Tag Archives: money creation

Central Bank Digital Currency is not Cryptocurrency as Envisioned

Recently the International Monetary Fund produced a research report on Central Bank Digital Currencies, titled “Casting Light on Central Bank Digital Currency”, and available here:


Even the title is interesting in its omission of the terms cryptocurrency and blockchain.

The basic concept they were evaluating was that of central bank controlled digital currency issued for the benefit of retail users (individuals and non-banking businesses). These would exist alongside existing fiat currencies and be intended for domestic use primarily. Their value would have to be tethered to the related fiat.

The study reached several initial conclusions:

  * CBDC could be the next milestone in the evolution of money.

  * It is a digital form of fiat money, issued by the central bank.

  * The ability to meet policy goals is one major issue.

  * The demand for CBDC depends on the attractiveness of alternatives (cash, e-money).

  * The case for adoption could vary from country to country.

  * Appropriate design and policies should help mitigate risks.

  * Cross-border usage would raise a host of questions.

A number of central banks around the world are studying CBDCs. This table from the IMF report indicates their publicly stated rationales, which include diminishing use of cash as other payment channels e.g. mobile become popular, efficiency gains for payment and settlement, and greater access for the unbanked or lightly banked to financial services.


But the key point is that CBDCs are quite antithetical to Bitcoin and mined cryptocurrencies in general (we exclude in this comparison airdrops, premined, and other largely centralized, but private, forms of cryptocurrency). CBDCs are closest to the tethered cryptos, but maintained by the fiat issuing authority itself.



Created by miners running hashing protocols Created by central bank
Predefined monetary policy Variable monetary policy set by central bank committee
Transnational usage Domestic usage primarily
Open triple entry ledger Central bank permissioned ledger
Validation by private computer nodes Validation by central bank

There is very little in common between Bitcoin and mined cryptocurrencies in general, and hypothetical CBDCs. Most existing fiat is already digital; a small portion is cash.

The main new alternative, besides existing fiat cash, for CBDCs are private payment channels (private e-money) such as PayPal and M-Pesa in Africa. These are similar to stored value cards with prepaid fiat balances, but with mobile interfaces. Here the account balances are managed by private companies, usually with a known partner, and a user needs to trust the company holding the balance.

Both new private money channels and CBDCs threaten to disintermediate balances held in bank checking and savings accounts. So do cryptocurrencies, of course.

These balances are used as reserves for banks to issue loans, so if they were moved to a cryptocurrency or a central bank ledger they are no longer available for lending (fractional reserve banking).

A fundamental difference is that cryptocurrencies are assets whereas fiat money is debt-based, created when banks issue loans. CBDCs in their basic form are not available as reserves for bank lending.

CBDCs would in essence just be a different form of fiat, tethered to fiat, and with the same accounting unit and value.

Cryptocurrency represents a challenge to the banking system and to central banks. It seems that the IMF may be encouraging central banks to sacrifice the interests of banks in order to maintain, and even increase, their own power.

The CBDC framework, like cryptocurrency, would move deposits away from the banks. Unlike cryptocurrency, which holds balances on an open ledger, accessed by private keys, CBDC balances would be held for individuals and businesses at the central bank. This means the central banks would be able to restrict access to funds owned by individuals. One can assume they would do this during crises or under court order.

Central banks could even apply interest to CBDC deposits, possibly even with negative interest rates during times of slackened growth.

Fractional reserve banking and the economy as a whole are based on the provision of credit by commercial banks, backed only by a small percentage of reserve balances held with the central bank. If deposits move in large amounts to CBDCs or cryptocurrencies, both of which are assets in the name of the depositor, the system of credit provision in the economy will have to be significantly transformed.

Or a system that allows banks to participate and hold reserves based in CBDC would have to be developed.

CBDCs of the simplest type discussed in this IMF paper seem like a way to protect the prerogatives and increase the power of central banks, and co-opt cryptocurrency. The losers would be traditional banks because their lending power would be decreased. 


Crypto Supercomputers: First Aggregated Ranking

Working with OrionX, we have just published the first aggregated list of cryptocurrency supercomputer mining pools, ranked by the economic value generated.

I have recorded a podcast about this list with Rich Brueckner, President, InsideHPC. You can listen here: https://insidehpc.com/2018/11/announcing-new-cryptosuper500-list/

A related slide presentation with a complete set of tables is available here: https://www.slideshare.net/mobile/insideHPC/announcing-the-new-cryptosuper500-list

The list is inspired by the Top500 supercomputer list that is released twice a year at the major supercomputer trade shows and conferences held each June in Germany (ISC) and each November in the US (SC).

That list is based on the performance of Linpack, a floating point intensive benchmark that solves a very large system of linear equations.

Supercomputers are based in a single location. They are very large clusters of general purpose CPU-based nodes, often augmented with GPUs, and frequently employing specialized interconnects.

Cryptocurrency mining is embarrassingly parallel. Many nodes can be racing simultaneously to solve the same cryptographic puzzle for the block reward. Mining pools may be centralized, but more likely they are decentralized to various degrees. Mining pools often have many contributors located in many countries, so even the concept of a host nation associated with the pool is fuzzy.

And the hardware employed is typically specialized ASICs or FPGAs, as well as the GPUs frequently found in traditional supercomputing simulation of science and engineering problems.

With mined cryptocurrencies, we must take a different approach and look at economic value.

For this initial list we looked at the top dozen cryptocurrencies by money supply, which is usually called market cap, and that is simply the number of coins created by a certain date, and the coin price on that date.

Of the top dozen, just half of those or 6 coins, are mined: Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Monero, and Dash. Other coins are generated by premining, airdrops, or consensus algorithms that avoid mining. As a result they are centralized to varying degrees and presumably less secure.

We chose October 30, 2018 to gather prices, supply, block production, and other statistics. This was prior to the Bitcoin Cash fork into two coins, so only the initial coin is considered for the first list.

Among mined coins, a range of mining consensus algorithms are used. Differing cryptographic hashing protocols may be used. Time windows and block rewards vary. Hashing rates have a tremendous range across the set of coins, from MHash/s with Monero to ExaHash/s with Bitcoin.

Thus we cannot compare across coins based on hashing rates and block rewards per se. Instead we look at economic value. For a given coin, one can rank order by blocks produced.

We ask what is the daily value of a certain coin produced by a given mining pool? How many coins at what price? We took daily averages for the prior week, and where we had better data, for the higher value coins, we used the prior month average daily rate instead. We then extrapolated the annualized value based on the average daily rate.

We compiled statistics for the 30 largest pools on a per coin basis. We also aggregated results for pool operators that produced more than one type of coin.

The first table is a table of average daily and estimated annualized production in millions of USD for the top coins. (With the very recent price slump following the Bitcoin Cash fork, the numbers would now be lower by about 1/4 if prices do not recover for a while). About $4 billion of Bitcoin is mined (minted) per year, and around $1 billion of Ethereum. Litecoin, Bitcoin Cash, and Monero collectively contribute around  $400 million (Dash did not make the cut).

Table 1: Top 5 Mined Coins


# Top Pools

Daily M$

Annualized M$













Bitcoin Cash












Next is a table of the top half dozen pool operators, combining different coin types if they are mining more than one of the top coins. Three are in China, one in Hong Kong, and two in the U.S.

Table 2: Top Pool Operators (aggregated across top coins)

Top 6 Operators (across coins)

# Top Pools

Daily M$

Annualized M$




1.901 694






Hong Kong








1.329 485
















Bitcoin has its own decentralized, open source, version of a central bank and a clearing house system embedded in the Nakamoto consensus. Bitcoin is presently an emerging economy with over $1 trillion in annual transactions (GDP, gross decentralized product), supported by a very economical and efficient seigniorage of about $4 billion in mining block rewards, or less than 0.4%.

The indicated inflation rate at present is about 4% in supply, but in about 18 months the block reward will have its third halving. This will decrease the block reward to 6.25 Bitcoin from its current 12.5 coins. The inflation rate will drop below 2%.

This is not like your Federal Reserve that issues forecasts and goals. Recently the Fed has been pushing to increase inflation to 2%, and happy that they achieved the increase.

With Bitcoin this decrease in inflation will definitely happen, come hell or high water; it’s math, it’s baked in to the Nakamoto consensus. Relative to the US dollar and fiat currencies in general, Bitcoin will be disinflationary going forward.

The next list will be announced in June, 2019, and we can begin tracking developments in the cryptocurrency space over time.

Cryptocurrency a Bridge to the Future

Bitcoin, and cryptocurrencies more generally, can be a bridge to a better monetary future for the globe. In almost every nation today, fiat currency managed by a central bank is the norm. This is money that is inherently inflationary by design. Since central banks are controlled by national governments, and governments routinely run substantial deficits, the banks promote inflation in order to benefit their governments.

In our current low growth environment, the Federal Reserve has grown the money supply (M2 money stock) 4.9% during the past year when inflation is running at 2% or less. They are operating on an equation of around 2% inflation plus 2% to 3% GDP real growth for about 5% monetary growth.

Bitcoin has a very controlled and low absolute inflation, much less than 1%. There are currently 16.6 million bitcoins available, and there will never be more than 21 million, and that does not occur until over 100 years from now. In practice, Bitcoin is currently deflationary since the economy around Bitcoin is currently increasing very rapidly, at triple digit rates. It has been gaining value against fiat currencies rapidly, albeit with very high volatility.

Bitcoin meets the attributes of currency, see Money 3.0 article. It is not debt-based, as are all currently circulating fiat moneys, paper and digital money backed by nothing but debt (Money 2.0).

Akashi Kaikyo bridge is the world’s longest suspension bridge. GFDL license.

The entire financial system was at risk of collapse in 2008 due to accumulated debts and risky and fraudulent derivatives built on top of those debts. Trillions of dollars of wealth were destroyed, with Americans losing 40% of their net worth during a 3 year period.

In addition, the system is well-designed for the money center banking elites to pull more and more wealth into their own hands, through financial techniques that create no real wealth. Those who get to create the money lend it out and accrue the highest benefits.

A more stable system is required, and Bitcoin could play an important role, as an asset-based, not debt-based, currency. Dollars and Euros come into creation as new loans are issued by commercial banks. Central banks manage the reserve and equity requirements of those banks, but a large amount of leverage is inherent in the fractional reserve system.

Bitcoin comes into creation as a result of the mining process, that occurs as new transactions are forged into the blockchain. Bitcoin creation is a direct result of the operation of the economy around the cryptocurrency. Bitcoins are ‘minted’, not ‘printed’. Like fiat currency they have value due to scarcity and utility, and dependent on the growth of their economy.

Bitcoin and other cryptocurrencies can be the basis for more honest money, as well as for decreased transaction costs, and higher efficiency. Banking will change forever. Like fiat currency, bitcoin can be borrowed and it can be lent.

Those who are involved in Bitcoin today, a “peer-to-peer cash” are pioneering a future that could be a more stable, more honest monetary system. Today Bitcoin is young, has plenty of growing pains, and volatility, but it is now 8 years old and maturing rapidly.

Web of Debt – Book Review

Web of Debt, by Ellen H. Brown, is a fascinating treatment of the monetary history of the U.S. and a revelation of how money is created in modern monetary systems. She writes in an engaging and highly readable style about one of the most critical issues that runs through all of American history from Colonial times through today with the financial crisis and Great Recession. There are no equations that I recall, a handful of charts, but mainly a lot of well-researched history and interesting anecdotes.

You can listen to an audio of the book’s Introduction here: http://www.webofdebt.com/media/WebofDebtintro.mp3.

There have been continuing struggles in the U.S. over the type of money, private or public, and gold, silver or paper, throughout the past 250 plus years. She focuses particularly on the time from the Civil War until present day. Who creates the money is just as important, if not more so, than what type of money we have.

Most money, including that in your checking or savings account (CD) resides as digits inside computers and not as stacks of bank notes, which represent only a few percent of the total. Money is created almost entirely by private commercial banks, not by the Treasury department, and not by the Federal Reserve (although the Fed does create monetary reserves or base money)[1]. But money in general, the money we know and love and use in the real economy, is created out of thin air by banks as a direct result of the process of making loans to individuals and companies. The banks create most of the money supply and the Fed creates the underlying bankers’ money.

Thus money is debt and debt is money. If loans outstanding expand, so does the money supply; if loans contract, the money supply contracts. With all the discussion currently around the “fiscal cliff” recently it is critical to understand that if the US government debt were to be paid off quickly, the money supply would shrink to a fraction of its present value, completely undermining the economy and causing not only a very severe depression but untold suffering.

The Fed has worked in recent years to try to increase the money supply in order to avoid deflation and depression and ameliorate unemployment. But they have been having a hard time of it, because it’s the banks and the players in the economy that have the real control. As banks foreclose on mortgages or write down loans the money supply decreases. As they tighten lending standards and as consumers and corporations cut back on borrowing and sit on cash, the money supply stops expanding or falls, and the velocity, or rate of turnover contracts.

Now this money created as debt is leveraged through the “magic” (or fraud) of fractional reserve banking. Banks are allowed to create 10 times or more money in loans than they have as reserves at the Fed. This is the “secret” of fractional reserve banking.

The book begins with, and almost revolves around, the story of the Wizard of Oz, written by Frank Baum. This is not just a child’s story, or a great American fairy tale, but actually was written purposefully as an allegory about the monetary battles in the U.S. at the end of the 19th century. For example, in the Wizard of Oz the yellow brick road represents the gold standard. When Dorothy throws water on the Wicked Witch of the East (the New York banking interests led by J.P. Morgan) it represents liquidity (greater money supply) which melts the witch.

Prior to the Civil War the US was on a bimetallic standard, that is, both gold and silver coin were minted. Paper money was issued by state-chartered banks. During the Civil War the US was on a national fiat money standard with the issuance of paper money (Greenbacks). But in 1873 the US reverted to a gold (only) standard.

As a result, in the post Civil War period, the bankers were able to keep credit tight and farmers were heavily in debt and often facing foreclosures by the banks. There were repeated booms and busts and the economy was generally deflationary, due to an insufficient money supply. A fight emerged between the Eastern banking establishment’s support of the gold standard, and their desire to keep the money supply restricted, and alternatively, the demand for greater coinage of silver or issuance of Greenback US Treasury notes as alternatives advocated by farmers and laborers for greater liquidity (and better prices for agricultural products).

There was no Federal Reserve during this time, that didn’t come until 1913, approaching the eve of World War 1. Coinage was created by the Treasury (US Mint) but was insufficient, there were Greenbacks in circulation, and there were Gold certificates (back by gold coin), Silver certificates (backed by silver coin) and Treasury notes (back by government bonds).

Gold and silver coins, and our modern coins represent debt-free money. In addition Greenback US Treasury notes were also issued as debt-free money. So either paper money or coin money can be debt-free.

In contrast, today’s Federal Reserve notes are backed by US Treasury bonds or agency bonds held by the Fed and are thus debt-laden money. US coinage, amounting to less than 1% of the money supply and issued by the Mint, is debt-free.

Ellen Brown’s fine book helps you understand these issues, and how the private banks struggled to grab control of the monetary system away from the US government. They won the battle in 1913 with the creation of the Federal Reserve system[2], and further consolidated their control with the elimination of the gold standard in 1971 by President Nixon. The value of the dollar has fallen by over 23 times (what was a dollar has shrunk to 4 cents) since the Fed was established because the bankers get to touch the money supply first, and continually earn interest on it, and thus it is in their direct interest for it to expand continuously, even faster than necessary to support population and productivity growth.

Federal Reserve Notes, legal tender for all debts public and private, note Green seal on right front side (and they retain the green back of Lincoln’s debt-free US Treasury notes).

In fact, in a debt-based money system, there is no real alternative, since loan principal must be paid back with interest added on top. When loans are created the principal is created, but not the interest! If the majority of people are going to be able to pay interest and principal fully on their mortgages and car loans and credit cards, then the money supply must continually expand. The Fed has indirect influence over the supply of money through direct market operations and the influence over interest rates, especially short-term rates, but not the ultimate control. (Thus the expression “pushing on a string” especially when short-term interest rates are near zero.)

Web of Debt is a great place to start to understand these issues, or for those who have a good understanding already, to get another perspective. The explanation of the tie-in to the Wizard of Oz[3] allegory is very interesting. Towards the end of the book she explores alternatives to our current system, such as the elimination of fractional reserve lending, and bringing the Federal Reserve system within the Treasury department, thus enabling a return to Treasury issued debt-free money. The government debt could be retired over a period of some years by paying the interest and principal as they came due with debt-free US Treasury issued Notes. This is not a radical idea, below is the image of a US  Note issued as recently as 1963, and which I remember in circulation when I was much younger (note the distinguishing red seal and red numbers and United States Note at the top). In reality, such US Treasury Notes would be primarily in the form of digits inside computers, just as Federal Reserve Note-based money is today.


The book is available through the author’s web site, Amazon and elsewhere in physical or e-book format.

Sections in Web of Debt:

  1. The Yellow Brick Road: From Gold to Federal Reserve notes
  2. The Bankers Capture the Money Machine
  3. Enslaved by Debt: The Bankers’ Web Spreads over the Globe
  4. The Debt Spider Captures America
  5. The Magic Slippers: Taking Back the Money Power
  6. Vanquishing the Debt Spider: A Banking System that Serves the People


[1] These monetary reserves are used exclusively between banks and the Federal Reserve. Individuals and non-banking corporations cannot have accounts at the Federal Reserve, only banks in the system can. Monetary reserves theoretically provide some limit on how much money banks can create through reserve requirements, but in practice have little effect since banks can and do lend reserves to one another. This monetary base can be said to support the much larger stock of money used in the economy and around the world.

[2] Is the Fed public or private? It’s a hybrid. Some call it the fourth branch of government, but in many ways it stands outside of the government, although in practice it coordinates with the Treasury. There are 12 regional Federal Reserve banks in the system; they are fully owned by the member banks, not by the government. The member banks, not the government, own the shares and receive dividends. The NY Fed is first among equals, it engages in the monetary operations in concert with the commercial banks centered in New York. The system has oversight by the Chairman and the Board of Governors whose members (generally bankers or academic economists) are appointed by the President, and who report to Congress regularly. Profits of the Federal Reserve system are returned to the US Treasury. But the Fed guards most of its operations in secrecy and is not fully audited.

[3] What is Oz? Simply, Oz = oz. = ounce, as in ounce of silver, or ounce of gold.

Modern money is Debt

“When you get in debt you become a slave.” – Andrew Jackson

Modern money is debt and debt is money. Almost all money in the Anglo-American system which predominates in the developed world is created as the result of private banks making loans. This blog will discuss issues and contemporary developments in our highly leveraged financial system. Banks today are the money creators. Not only do they create money even beyond the bounds of fractional reserve banking, but they also have participated and enabled a huge shadow banking system which has made the system even more unstable and more difficult to understand and regulate by the central banks and national authorities.

The wealth destruction since the onset of the financial crisis and the Great Recession has been massive due to this inherent instability and very high leverage. It is essential to understand clearly developments such as quantitative easing by central banks. Are they creating too much money which will lead to excessive inflation, or are they just trying to backstop the monetary destruction that occurs as defaults continue, as individuals increase savings, and as loans get paid down. Or is what they are doing ineffectual since creation of monetary reserves doesn’t in and of itself force the banks to expand the money supply through lending?