no country has gone further down the road to being cash-free. Since all of us seem to be following the same trajectory, we should probably be paying attention.Lucky for us, every two years the Riksbank—Sweden’s central bank—-carries out a payments survey and puts the data up on its website. One of the most interesting questions that is asked is "which of the following payments methods have you used in the last month?" I plotted out some of the data and tweeted the result:

Sweden is at the forefront of digital payments. I made this chart with data from the Riksbank payments survey: https://t.co/WTZlFYOl2Y:
1. Debit cards are universal, beating out credit
2. Cash use is plunging but still high
3. Swish adoption is exploding
4. Not

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Death of a Northern Irish banknote

February 20, 2019

I was disappointed to see that First Trust Bank, a commercial bank based in Northern Ireland, will stop issuing its own brand of banknotes. Under different names, First Trust has been in the business of providing paper money for almost two hundred years, starting with the Provincial Bank of Ireland back in 1825.Source: First Trust
99.9% of the world’s population uses government-issued banknotes. A small sliver of us—those who live in Northern Island, Scotland, Hong Kong, and Macau—get to use privately-issued banknotes. Prior to First Trust’s announcement, I count twelve private issuers scattered across the globe:Northern Ireland: Bank of Ireland, Danske Bank (formerly Northern Bank), First Trust Bank, and Ulster BankScotland: Bank of Scotland, Clydesdale Bank and The Royal Bank of

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The Haitian dollar

January 30, 2019

Haiti is home to a strange monetary phenomenon. Shopkeepers and merchants set prices in the Haitian dollar, but there is no actual thing as the Haitian dollar. I’ve written before about an exotic type of unit-of-account known as an abstract unit of account. A nation’s unit of account is the symbol used by its citizens and businesses to advertise and record prices. Here in Canada we use the $ while in a country like Japan people use the ¥. The national unit of account almost always corresponds to the national medium-of-exchange. In both Canada and Japan, the $ and the ¥ amounts advertised in shop aisles are embodied by physical dollar and yen banknotes and coins.Abstract units of account, on the other hand, don’t correspond to anything that exists. In the UK, for instance, race horse

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Should we have to line up for money or not?

January 3, 2019

I finally had some time to read George Selgin’s excellent Floored! over the Christmas holiday. Some family members saw me reading the book and asked me what it was about. The subject that George is tackling—two types of central bank operating systems—is quite technical, so I wasn’t sure how to break it down for them. But in hindsight, here’s how I would go about it. I’m going to explain what the issues are in terms of an instrument we all use and understand: good ol’ fashioned banknotes. 
——-

Imagine that when you go to your bank this morning to withdraw $200 in cash, you can only get $100 out of the ATM. The bank manager says that it is expecting another shipment of cash later in the day, so come back then. But be early, he warns, since a lineup is sure to develop. What explains

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Swedish betrayal

December 27, 2018

I recently wrote two posts for the Sound Money Project about Swedish monetary innovation. The first is about an effort by the Swedish central bank—the Riksbank—to force retailers to accept cash, and the other is about the e-Krona, a potential Riksbank-issued digital currency. This post covers a third topic. For many years now those of us who are interested in cash, privacy, and payments have had our eye on Swedish banknote demand. The amount of paper kronor in circulation has been declining at a rapid pace. Many commentators are convinced that this is due to the rise of digital payments. Since Sweden is at the vanguard of this trend, it is believed that other nation’s will eventually experience similar declines in cash demand too. But I disagree. While digital payments share some of

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Christmas and cash

December 23, 2018

Merry Christmas and Happy New Year to all my readers. And to everyone who left a comment this year, thank you. It’s always fun to debate things over in the comments section and I feel it makes the blogs themselves stronger. Don’t forget to check out the discussion board where we had a number of interesting discussions in 2018.The last time I published my Christmas cash usage chart was in 2015. I figured it was high time to update it:

The annual Christmas spike in U.S. banknote demand is getting harder and harder to pick out in the chart. So are the monthly upticks coinciding with payrolls. Most people are getting pretty comfortable buying stuff with cards. And so they are less likely to take cash out of an ATM before the holiday chaos or withdraw grocery money after a paycheck has been

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Can lottery tickets become money?

December 12, 2018

Say that the local lottery system has decided to innovate. Lottery tickets can now be used as money. A ticket with a face value of $x can be used to buy $x worth of stuff at any checkout counter in the country. Or they can be held in digital form and transferred instantaneously across the lottery’s new payments system to friends, the utility company, or the government tax department. With the payments infrastructure in place, will people actually use lottery tickets to pay their bills, transact with friends, or settle their taxes? Can lottery tickets become money-like?I’m skeptical. Here’s my thinking. Say that Jane has just bought $10 worth of digital lottery tickets. At the same time she’s chosen to leave $10 in her bank account (she likes the fact that they aren’t risky). She spies

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No, Ohio isn’t accepting bitcoin tax payments

November 28, 2018

Anthony Pompliano, or Pomp, is at it again. Some of you may recall his odd claims about bitcoin adoption in Argentina, which I took apart here. Well, the following tweet wandered onto my twitter stream a couple of days ago.

For more, here is the Wall Street Journal.So let’s get this straight. The Ohio state government is not accepting bitcoin as payment for taxes. Rather, it is sponsoring a gateway that allows business owners to offload their bitcoins on the market in the moments prior to tax settlement. The actual tax obligation will be settled in actual dollars. Take a look at the FAQ at ohiocrypto.com.
"At no point will the Treasurer’s office hold cryptocurrency. Payments made on OhioCrypto.com, through our third party cryptocurrency payment processor partner BitPay, are immediately

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The demonetization gap

November 13, 2018

Two years ago, Indian PM Narendra Modi suddenly demonetized all of the nation’s ₹1000 and ₹500 banknotes. His stated goal was to exact justice on all those holding large amount of dubiously-earned cash. But since these two denominations constituted around 85% of India’s currency supply, the demonetization immediately threw the entire nation into chaos.After suffering from a nine-month note shortage, enough new notes were printed to meet India’s demand for cash. But in the interim, what had happened to Indians’ demand for cash? Did their experience with demonetization lead them to hold less cash than before, or did they simply revert to their pre-demonetization habits and patterns? I wrote an article in September 2017 dealing with these questions. With another year having passed we now

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The credit theory of money

November 4, 2018

Over on the discussion board, Oliver and Antti suggest that I read two essays from Alfred Mitchell-Innes. Here are a few thoughts.  A British diplomat, Mitchell-Innes was appointed financial advisor to King Chulalongkorn of Siam in the 1890s as well as serving in Cairo. He eventually ended up in the British Embassy in Washington where he penned his two essays on money. The first, What is Money, attracted the attention of John Maynard Keynes, while the second essay, The Credit Theory of Money—which was written in 1914—expounded on his views. Both are interesting essays and worth your time. One of Mitchell-Innes’s main points is that all money is credit. This may have been a controversial stance back in 1914, when people were still very much focused on metallic money, but I don’t think

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Gold regulators

October 23, 2018

While our modern monetary system certainly has plenty of detractors, one of its successes is that we no longer need the services of the local gold regulator. In the late 1700s, the job of a gold regulator was to assay gold coins to determine if they were of the appropriate weight and fineness, modifying (ie ‘regulating’) the coin if necessary. When he was done, the gold regulator stamped the coin with his seal of approval and put it back into circulation.The job of regulating coins may seem strange to us. But it was an ingenious way to cope with the lack of standardization that bedeviled monetary systems in the 1600 and 1700s, particularly in the colonies. There was no domestic supply of coins in North America back then, so settlers relied on a bewildering array of foreign coins as

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Bitcoin and the bubble theory of money

October 13, 2018

A few months ago Vijay Boyapati asked me to "steel-man" the bubble theory of money. The bubble theory of money, which can originally be found in a few old Moldbug posts, has been used by Vijay and others to explain the emergence of bitcoin and make predictions about its future.So here is my attempt. I am using not only an article by Vijay as my source text, but also one by Koen Swinkels, a regular commenter on this blog. Both are interesting and smart posts, it’s worth checking them out if you have the time. Steel-manning the bubble theory of money and bitcoin1. Unlike a stock or a bond, which is backed by productive assets, bitcoin cannot be valued using standard discounted cash flow analysis. And since it has no intrinsic uses, it can’t be valued for its contribution to various

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Are Argentinians paying for Uber rides with bitcoins?

September 26, 2018

Earlier this month the following tweet elbowed its way onto my Twitter timeline:

The tweet comes from Anthony Pompliano, aka Pomp, who works at Morgan Creek Digital Asset where he runs a cryptocurrency fund.So, have I been wrong all along about bitcoin? As anyone who has been reading me for a while will know, I’ve been skeptical of the bitcoin-as-money story. Rather than fulfilling Satoshi Nakamoto’s vision as being a next generation medium of exchange, bitcoin has gone mainstream as a new type of gambling technology—an exciting decentralized zero-sum financial game. This is a somewhat useful role, but let’s face it, it’s not quite as revolutionary as digital cash.But if Argentinians are indeed hailing rides and paying drivers directly with bitcoins, as Pompliano seems to be saying,

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Did Brexit break the banknote?

September 23, 2018

Nations never experience year-over-year declines in cash in circulation. Sweden (which I wrote about here, here, and here) is one of the rare exceptions. India is another, but this was due to its notorious botched demonetization attempt (which I wrote about here, here, here, and here). But now the UK seems to be joining this small group of outliers. Why does a nation’s cash in circulation generally grow consistently from one year to the next? While economies do experience the odd recession, in general they are always improving. Improving economies coincide with more demand to make transactions, and for this the public needs to have greater amounts of cash on hand. There is a counter-cyclical element to cash holdings. When recessions occur, people often turn to unofficial sectors of the

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“The Narrow Bank”

September 8, 2018

A strange new bank called TNB, or The Narrow Bank, recently applied to get a clearing account at the Federal Reserve Bank of New York, only to be refused. Funny enough, TNB is run by the New York Fed’s former director of research James McAndrews, who left in 2016 in order to get the bank up and running. McAndrews and TNB are now suing the New York Fed.There’s a backstory to all of this kerfuffle. While still employed by the New York Fed, McAndrews coauthored a paper in 2015 entitled Segregated Balance Accounts. The paper proposed a solution to the following problem. Interest rates in wholesale lending markets were refusing to align with each other. Wholesale markets are the sorts of markets which neither you nor I have access to but are reserved for large institutions. For some

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Norbert’s gambit

August 31, 2018

I executed one of the oddest financial transactions of my life earlier this week. I did Norbert’s Gambit.These days a big chunk of my income is in U.S. dollars. But since I live in Quebec, my expenses are all in Canadian dollars. To pay my bills, I need to convert this flow of U.S. dollars accumulating in my account to Canadian dollars. Outsiders may not realize how dollarized Canada is. Many of us Canadians maintain U.S. dollar bank accounts or carry around U.S. dollar credit cards. There are special ATMs that dispense greenbacks. Canadian firms will often quote prices in U.S. dollars or keep their accounting books in it. I suppose this is one of the day-to-day quirks of living next to the world’s reigning monetary superpower: one must have some degree of fluency with their money.

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