Over the last few weeks, we’ve been thinking about the next stage of the crypto cycle.
We’re convinced that we could see Bitcoin retest new heights over the next two years – from $3,400 now to $40k or $50k.
Money remains a great use case for cryptocurrencies.
Bitcoin already has millions of users.
And in a regulated market, we see Bitcoin becoming an asset that pension funds and institutional money want to diversify into. It will also be a hedge against national currency failure in places like Venezuela, Argentina and many parts of Asia.
For now though, the market remains in a crushing bear market and regulators continue to clean house. In the US, regulators are targeting exchanges. They are also working to wash out widespread fraud in the ICO end of the market.
The question is: what will a regulated crypto market look like?
And who will be the main players?
In this briefing, I want to make the case for cities as the next big entrants to this market – with the potential for huge returns as city after city launches its own currency.
Let me start with an early example…
The town built on its own “free money”
When Michael Unterguggenberger was elected mayor of Wörgl in 1932, the town was on its knees.
This was the early days of the Great Depression and Wörgl was wracked with joblessness. Many families in the town were penniless and going hungry.
Unterguggenberger (pictured) had a list of projects he wanted to tackle – repaving the streets, making the water distribution system available to every in the town – but there was only about 40,000 Austrian schillings in the bank.
The town was headed for ruin. So the new mayor embarked on a wild experiment.
Instead of spending any money, he put the 40,000 schillings on deposit at the bank and used it as a guarantee for issuing Wörgl’s very own currency.
He used this scrip to pay people for work and they spent the money quickly, putting money back into local hands.
Wörgl paved the streets, rebuilt the water system, and lifted most families out of unemployment.
Then they built new houses, a ski jump and a bridge with a plaque reminding visitors that “This bridge was built without our own Free Money”.
In the months that followed, 200 other Austrian villages decided to issue currencies of their own.
And in a panic, the central bank decided to assert its monopoly rights, making it a criminal offence to issue “emergency currency”.
An experiment for cities in serious trouble
But this is a story that we could see play out again over the next few years.
Right now many major cities in the UK are struggling.
Manchester city council needs to find £60m. Liverpool has a £90.3m budget gap to deal with and Birmingham is looking to cut £123m by 2022.
In recent years, councils have tried to plug these gaps by borrowing heavily from the Treasury and investing the proceeds in high-yielding commercial property.
It worked for a while.
But now that game is up too.
As interest rates climb, the cost of borrowing and servicing debts at every level of government is rising.
The era of cheap credit is coming to a crashing end.
That’s true of cities in the UK. It’s true of cities across China and Asia.
And faced with terrible debts and budget shortfalls, many cities and councils will have to get very experimental.
The rush for civic currencies
That’s why so many cities are preparing plans to launch their own currencies.
In March, Paris launched a local currency that can be used alongside the euro.
Seoul has announced plans to launch it’s own cryptocurrency.
In the UK, Hull, Kingston, Birmingham and Liverpool have schemes underway.
These cities are following the example of Michael Unterguggenberger, leading a revolution in “civic currencies” – some digital, some physical – that will be used to plug gaps, repair roads and look after growing populations.
How will it work?
Well let’s say Shenzhen – where a court recently lifted a ban on owning and transacting in Bitcoin – launches it’s own digital currency.
Let’s call it the Zhǒngzǐ.
On the day of launch, you can buy Zhǒngzǐ at local electronic markets or on your phone.
These can be spent on local services across the city: health clinics, utility bills, council taxes, hospital and school bills.
Shenzhen releases an app that would allow you to send and receive the currency.
Every transaction is recorded on the Ethereum platform – a central record of transactions on the blockchain that is accessible to everyone through the app on their phones.
The city benefits as money stays local.
And as local businesses thrive, and projects built, the Zhǒngzǐ project starts to scale.
The most important question then is “what gives this currency value?”
How do we stop it from swinging wildly from one week to the next?
Well the value of the currency could be pegged to a currency, or gold or perhaps property: one Zhǒngzǐ could be equal to the market value of 1 square metre of Shenzhen real estate.
The city maintains a ledger of sales and property changes.
The value of the currency rises and falls with demand for space.
And the number of Zhǒngzǐ in circulation corresponds exactly to the total covered area of the city.
There are no wild fluctuations in value. This is what’s called a “stablecoin”.
And the growing prosperity of the city feeds directly into the value of the currency, which feeds back into the local economy.
Money creation by credible sources
This sounds great in theory.
And there is no shortage of cities and countries preparing plans to launch digital currencies of their own.
But why would the People’s Bank of China allow this project?
The authorities in China have gone to great lengths to take control of the crypto market – banning exchanges, ICOs and payments in Bitcoin on major platforms.
What happens when they have regulated the market to their satisfaction?
Well we could certainly see the Chinese central bank release its own digital currency.
And a cryptocurrency project certainly makes sense for special economic zones.
We assume now that the way money works – currency created and controlled by central banks, issued by commercial banks – is a law of nature.
But it isn’t.
Increasingly we will see projects where money is created by a wide variety of authorities.
That includes cities and state-backed companies.
The list of companies currently preparing to launch coins includes everyone from Air Asia to Paris Saint-Germain to Mitsubishi Financial Group.
In the past, you had to expend enormous resources to issue and protect the value of money.
Consider gold – the most credible store of value for most of modern history.
To source a large supply of gold in the past, you had to:
1. Be good at warfare
2. Be able to marshal a huge workforce to mine it
3. Master global supply and logistic routes
4. Be able to command guards to watch over it.
And of course this sounds a pretty good description of the “proof of work” idea behind many crypto projects.
You take some commodities – electricity, computer chips – and then you put them to work proving transactions.
And by doing so, you can behave like a state.
The lesson of Bitcoin and other cryptocurrencies over the last few years is that anyone can create money.
By contrast to gold…
It is relatively easy to set up a crypto project. You need a website, a whitepaper, a decent team.
It is also very easy for people to access and buy the coin because you can do it all through your phone.
And projects can attract serious investment and achieve enormous scale within a matter of months.
The main issue is the credibility of the people behind the project.
This is where cities come in.
Increasingly, we will rely on cities as engines of global growth. And these cities will be increasingly autonomous: issuing their own currencies and taking greater responsibility for growth of the local economy.
I’m a big fan of fintech expert David Birch, author of Before Babylon, Beyond Bitcoin.
And over the last few years, he has been making a compelling case for cities as the new means of money creation.
“We should set ourselves up for a world in which there are hundreds, thousands or even millions of kinds of money,” says Birch.
“Your phone will show you the price of a latte in London Loot but transfer money in California Cabbage, Apple Apples, and SF Parking Permits.”
This may seem unlikely, given the current state of the cryptocurrency market.
On the face of it, there is a growing backlash by authorities against these projects.
China continues a policy of blockchain before Bitcoin.
Baidu has banned crypto discussions in its chatrooms. Alibaba and Tencent are cracking down on crypto payments on their platforms.
Still, Alibaba has the highest number of blockchain patents in the world.
And the Chinese government continues to back Waltonchain – partners now include Alibaba, China Telecom, Skynovo – and other blockchain projects that are integral to OBOR.
Cities have watched the success of these projects and they now want to versions of their own.
And it could mean that we have a string of new coins in the next cycle. We’ll be looking at other use cases for these as they launch.
All information in this briefing is provided in good faith and is accurate to the best of my knowledge. This document is for information purposes only and does not impart financial advice. We recommend you do further due diligence before taking action based on the information in this report.