Cryptocurrencies: False radicalism or the new smart economy?

One of the most popular debates in today's economic world is whether cryptocurrencies are a big Ponzi or not. While some claim that cryptocurrencies, including Bitcoin, are one of the biggest Ponz

i schemes in history, others say that, on the contrary, cryptocurrencies are real saviors that will stop the financial world from robbing ordinary people.

In my opinion, the struggle between these two different views, in this context, will only lead us to a sterile and obvious conclusion: the trading of all kinds of private and virtual money, illegal and unregulated, will eventually fail to exceed the depth of a casino economy. On the other hand, if viewed from a much different perspective, cryptocurrencies can lead us to become a part of the new smart economy. Let's examine together the shift in perspective regarding this new smart economy.

First of all, if we had to put forward the “real” problems in the international monetary system, the first ones that come to mind would be the following:

1. At the beginning, the money creation process is problematic because money is created from nothing by banks.

2. This money created from nothing by banks goes to the FIRE Finance, Insurance and Real Estate sector instead of production and infrastructure, creating deep economic crises.

3. This created money cannot be used efficiently and effectively in international trade because international payment systems are still very primitive.

4. There is a huge gap between the rank of the USA in global trade and the usage rate of USD in international trade. This dependence on the dollar prevents the establishment of a fair and effective world trading system.

Let's start with the "mother" of all economic and politic problems today. In fact, it has been a debate among economists for a long time: Can banks create money from nothing? Is the main problem of today's world economy this huge financial oligarchy created by private banking?

Mostly three hypotheses are put forward in the economic literature for money and banking sector. According to the financial intermediation theory of banking, banks are merely intermediaries like other non-bank financial institutions; first collecting deposits then lent out. With regard to the fractional reserve theory of banking, individual banks are mere financial intermediaries that cannot create money, but collectively they end up creating money through systemic interaction. A third theory, the credit creation theory of banking, claims that each individual bank has the power to create money ‘out of nothing’ when it gives credit.

Although credit creation theory was the generally accepted dominant view from the end of the 19th century until the 1920s, especially with the neoliberal economic movements of recent years, the idea that banks are simple commercial

intermediaries has also been accepted by many "famous" economists. It is very interesting to see that since the 1930s, economists have moved further and further away from the reality, instead of coming closer to it. This happened first through the half-truth of the fractional reserve theory and then reached the completely wrong and misleading financial intermediation theory that today is so dominant.

In reality, banks create fiat currency from nowhere whenever they make a loan. Considering that the financial center of the world is the USA, this enormous money created by US banks is largely spent on purchasing existing assets, rather than on infrastructure, production or advanced technology investments. In USA, approximately 80% of bank loans are mortgage loans for transferring real estate ownership. Banks now play the role that landlords played several hundred years ago. There is a kind of return of capitalism to feudalism in the West; much more financialized downgrade than feudalism was in the Middle Ages.

The reality of banks as creators of the money raise the question of the ideal type of monetary system worldwide. The most important problem of today's dominant monetary system is that this huge money created from nothing by banks is largely channeled to the FIRE Finance, Insurance and Real Estate sector, instead of the real economy.

FIRE sector uses derivative markets to handle this incredible amount of money created in the banking industry. So much so that in 2008 the notional amount of "money" invested in OTC derivatives was $673T. US GDP was around $14.5T and global GDP in the same year was about $61T. Following the 2008 financial crash, commercial banks continued to spend a lot of money into the derivatives market. No one really knows how big the "notional" value of the current derivatives market is.

Following the 2008 financial crash, caused by the manipulation in the financial derivatives market by creating money out of nothing; the US government injected $250B of capital into the commercial banks. This was in addition to the $700B purchase of the banks junk assets and a senior debt underwriting package worth $1.5T (trillion), including $500B deposit assurance for business accounts. This amounted to an initial $2.45T bank rescue mission in the US alone.

Obviously, we have a real trouble: alliance of central banks and big banks have done much to create unsustainable asset bubbles and banking crises.

Could cryptocurrencies, or more broadly defined - tokenization - be a part of the solution to deal with this most fundamental problem of our day at the macro level? Can the emphasis on "value in motion" of capital, especially in Marxist political economy, be the mainstay of the new monetary system? What doors can be opened by evaluating new advanced technologies and token economy in this context? My answer is this: The crypto economy and tokenization in the broad sense should be

included as legal digital assets within the framework of new technological payment systems. Because in many cases, finance can be provided through tokenization within its own ecosystem, instead of money created and provided from outside – by parasite sector! In many business projects, it is possible for the parties that make up the ecosystem to solve their financial needs within that ecosystem with the tool that we call -tokenization. Without any need for external money. This is a very radical and important development that will prevent traditional money, which is created out of nothing by banks, from taking part in projects through credit financing. Therefore, crypto economy can be a part of solution but crypto exchanges are not!

For the production of cryptocurrencies, we do not need crypto exchanges, but real business projects where crypto assets will be used as value carriers. Therefore, the crypto economy can only make sense if it remains a tool of the real economy.

When it comes to digital money, of course the most important change and impact on the economy will come with the use of central banks' digital currencies. Central banks' digital currencies (CBDC s) will change the thousands of years of history of money in the very near future. With CBDCs and block chain technology, digital management of the economy will be technologically possible through sovereign states and their elected governments. The real radical, revolutionary transformation is here. If democracy requires elected representatives to be decision makers in economic management, for the first time in history, an opportunity emerges for all economic processes to be implemented by the representatives of the people, without intermediaries. We estimate that this opportunity will also accelerate the rise of mixed economies and their elected governments. In other words, we can claim that politics will also gain importance - in a positive sense.

So far, to summarize briefly, we urgently need to replace an -unsustainable- monetary system in which money is created from nothing by banks and huge unregulated derivative market bubbles: We should introduce CBDCs and we need to build the tokenization economy at the same time.

Furthermore, Marxist political economy concept that is “value in motion” can be an important tool for the development of international trade systems by the new technological products. When money is stored, it does not fulfill its function as money capital. Capital as value in motion, takes on different identities by going through various transformation cycles by turning into 'use values' consumed by businesses and households. But this kind of monetary movement will only take action when it has sufficient information. Its movement will only take place when the relevant conditions about the counterparty are met.

Therefore, knowledge about processes and actors is a necessary condition for the release of money in processes of economic exchange and broadly international trade. In this sense “information” organizes and builds the economy. Any blockages to the smooth flow of information are, consequently, costly to economic agents and to the

system as a whole. Then we need more and more credit with the higher cost, to cover these economic losses. Didn't we experience exactly this situation during the pandemic?

If we think of capital as money or other forms in flow in this way, we will need to focus on block chain technology and emphasize new technologies that will change the entire world economy and especially international trade. On the other hand, virtual currencies that are static and have supposed inherent value, as in crypto exchanges, can only create opportunities for a fetishistic Ponzi economy. For this reason, corporate block chain projects in China also include a newly developing economic perspective that aims to move from the internet economy to a "public IT" economy.

So, do we know enough about how the corporate applications of this block chain economy we are talking about are carried out in China - in practice? Is China an important implementer and representative of this new smart economy?From an economic policy perspective, block chains with Chinese characteristics are mainly about creating trustful information flows as part of value flow systems.

In this regard, block chains with Chinese characteristics aren’t so much about money, as was the case with cryptocurrencies. Rather, block chains with Chinese characteristics are related with notions of value as systems of flow, in which value resides not in money but in the information about processes and agents.

The digitalization of RMB in China is actually the beginning of a process. The extent to which eRMB will be involved in cross-border transactions is closely related to the development and rollout of block chain networks that can interoperate with distributed information networks being developed in China. Importantly, the nature of multipolar information systems, which reduce the risks of information circulation, provides the basis for allowing multiple parties to 'do business with each other' regardless of the currency involved.

China treats money and credit as a public utility allocated by government instead of letting the monopoly privilege of credit creation be privatized by banks.

On the other side, in the USA, one of the two largest economies in the world, the creditor One Percent has become a politically powerful oligarchy despite nominal democratic political reforms expanding voting rights. The US banks and Wall Street, and the city of London are the “central planners”. We have a central planning much more centralized than anything that was dreamed by the socialists. But the centralized planning is done by the financial sector. Most Western credit today is created to inflate stock, bond and real estate prices, not to improve technological or industrial ability.

As a result, in order for the revolutionary nature of the crypto economy to develop, we must first accept that the real problem of the current world financial system is the credit creators who represent the 1%, that is, the banking system that produces money from nothing, and its supporter, the US government. If we further look at the concept of capital as money in motion or other forms of carrying value, we can see that new high technologies, especially CBDCs, tokenization on project finance and block chain technology, create tremendous possibilities. In the very near future, we have to pay attention to China's practical work in these fields and ensure cooperation. Thus, instead of meaningless "crypto cult" or "crypto Ponzi" activities and discussions, we can pave the way for real radical economic revolutions aimed at social inclusion and equality.

Ulusoy Erdoğan Economist, BSN Türkiye Board Member, İstanbul Digital Economy Club President