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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

From Circle-of-Gold to Mega$Nets to Bitcoin

11 days ago

We tend to dismiss chain letters as mere scams or frauds. In this post I want to get readers thinking about chain letters as a type of financial innovation, one that has been steadily updated over the decades.Chain letters are lists. That list is governed by a rule: the first people on the list are to be paid by the latecomers. The chain letter stop working, or paying out, when no one else wants to join up. The amount of money flowing to early-birds who joined the list is equal to the amount arriving from latecomers. No additional value gets created. That’s why chain letters are zero-sum games.The greatest technological strength of a chain letter is its decentralization. Each node, or participant, is independently responsible for receiving, copying, updating, distributing, and marketing

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Hacksilver

27 days ago

1. Over the last month or two I’ve been following an interesting archaeological debate over the discovery of coinage. I thought I’d share it with you.2. It’s generally accepted by archaeologists and numismatists that the first coins were invented in Lydia, modern day western Turkey, in the 7th Century B.C.E. (i.e. 610 B.C.E. or so). The idea quickly spread to Greece. The Lydians used electrum, a strange silver/gold mix, to make their discs. (I wrote about electrum coins here). I’ve included an example below.Electrum coin from Ephesus, 625–600 BC [Source]We don’t know exactly why the Lydians used electrum, or even if they treated their discs in the same way that future generations would use coins. But when the Greek city states copied Lydian coinage in the 6th Century, they didn’t use

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Tether, a bigger badder PayPal

March 6, 2021

My recent article on Tether, a stablecoin, was just published at Coindesk. In the article I commented on Tether’s recent settlement with the New York Attorney General’s office. Because the settlement forces Tether to adopt a bunch of new practices, I think it’s a win for stablecoin consumers. Why have I been focusing so much of my time on Tether stablecoins? Diligent readers will recall I wrote about it twice last month. (1 | 2 ).First, I’ve been writing about stablecoins for a long time now, and Tether has always been the biggest of the bunch. So it merits our attention. But it isn’t just the biggest stablecoin. These days it’s also becoming big by regular fintech standards. According to its website, Tether recently passed $35 billion in deposits, ranking it above PayPal’s $34 billion.

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Ponzis and bitcoin as a response to a bad economy: the case of Nigeria

February 22, 2021

Usually when I think about gambling and speculative excess, I’ve always associated it with giddy prosperity. When an economy is doing well, productivity is improving, new technology is being introduced, and unemployment is low, people have extra income that they can throw away at the casino. Or they put it into their brokerage account and, with the help of margin, generate speculative bubbles.But lately I’ve been rethinking this view. Speculative bubbles and over-gambling are just as likely to be driven by sick and decaying economies as they are by prosperous ones. And Nigeria is a prime example of this.Nigeria, one of Africa’s largest major oil producer, plunged into recession in 2015 as oil prices collapsed. It saw only anemic growth from 2017 to 2019 before COVID-19 pushed it back into

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Defining the “regulated” in “regulated stablecoin”

January 28, 2021

1/n This is a thread on what is means to be a "regulated stablecoin." (This was originally meant for Twitter, but I didn’t feel like wrestling with the 240-word limit and threading, plus it got a bit long, so now it’s a blog post). 2/n People in the cryptocurrency space often use the term of art "regulated stablecoin." No one has a monopoly over what "regulated stablecoin" means. It is a community-defined term. It’s not terribly well-defined. But it should be.  3/n It should be well defined because when newcomers enter the crypto space, and they have to choose what stablecoins to adopt, they may assume that those stablecoins that are tagged as "regulated stablecoins" are products that offer a degree of government-provided consumer financial protection. 4/n But are there government

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The fabrication of trust in various types of dollars

January 23, 2021

How are we consumers to know whether the dollars that financial institutions provide us aren’t fraudulent dollars? On what basis can we assume that the funds we hold at PayPal, for instance, or in Cash App, are "good money"?It’s an age-old problem. If you were alive in 1889 and someone offered to pay you with a $10 note from Banque d’Hochelaga (see below), a privately-owned Montreal-based bank, how could you know the issuer wasn’t a fraud and that it had enough assets on hand to always redeem notes with gold and/or silver?1889 $10 note, Source: Bank of CanadaThe question of fabricating trust in dollars also applies to today’s rapidly growing stablecoin sector. Stablecoins are dollars issued on public blockchains like Ethereum or Tron. Tether has an astonishing $24 billion in U.S. dollar

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The unbanked, the post office, and fintech in the 1880s

January 1, 2021

"A large population of people are excluded from the financial system because they don’t have bank accounts. Fintechs compete to connect them and parallel plans emanate from the government to reach the unbanked, including postal banking." What year am I describing in the above paragraph? It could be 2021. But it also describes 1870s. It’s 2021 and the U.S. still has a large population of unbanked, those who have so little money that banks would rather not serve them. An astonishing 5.4% of Americans—that’s 7.1 million households—do not have bank accounts.Financial technology companies (aka fintechs) like PayPal and Facebook’s Libra have well-meaning plans to connect the American unbanked population. Government-run proposals abound too. Postal banking is probably the most popular option,

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Dolphin Safe Tuna and Fair Trade bank accounts?

December 24, 2020

The Royal Bank, Canada’s largest bank, says that it won’t lend to clients that get more than 60% of their revenue from thermal coal or coal-fired power generation. Should a bank be able to avoid providing services to businesses just because they don’t engage in the sorts of activities the bank, or its depositors, approve of? Put differently, should the Royal Bank be able to avoid "dirty" loans so that it can offer its depositors the semblance a Fair Trade, or green, bank account?Critics would say that the Royal Bank shouldn’t be allowed to avoid banking coal-fire dependent companies because it operates within a “regime of privilege.” That is, the Royal Bank benefits from a system of government regulation, central bank lender of last resort benefits, Federal deposit insurance, and direct

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Judy Shelton at the Bank of Canada? No thanks

December 6, 2020

How would I feel if Judy Shelton was a candidate for Governor of the Bank of Canada? Here are my thoughts.A bit of background first. Judy Shelton was a Trump appointee to a key spot on the Federal Reserve board, the U.S.’s central bank. A President’s appointees must be confirmed by Congress, and this was probably the most heated confirmation process I’ve ever followed. Shelton has espoused several controversial view points, including a return to the gold standard. The reason this appointment is so important is because Federal Reserve board members determine American monetary policy. That is, they decide whether to pluck interest rates up or down in order to ensure that the central bank is hitting its mandated targets. That’s a pretty important job! Not only would Shelton have been in the

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Stablecoins as a route into Venezuela?

November 23, 2020

Over the last decade, few nations have experienced as much monetary and payments chaos as Venezuela has. Fans of bitcoin, Dash, and other cryptocurrencies have all tried to help by introducing Venezuelans to their preferred coin. But even with Venezuela’s bolivar currency entering hyperinflation stage, cryptocurrency adoption never happened. Circle, a U.S.-based company that issues the stablecoin USDC, is the latest to join the Venezuelan crusade. Last week it belatedly announced that it had partnered with the opposition Guaidó government  to deliver financial aid to Venezuelan health care workers. Here is Circle’s CEO, Jeremy Allaire:Breakthrough use-case for $USDC — with US Govt permission, we partnered with the exiled govt of Venezuela (@jgauido) and Airtm @theairtm to distribute aid

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

November 19, 2020

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?

November 10, 2020

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?

October 26, 2020

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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