Lado Okhotnikov analyzes the state of the modern economy and considers the prospects of transition of the financial system to cryptocurrencies.

Photo byLado Okhotnikov

Lado Okhotnikov is a CEO and founder of Meta Force, expert in crypto-industry, investor and originator of large-scale blockchain projects. Meta Force is a company developing a unique digital Metaverse focusing on business applications.

Crypto: quick money or new economic model

Despite the cryptocurrency boom, caused, in many ways, by opportunities for risky but quick money, there was no perception of cryptocurrency as a phenomenon in the mass consciousness. The crypto is still perceived as an analogue of traditional money or a kind of asset. This is the ideology driven by traders and companies organizing the release of an ETF. We perfectly understand this approach. When it comes to crypto-business, these are projects involving investments in a crypto or services supporting such projects.

"If you look at articles and news posts related to the crypto business: it turns out that the majority is reduced to an analysis of the price of individual cryptocurrencies and cryptocurrency investment projects. Cryptocurrencies have become a common asset, like almost any physical commodity - metals, hydrocarbons, stocks, bonds. After the release of the ETF, crypto came to traditional exchanges. Surely, this is a positive trend. Market is growing, investors are making money. Society is getting used to the constant presence of cryptocurrencies in the economic space. They have become commonplace and are no longer regarded as exotic toys of smart programmers...»

Lado Okhotnikov, of Meta Force

Certainly, investing in cryptocurrencies is a benefit to the industry, but the quick money distracts us from other opportunities of blockchain and hinders the development of its potential. Going back to the blockchain fundamentals, Satoshi Nakamoto didn’t talk about bitcoin as a commodity and speculative asset. It was certainly meant in his work, but was not the main. The motivation for the blockchain theory was not to create a new asset, but to overcome the fundamentals of the fiat system flaws. That is, cryptocurrency makes economic sense when replacing a fiat, not in the case of parallel existence. Not together, but instead!

Lado Okhotnikov about Fiat model: global fraud and development limit

The fiat economic model has undergone significant changes over the millennia. In fact, there were two fundamental breakthroughs: the first one happened when paper money appeared. And the second one occurred when non-cash money was issued.

As a result of the first breakthrough the states got a great opportunity to issue as many banknotes as you like. If previously the rulers satisfied their financial appetites by reducing the precious metal content in coins, then now it is easy to turn on the printing press and get the amount needed for the budget. True, the price is being paid by rising prices and inflation. Non-cash money effectively introduced a banking monopoly on the settlements and keeping funds. You can only make a payment from your bank account to the recipient’s one. Your bank account is not equivalent to your crypto-wallet. The bank, along with a variety of government agencies, have access to the accounts and can affect it and your transactions. The account can be blocked, and the transaction stopped. The payment is not final, it can be withdrawn by the bank, the supervisory authority or even by the payer.

"We used to think that the money in the bank accounts belonged to us. From the point of view of the legislation, this is a case. However, we were forced to put our money in the bank, we had no alternative except keeping banknotes. We have banknotes, but States are already limiting the circulation of cash as much as possible. As for the non-cash money in the accounts, the banks together decide whether to give you your money, make a payment or block it. The fiat system put us in the most dependent position. Cryptocurrency has often been called fraud, although fiat has all the signs of global fraud..."

Lado Okhotnikov

The ease of printing banknotes and issuing non-cash money creates an almost insurmountable temptation for states. And here we face another problem of the fiat economy, namely the subjectivity of financial authorities' decision-making. Actually, this is not a problem, but a property that leads to problems.

Any State pursues its own financial policies; these policies can be successful, or failure. Whatever the genius of a Minister of Finance or a Central Bank chief, whatever the complex decision-making mechanisms may be; mistakes related to abuse, human error or lobbying by stakeholders are almost inevitable.

Such mistakes can be costly, and they accumulate, leading to global crises. Such a crisis is developing now, before our eyes.

Sadly, there is no fundamental solution to the crisis within the existing fiat model. The reason for this is the disappearance of objective mechanisms of self-regulation of the economy.

Is "invisible hand of the market" alive or dead?

In the 18th century, Adam Smith introduced the concept of the "invisible hand of the market". It is a very concise term, clearly describing the essence of the phenomenon. In the case of the free market, the economy works as a self-regulating mechanism. This theory has indeed repeatedly been confirmed in practice, the theory, for example, perfectly explains the European and American industrial revolutions of the XIX - early XX centuries.

However, now, in the first half of the 21st century, the free hand of the market remained only in the small business segment. Mega-corporations that influence political and macroeconomic decision-making are governed by very different laws. There’s competition, too, but it doesn’t follow the principles laid down by Adam Smith. The objective "invisible hand of the market" regulator of the has been replaced by subjective decisions.

The economic crisis itself is normal and natural. However, such crises have a fairly high chance of escalating into war, perhaps even world war. And this would not be desirable.

Cryptocurrencies as a tool for economic transformation

Let’s say we have correctly diagnosed the modern economy. Is there any chance of avoiding the crisis?

Forecasting is a thankless task, we can only operate on probabilities. Indeed, the probability of avoiding a crisis exists. The question is what the price of the safe exit will be and how quickly the new crisis will form; the problems of the fiat economy will not go away.

Theoretically, there are two following possible outcomes that maintains a leadership role of the fiat: an introduction of a regulated economy, that is reprogrammed to fix actual problems, or the return of the real free market. The probability of achieving both scenarios is minimal, there are too many technical difficulties. First of all, it is not clear what tools can be used to achieve correct results.

In fact, the real tools to transform the fiat system did not exist until the 21st century, when Satoshi Nakamoto published his first work on blockchain. If we recall Satoshi’s motivation, it boils down to the need to find a solution to one of the problems of settlements' unreliability using the banking system. Payers may withdraw payments already made which is an excellent prospect for abuse. To avoid it Satoshi has proposed a blockchain, and the first cryptocurrency, Bitcoin appeared as a reward for miners who provide stability of the blockchain.

Nakamoto’s version of the blockchain, with its resistance to hacking, has limited practical applications. With the exception of Bitcoin as a new type of asset, it can be used for creation of a variety of registries. However, these registries will not be operated very well.

The second fundamental development of blockchain was the emergence of Ethereum, proposed by Vitalik Buterin. Its main new feature is the ability to implement smart contracts. That is, users can specify algorithms for interaction with the blockchain. Based on such algorithms, it is possible to organize complex control systems, which are characterized by stability and reliability. If the agreement is fixed in a smart contract, it will definitely be fulfilled.

Fiat and cryptocurrencies seem relatively similar for the consumer, with the help of both can make payments, store, accumulate, and receive interest from deposits. There are, of course, differences in operations with crypto-wallets and bank accounts, but they are easily leveled when accumulating user experience.

Cryptocurrencies, as proposed by Nakamoto and Buterin, pose a critical threat to the current financial system. Banks suddenly realize that they may not be needed, and the state may lose the ability to influence the issuance of national currency. Moreover, there is an independent supranational currency. Naturally, they do not like it. Hence the rather aggressive reaction of such entities as the SEC.

Lado Okhotnikov

From the point of view of financial authorities and banks, the difference is very large. First of all, there is no need for a bank intermediary to deal with cryptocurrencies. The wallet belongs to you only, and only you have access to it. Obviously, all this doesn’t add to banks' love for cryptocurrencies.

Cryptocurrencies like Bitcoin, for example, provide formal anonymity. We call it formal because intelligence agencies have already learned to identify the users of the blockchain, but the process is complicated and slow. That is why the financial authorities don’t like it.

Wallets are available to the owner only; this property also causes irritation of the state. To freeze, or confiscate funds becomes difficult at least by relatively simple means.

Bitcoin blockchain does not imply the ability of third parties to influence the issue of coins. The authorities do not want to live in a world where strict rules for financial management exist, and no one can violate them, not even the supreme authority. No one can change rules and smart contractual arrangements retroactively. Everyone, even the State, will have to comply with their obligations. This is a challenge, is it?

The dissatisfaction of the state and banks with cryptocurrencies is understandable, for the first time in history the fiat financial system has a competitor superior in functionality. Moreover, the promotion of cryptocurrency ideology deprives the financial elite of seemingly immutable advantages of access to the government.

Blockchain, which until now has mostly been perceived as a technology for cryptocurrency minting, actually has a very wide range of functions allowing to manage both individual transactions and in general economic policies of corporations and states. This is a tool and it can be used.

Fiat vs crypto: it is possible to bet

Currently, states and fiat financial system institutions are not interested in the transition to a cryptocurrency economy. They are interested in some of the blockchain’s capabilities, primarily related to the transaction transparency, but the introduction of a full-fledged blockchain deprives them of their usual income and the ability to influence financial policy. That’s why it’s hard to expect a quick blockchain revolution.

However, financial elites have no understanding of how to break the fiat economy’s deadlock. In the coming years we will witness an epic confrontation of a fiat vs crypto. And who will be the winner, it is not easy to forecast. However, investors seem to be starting to bet on the crypto.