Bitcoin notes will transform bitcoin from a decentralized payment option into a viable global currency. These notes will create multiple manifestations of bitcoin, each with its own local features, but all with the common value of bitcoin underneath.
So what is a bitcoin note? A bitcoin note is simply an IOU that requires payment in a fixed amount of bitcoin on demand. It is similar to a bank account in dollars. It is not technically bitcoin, but so long as the issuer of the IOU is highly credit worthy it will be accepted as bitcoin just like debit card payments in dollars are accepted as dollars. The notes can also have features unique to the note issuer, but these features do not change the fundamental value of the note as bitcoin.
The purpose of a bitcoin note program is to improve upon bitcoin as a payments method while maintaining the underlying integrity of bitcoin as a decentralized store of value.
Bitcoin note programs can be centralized or decentralized. Centralized programs have the benefit of being able to create a payments system in bitcoin similar to what we have today in dollars. Decentralized programs may also be created to add or change features of bitcoin while maintaining decentralization.
Below is a description of three broad categories of note programs.
Government issued bitcoin notes
This is the fastest route to the adoption of bitcoin as a global currency. A government replaces its fiat currency with government-issued, bitcoin notes. Banks and card networks adopt the new currency, resulting in a payment experience identical to that of dollars. The government starts the process by buying bitcoin reserves in the market with the new currency. The government would not be able to "print" their currency in this program, but they could manage the supply of notes by adjusting the reserve requirements of banks.
When governments convert their currencies to bitcoin notes they may choose to update to a blockchain-based record keeping system. They may also choose to add features to the notes such as identity or voting functionality. The decision as to which features to add would be made on a country by country basis and would not greatly affect the nature of the notes as bitcoin. This would preserve national flavors while eventually creating a single common global currency in bitcoin.
Note that this is similar to the gold standard, but with bitcoin instead of gold. The difference will be that a bitcoin-based note system will have much less leverage. Unlike gold, people can actually use bitcoin as a currency directly, so the demand for the notes relative to the demand for the underlying will be much less than with a gold standard - resulting in higher reserve rates. This lower leverage will make bank runs less problematic.
It is not likely that the largest governments will convert to bitcoin notes anytime soon for political and economic reasons. Politically, voters do not yet understand bitcoin well enough to accept such a transition. Economically, the amount of leverage built into the banking system of most countries would not be suitable for bitcoin, based on current levels of bitcoin price volatility. The first note programs will need to be created with reserve ratios that are much higher than that of most banks. As bitcoin matures and the price volatility subsides, it will be more easy for governments to convert.
Although it is not likely that a government will start such a program in the near future, there is a big economic incentive to do so. The first governments to convert to bitcoin notes could create enormous value for their citizens as the price of bitcoin increases due to the additional network effects derived from the citizens of the country becoming bitcoin users.
Privately issued bitcoin notes
Bitcoin notes can be issued without government backing. This can be done by banks or highly credit worthy non-bank organizations. It is also possible that a group of organizations could partner to issue the notes.
A centralized, private bitcoin note program could offer the same user experience as a government-backed program - either through the existing credit card networks or new networks.
As with the government programs, the sponsors of private note programs will likely add features to the notes specific to their own organization. For merchants, the notes could be used to administer a loyalty program. Banks and non-bank finance companies may use the notes to arb liquidity and borrowing rates between bitcoin and the bitcoin notes. Non-profit organizations may use the notes to create a more equitable or environmental friendly form of bitcoin.
The issuer of a centralized, private bitcoin note program would not necessarily be required to hold 100% reserves in bitcoin. The reserve rate and the structure of the notes as secured or unsecured would be a function of the credit-worthiness of the issuer. For example, Walmart and Goldman Sachs may be able to issue unsecured bitcoin notes, whereas the market may require other companies to hold 100% bitcoin collateral.
Decentralized bitcoin notes
Bitcoin notes can also be issued on a decentralized platform. As with other types of bitcoin notes, the holder can exchange the note for a fixed amount of bitcoin, but there is no central authority to monitor the program or guarantee conversion - the conversion would happen programmatically.
This type of note program could be used to add or change features of bitcoin to meet the needs of a particular market. For example, the decentralized note platform could use a different consensus algorithm or have different governance features. Trades in the bitcoin notes would be executed with the new protocols, but the underlying bitcoin blockchain would serve to support the value.
Each of these forms of bitcoin notes will serve to expand the reach of bitcoin and strengthen the bitcoin network. The bitcoin protocol will continue to be improved and used as a direct means of payment, but most people will likely choose to operate through centralized bitcoin note networks for everyday transactions.
Many note programs will be created to meet the diverse appetite of the market or to promote issuer objectives. The value of bitcoin will grow as the note programs grow. The note programs will create leverage/additional bitcoin supply, but this leverage will not be as great as that of fiat programs.
The bitcoin network should work to assist third parties in developing these note programs. If a template for these note programs is developed and several large programs are successful, bitcoin has a very good chance of becoming the world's common currency and most popular store of value. It is also possible that other currencies like DASH or Litecoin could use the bitcoin note model to pass bitcoin. It is still very early in this process. #bitcoin2030.
By Shane Hadden, CBP, CFA; email@example.com
About the Global Currency Group: The Global Currency Group promotes the adoption of a decentralized global currency through investments, advisory services, new currency creation and advocacy.
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