The FTX Fiasco Demonstrates the Utility of Analog Currency...Again

With the downfall of FTX, cryptocurrency is getting another black eye. The valuations shrink and those who bought cryptocurrency in the last few years are looking at huge losses. Sam Bankman-Fried is persona-non-grata now. The FTX implosion is a warning to all that the world now runs on Internet time AND that includes the money world. Remember it is not just cryptocurrency tokens that are digital money. Most money everywhere is digital.

Sending money via our smartphones is convenient, but is it in our best interest? Already some countries are nearly free of physical money with most transactions being done digitally. There is an extreme disconnect in some of these countries between the assets stored digitally as savings and checking accounts and the actual physical currency available. In New Zealand, there is only enough physical money to cover about 5% of the money in citizen accounts. If 6% of New Zealand citizens withdraw their money due to some panic, the system would be in crisis and perhaps even collapse.

One could be forgiven for seeing today’s digital improvements as far superior. Ironically in the Information Age, information is more controlled than ever before. The digital revolution now allows for more control of the distribution of information rather than facilitating a wide distribution of useful knowledge. Digital money of all kinds has made things more opaque for average people.

During the Great Recession, the run on the banks was significant. Wealth was fleeing American financial institutions very quickly in the summer of 2008. The flight of “digital cash” nearly crashed the financial system. The reasons to move back to Glass-Steagall and other regulations born from the Great Depression seem quite justified when one sees some of the numbers, but I digress.

The Great Recession of 2008 was a Great Warning. It was a warning that things can move dangerously fast in digital finance, not just cryptocurrency. FTX should be the final proof anyone needs that cryptocurrencies are some kind of “safe haven” from things like the Great Recession or the Great Depression. Cryptocurrencies are an evolving tool in an ever more complicated financial world, but they are no silver bullet.

A possible positive outcome from the crash of FTX could be a slowing of the movement to eliminate analog cash. There is no question that analog money can be a throttle on finance. Physical transactions must take longer than digital ones. In that light though, analog cash can be a stabilizing factor because things just take longer to move through the systems. Analog cash also forces transparency on the financial markets.

Transparency is the great gift of analog cash. The elimination of cash has made things predictably more opaque. Digital cash ESPECIALLY digital cryptocurrencies hide terrible things behind the scenes and then collapses quickly. The collapse of FTX illustrates demonstrates the speed.

In the late 20th century, when the savings and loan crisis roiled American financial systems, I learned of it because I saw a line outside of Tahoe Savings and Loan in Rancho Cordova, CA. There was a physical manifestation to the savings and loan crisis. Even before it really started showing itself in the financial markets, I saw lines begin to form at some local savings and loan institutions.

A cryptocurrency exchange has no physicality. Insiders probably started queueing up early to get their money out of FTX, but no one saw it. Regular accounts on the exchange had no idea what was happening. No one was watching traffic to FTX. There were no lines out of the FTX offices. It just went, Poof!

Analog cash does act as a throttle on how quickly things can get really bad. We on the street get to know a bit more about what is truly going on in the financial markets when there is more physical cash. I fear a completely opaque system operated by greedy robber barons. Analog cash prevents COMPLETE opacity. Regular people should preserve that as much as possible.

Let me be clear here. I have some cryptocurrencies. I definitely think there is a place for them in this world. Mostly, I decided to park some money in the crypto space to wait and see. Depending on how this epic battle between the super-rich libertarians and the all-powerful nation-states works out, things like Bitcoin, Ethereum, and Dogecoin may still have their place as cash alternatives.

Cash is king, but cash is a friend of the regular people, too. Do not forget this. If a person split their pandemic stimulus check between cash put in a cookie jar and crypto, I hazard a guess the cookie jar would be worth more than any crypto holdings accumulated. Though, if they were smart they still have their crypto in a hardware wallet.

Despite FTX, I continue to HODL cryptocurrencies, even if cash is still king to me. I am proud of the fact the book I wrote on cryptocurrency is just as valid today as when I wrote it well over a year ago. If you bought that book then, you were not on FTX when it imploded.