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Feb 22, 2017

Fintech makes it easier than ever to protect our wealth

Imagining a future where money doesn’t need the involvement of central banks or legal tender laws

There are many predictions about what will happen in the field of financial technology (fintech) in the coming years. But do we really see all the potential benefits? What if new technologies in finance will not only allow us to process our daily payments faster and cheaper? What if – at the same time – our purchasing power could be protected? What if our money is – at the same time – a tangible asset that cannot be wiped out from our account or eroded by inflation?

It’s easy to feel like money couldn’t work without the involvement of central banks and legal tender laws but nothing could be further from the truth. For 6,000 years, mankind used silver and gold as a medium of exchange out of choice. Even today, many currencies continue to carry names that originated as units of weight – such as pound or shekel. And there were no central banks until the late 17th century.

Don’t get me wrong: rulers always wanted to monopolize the production of money. Diluting coins (so-called debasement) and later in history issuing unbacked currencies and credit were common practices of financing wars at general public cost. But only over the past 100 years have governments taken complete control over our money. It didn’t happen all at once, but rather gradually. The last link to gold was broken in 1971 when then US president Richard Nixon terminated convertibility of the US dollar to gold, meaning that even foreign counterparts could no longer swap their dollar bills for gold. Our money became inconvertible paper money enforced by legal tender laws – so called fiat money.

What happened afterwards is history: $1,000 in 1971 would buy you the equivalent of $160 worth of goods today; that is 84 percent of your purchasing power destroyed. If you had invested your $1,000, you’d have needed a 1.4 percent annual yield for each of the 46 years just to maintain the original purchasing power. By contrast, $1,000 worth of gold from 1971, simply left lying in a box, would be worth almost $28,000 today. What has also happened during the last 50 years has been an explosion of global public debt as, together with gold, the last hurdle to excessive debt spending and money creation disappeared.

Should we be concerned?

I’m sure everyone remembers the crazy multiples at the height of the dotcom bubble, or the largely ignored phenomena during the housing bubble – such as the ridiculously low lending standards and rising delinquency rates – that nobody paid attention to? The symptoms of a monetary failure (collapse in purchasing power) are similar to these asset bubbles brought by cheap money and easy credit.

We currently have an unsustainable trend (in both public and private debt) and a bloating of central bank balance sheets – trends that are largely ignored. We observe a complacency and blind faith in central banks and governments in their engineering and navigation of economic forces. Not that we haven’t seen this movie before; everybody will be happy until the bubble pops. When it will happen, I don’t know, but it seems like we have already entered the era of global stagflation with meager growth and accelerating inflation. It’s likely that, as with previous bubbles, there won’t be any warning when the current monetary system built on exploding debt and fiat money implodes.

So how will investors protect themselves? Sure, you can buy shares, land or property – and ensure yourself a healthy stream of income from some of these assets – but none will provide you with the same level of liquidity as gold or silver.

It’s not bitcoin

So what are the alternatives? Well for a start, it’s not bitcoin. It’s a great payment system, but it’s not a serious currency unless you’re a gambler and 4 percent average daily volatility and occasional double-digit percentage daily movements don’t worry you. The idea of a decentralized digital transaction ledger is great, but bitcoin suffers from the absence of any backing asset. You don’t want to put your wealth into strings of code, and that’s exactly what you ‘own’ when you hold bitcoin.

But fintech offers other alternatives. Toronto-listed Goldmoney or London-based BullionVault allow their clients to return to what worked for so long for mankind. These types of fintech companies allow you to own money that is tangible, tradable, durable, uniform, divisible and limited in supply while at the same time being able to make global transactions in an instant. There are no limits to transferring digital titles to physical gold, however small. Imagine €50 worth of gold sent instantly to a friend in China or 100 mg of gold subtracted from your account for your morning vanilla latte – it might sound far-fetched today but who knows how long the fiat money experiment will last?

My favorite ‘honest quote about dishonesty’ is by William Woodin, the Secretary of Treasury under FDR in the 1930s: ‘The Federal Reserve Act lets us print all we’ll need. And it won’t frighten the people. It won’t look like stage money. It’ll be money that looks like real money.’ After 80 years of this unprecedented experiment, people might actually start to wake up to this fact and would like to own, once again, real money.

Radek Nemecek is a partner at Cook Communications IR&PR