From IOUs to Crypto | Ask the CFP practitioner

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Internet is going to be one of the main forces to reduce the role of government. One thing that is missing but which will soon be developed is reliable e-cash. ~ Milton Friedman (1912-2006); American economist and statistician, winner of the 1976 Nobel Peace Prize.

Question: Could you discuss the concept of money, digital currency and cryptocurrency?

Answer: Let’s start with an overview of money and civilization. Before the development of money, people bartered by exchanging one type of good or service for another. Ledger systems originated using IOUs or tokens like seashells, pearls, or whale teeth in exchange for credits, goods, and services. Obviously, these systems were cumbersome and lacked centralized control and monitoring.

As civilization developed, metals such as bronze, copper or tin were traded and valued as they had end use and could be used for cooking utensils or weapons. Eventually coins were issued with ratings based on the metal used. Gold and silver, due to their relative scarcity, were turned into coins and helped improve trade.

On his return from China, Marco Polo reported that paper money was used and eventually adopted as a medium of exchange around the world. Paper money was backed by a physical commodity such as gold or silver whose values ​​changed according to supply and demand. When gold and silver started to come in from the United States, or what was called the New World, the increased supply pushed up prices in Europe, in other words inflation.

In 1973, the United States and other countries abandoned the gold standard, which meant that gold reserves no longer supported paper money, leaving us with fiat money. There is no inherent value in the dollar; value is determined by trust or a shared concept of what a dollar can buy. The dollar is legal tender and is recognized by the courts as a satisfactory payment of monetary debt.

With technology we now have electronic forms of money. Most central banks study digital currencies as part of the money supply and a key factor in the global development of society. These changes are here to stay, offering benefits as well as potential risks. Today, the concept of money includes more than hard currency, with paper and coins making up only a small percentage of transactions.

Stablecoins are a type of cryptocurrency linked to a hard currency. Stablecoins can improve payment efficiency, speed up settlements, and reduce costs, but they don’t offer the same protections as conventional payment systems like your bank account. Banks are required to hold a certain percentage of deposits in reserve. The rest can be loaned, thus increasing the money supply. There are a number of measures of money supply reflecting varying degrees of liquidity. The monetary base includes the currency in circulation and the reserves of banks and other depository institutions held at the Federal Reserve (the Fed).

The Fed creates money by buying treasury securities from commercial banks using money it literally creates out of thin air, then crediting commercial banks with bank reserves which are multiplied by the reserve banking system fractional. Banks must hold a certain percentage of deposits in reserve to provide liquidity to depositors; the rest can be loaned. Loans are made with excess reserves and further increase the money supply. The Fed raises or lowers interest rates to influence and adjust bank reserves.

Bitcoin, Ethereum, and Dogecoin are cryptocurrencies or digital assets that use ledger technologies, such as blockchain, to secure transaction records and verify transfers. Cryptocurrencies are an elaborate and elegant but limited medium of exchange. Currently, digital currencies can only be used to purchase a small number of goods and services, and transaction fees tend to be high. They can store value, but as we see the values ​​change drastically from day to day. Currently, cryptocurrencies are not an easily acceptable, recognizable, or convenient way to make payments.

Some critics liken cryptocurrencies to a pyramid scheme and point out a number of negatives. Cryptocurrencies are widely used in money laundering, the illegal drug trade, and other criminal activities. It is no different from paper money when it is used for evil rather than good intentions. Another complaint is that a large amount of energy is used when mining new cryptocurrencies, which adds further concerns about the impact on the environment. Despite its convenience and value, digital currency is extremely controversial. People have a love-hate relationship for it.

The Fed is studying the risks and rewards of digital coins from centralized banks and will release a discussion paper summarizing its findings later this summer. In the meantime, stay focused and plan accordingly.

The opinions expressed are those of the writer as of July 11, 2021, but not necessarily those of Raymond James and Associates, and are subject to change at any time. The information in this report has been received from sources believed to be reliable, but its accuracy is not guaranteed. Past performance is no guarantee of future results. Every investor situation is unique and you should consider your investment objectives, risk tolerance and time horizon before making any investment. Before making an investment decision, please consult your financial advisor about your personal situation. Bitcoin issuers are not registered with the SEC and the bitcoin market is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involve a high degree of risk.

Certified Financial Planner Board of Standards Inc. holds the CFP, CERTIFIED FINANCIAL PLANNER, CFP (with plate design) and CFP (with flame design) certification marks in the United States, which it awards to individuals who successfully complete the initial and continuing certification requirements of CFP boards. .

This article is provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange / SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. It can be reached at (239) 389-1041, by email at [email protected] Website: www.raymondjames.com/Darcie.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER ™, CFP® (with a plate design) and CFP® (with a flame design) in the United States, which it awards to individuals who successfully complete the CFP Board initial and ongoing certification requirements.

This article is provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange / SIPC 606 Bald Eagle Drive Suite 401, Marco Island, FL 34145. She can be reached at (239) 389-1041, e-mail [email protected] Website: www.raymondjames.com/Darcie.

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