Who owns the cash in your pocket and the BTC in your wallet?

22 November, 2019

Stick your hand in your pocket. Right now. Do you have coins and bills hanging out with your breath mints and smartphone charger? If so, ask yourself this question: who really owns those coins and bills? You probably think you do. But think again. Fiat currency is owned by the government that creates it.

On the other hand, consider the Bitcoin (BTC) you currently control in your digital wallet. Who owns that? You do. Despite your BTC being intangible, it is not owned or controlled by any central bank or government. Ownership and control are maintained by the owner of the wallet in which it resides. That means any BTC in your digital wallet is yours and yours alone.

Among the many arguments in favor of cryptocurrency as a monetary system, few are as powerful as the ownership argument. The argument becomes even more powerful when you observe government actions that prohibit access to fiat among citizens.

Troubling times in India

What kinds of government actions limit access to fiat? Consider a crisis now underway in India. It all stems from action taken by the Reserve Bank of India (RBI) last month. The RBI used its regulatory authority to place heavy restrictions on one of India's most prominent banks, Mumbai-based Punjab and Maharashtra Cooperative (PMC) Bank.

PMC Bank operates nearly 140 branches in six states throughout India. Customers who have deposits with PMC were prevented by regulatory action from withdrawing more than Rs.1000 per day. That amounts to just USD $14.00. Though the RBI recently raised the limit to Rs.40,000 per day, it is still not enough to meet consumer needs.

Why the restrictions? The RBI says that PMC Bank is guilty of undisclosed banking irregularities that need to be corrected. Until the bank can demonstrate it has corrected the cited deficiencies, it will remain tightly restricted in its activities.

Without knowing all the details, it seems reasonable to restrict how the bank can operate until concerns over irregularities are properly addressed. But such restrictions should have no impact on customers. Their access to funds should not be restricted because of the bank's problems. And yet, that is exactly what is happening.

Trouble in Argentina

The problems in India show just how little control people have over their money. If India's central bank can restrict access to cash, then people do not really have full and complete ownership of that cash. To drive home the point, let us travel to the other side of the world and look at Argentina. That country has troubles of its own.

Argentina has been dealing with economic decline for decades. Like Venezuela, Argentina used to have one of the strongest economies in South America. But thanks to government mismanagement and a fiat currency that has lost nearly 85% of its value in the last four years, the country's economy is in serious trouble.

Argentinians know what is going on. In the run-up to the country's recent elections, fear caused average citizens to start converting their Argentine pesos to U.S. dollars in large volumes. Now people are afraid that the country is headed for even more economic struggles thanks to a regime change facilitated by the election.

Fearing a run on banks, the Central Bank of Argentina (BCRA) just implemented restrictions on how much money citizens could convert. Through at least the end of 2019, Argentinians are now limited to purchasing no more than $100 in U.S. notes per month using cash. They can buy up to $200 per month using their bank accounts.

That is not much, which is by design. The BCRA believes the tight restrictions are necessary to prevent further devaluation of the peso. The last thing they want is a bank run that makes the already troubled peso totally worthless.

The uncomfortable fiat reality

Citizens of India and Argentina are learning firsthand the hard, cold, uncomfortable reality of fiat. They are learning that the government owns and controls fiat at all times. And if the government decides to restrict access to it, there's little consumers can do in response. Herein lies the biggest advantage of Bitcoin and other cryptocurrencies.

There is nothing government can do to restrict your access to Bitcoin other than preventing exchanges from legally operating. But even if every exchange in the world were shut down, Bitcoin and the digital tokens created from it would still exist. You would still be able to trade directly with other Bitcoin owners just by transferring coins to and from your individual wallets. Such trading would still require mining operations, so new coins would continually be put into circulation.

This reality should make it easy to understand why governments seem so fearful of genuine cryptocurrency. Crypto is something they cannot control. It is something they cannot prevent consumers from using. Indeed, cryptocurrency is to modern banking what bartering was in the days before fiat became the de facto method for transacting business.

Just like bartering in the past, cryptocurrency makes it possible for people to conduct business among themselves without any need for government assistance. Buyers and sellers can do business without the need for a bank account. They can do business without the need for minted coins and printed bills.

The legal tender issue

Whether or not you own the fiat in your pocket is further complicated by the legal tender issue. Bear in mind that there is no country on earth that recognizes truly decentralized cryptocurrencies as legal tender. That BTC in your wallet may be effective as an alternative monetary system but it is not considered legal tender for any debt.

Legal tender is defined as currency recognized by government as a legal means for settling debts. The thing to understand here is that there is a difference between settling your debts and paying your bills. Once a debt is settled in a legal sense, any obligation the debtor had to his or her creditor is completely satisfied. Paying your bills does not constitute legally settling your debts. It only means that you remitted a payment to your creditor.

In the U.S., the only legal tender is the U.S. dollar. Legal tender in the UK is the British pound. It is the rupee in India, the peso in Argentina, and the euro throughout the European Union. So where does this leave cryptocurrency?

In countries where crypto is legal, it can be used as an alternative monetary system. That means you can use it to pay any creditors willing to accept it. Yet there is no legal guarantee that paying your bills with crypto will result in your indebtedness being settled.

None of that changes the fact that you own the tokens in your digital wallet. You do not own the fiat in your pocket, even though said fiat is considered legal tender. Do not forget this fundamental truth either: the concepts of legal tender and debt settlement are government-created concepts. You and your creditors can agree between yourselves to settle debts with crypto whether government recognizes such agreements or not.

Control is the sticking point

The sticking point in all of this is control. When you consider who owns the bills and coins in your pocket, what you are really questioning is who controls that money. This is where decentralization becomes so important in the cryptocurrency environment. Decentralization is what guarantees coin owners complete control over their coins.

Fiat is minted by government and controlled by central banks. We can use the U.S. dollar as a good example. Coins and bills are minted in government plants and sent to federal reserve banks for storage and distribution. Ultimately, those banks determine how much cash is in circulation at any given time.

When the Fed chooses to increase the money supply, they simply send more cash to commercial and retail banks for their day-to-day use. When they want to restrict money supply, they recall bills and coins as necessary. Through such manipulation the Fed can affect the U.S. economy in very tangible ways.

How can they get away with it? By virtue of the monetary authority granted them by the federal government. The two work together to manage monetary policy and money supply for the purposes of controlling national economics.

Cryptocurrency is completely different. For starters, there is no central authority that creates coins indiscriminately. With few exceptions, cryptocurrency networks start with a limited number of coins built into their underlying code. Even among those projects with no predetermined coin limit, new coin production is controlled by parameters embedded on the code rather than indiscriminate decisions made by bureaucrats.

Another significant difference is that cryptocurrency networks are governed by consensus. This prevents any one entity from taking complete control. Unlike the U.S. dollar, control of Bitcoin cannot be seized by the Fed or any other organization that wants to determine its future. Bitcoin is controlled by network computer nodes, miners, and those who own the coins.

So, who owns the fiat in your pocket? You sure don't. It has only been loaned to you by your government and central bank. If you own cryptocurrency though, you are the rightful owner of the coins in your wallet. Isn't that comforting?