Cryptocurrency: The Resurgence Of The Bearer Asset

grarpamp grarpamp at gmail.com
Mon Jul 4 11:46:26 PDT 2022


Bitcoin and the Resurgence of the Bearer Asset
Scott Hill June 23, 2022
https://bombthrower.com/bitcoin-and-the-resurgence-of-the-bearer-asset/

If you’ve seen the film “Die Hard” you’ll notice the villain is trying
to steal strange assets called Bearer Bonds. Why did this entire asset
class disappear from the modern financial landscape?

Which properties of these long forgotten assets are important for the
future the Crypto industry is trying to build? Why did governments
around the world outlaw the Bearer Asset in the first place?
History of the Bearer Asset

Until the 1980s, bearer assets were very common. Bonds would be issued
on paper and bondholders would present the instruments physically to
receive payment. In fact the paper certificates would often have small
tear off sections that were redeemable for interest payments. This
record keeping mechanism is why we still call the interest payments
from Bonds, “coupons”.



In the pre-digital era assets could be represented in two ways:

Registered instruments, where every owner was recorded in a
centralized registry. Transfers would be executed by a contract that
was then “stamped” by the registrar. This would enable a verifiable
list of owners to be kept and checked as necessary. Usually for
taxation purposes or so that banks could be aware of who the true
owners of a company seeking financial services were.

Then there were bearer assets.

Bearer assets were owned by whoever held them. They could be bought
and sold by physically transferring the document. There was no
registry of owners.

This wasn’t some niche quirky asset class. Some of the most important
companies in history issued bearer stock, like the Mississippi
company, formed in 1717 and responsible for the infamous “Mississippi
bubble”.

Most governments issued bearer bonds to fund themselves. In the United
States for example if you wanted to claim an interest payment on your
government bonds you would need to physically present the certificates
at your local Federal Reserve building.

Bearer assets haven’t completely disappeared. Chances are if you open
your wallet you still have some bearer assets in the form of your
banknotes. They aren’t even from such a long time ago. The last US
Government issued bearer bond only matured in 2016.
The Problems with Bearer Assets

Starting in the 1980s there was a concerted effort to eradicate bearer
assets from the world. In a combined effort from FATF, the global
anti-money laundering organization, and the US government, an agenda
was pursued where all assets would become registered instruments. This
would ensure that the owners of all assets could be known, taxed and
tracked.

The problems for governments are fairly obvious. Assets that you can
hold privately and anonymously are difficult to tax. Transfers that
can occur between two people without any authority being notified can
be used to launder money or evade capital controls.

There’s also the issue of counterfeiting. In 2009, over $130 billion
in US government bearer bonds were uncovered by Italian customs
officials. Without a central register modern printing techniques had
made bearer instruments far too easy to counterfeit.

The practical issues are possibly more important for this analysis.
Without a centralized authority to record ownership it’s difficult to
develop the trust required to exchange assets between entities who
don’t already have a business relationship.

Transfers are also slow compared with changing an entry in a computer
database if you’re not in the same place as your counter-party. This
problem is particularly noticeable if there isn’t a ready market for
assets nearby. For example, in the 1900s it would be difficult to
exchange bearer assets in Nebraska where there was no market, but
relatively easy to do so in New York.
The Benefits of Bearer Assets

The need for a physical marketplace for bearer assets is a large part
of the reason why financial hubs like New York, London and Amsterdam
arose. Bearer assets could simply be handed over in exchange for cash
so traders would congregate around the largest markets. Traders could
exchange bearer assets as quickly as necessary without needing to stop
and register each transaction. This ease of transfer was a significant
financial innovation in earlier eras and could be credited for pushing
forward capitalism itself by making corporate shares and bonds easily
tradable assets.

Portability and usability were also significant features. In this
previous era you might take a loan on your stock or bonds by
physically depositing the certificates as collateral with a bank. If
you needed to relocate countries your assets could easily move with
you and be used in your new country without requiring any verification
from the institutions in your previous homeland.

Bearer assets opened up the ability to perform global capitalism in a
way that simply wasn’t possible before their invention. A stock
certificate could be issued in Paris then transported to Amsterdam and
traded at their stock exchange with ease. This did open up some
strange issues with corporate governance however. Shareholders
scattered throughout the globe are not easy to contact and gather for
a shareholders meeting.
The Modern System

Now that bearer assets are all but wiped out, the modern asset system
functions using a string of registries and a plethora of
intermediaries. A modern stock certificate might be held digitally
with the DTCC in New York, on trust for a German Holding company who
then fractionalizes the share and sells those fractions to Robinhood
who then sells those fractions to an investor.

Complicated, huh?

But it all works seamlessly thanks to digital communications systems
and trust. The trust part is important. This entire system is held up
by trust in other countries’ regulatory authorities. In the solvency
of their financial institutions. In their systems.

It could all go away very quickly if that were no longer the case.

We already see what this world would look like by examining how
emerging markets operate. Would you trust an Argentine stock registry
to record your assets? How about an Iranian one?
Bitcoin Fixes This

If we are heading into a fractured world as many analysts are
predicting, we’ll need the return of bearer assets to keep capital
markets functioning. Cryptocurrencies like Bitcoin represent the
return of the bearer asset in the form of digital shared ledgers.

Just like old paper bearer assets, an individual can prove they own
their digital assets directly, without the assistance and trust of
intermediaries. They can simply sign using their wallet to confirm
ownership of the assets held within.

People can transfer digital assets directly, globally, at near instant speeds.

This financial innovation is both extremely powerful but also
extremely risky for the current institutions that exist primarily to
provide trust and custody to assets.

Most people who haven’t gone down the Bitcoin rabbithole yet don’t
really understand the paradigm shift that has happened with the
invention of digital bearer assets. They can type an order into their
stock trading app and to them that’s as good as Bitcoin’s near instant
global settlement. They fail to see the fundamental difference.

Trading a stock on an online exchange relies on a huge number of
intermediaries to execute the trade, to store the assets and to verify
the existence of assets. If you hold a share of a company in the
modern system it’s impossible to prove this fact directly. The best
you can do is present a brokerage account statement and ask that your
brokerage is trusted. This system of trust works fine in the
functional modern world we have lived in for decades, but in a world
where trust is fragmented and scarce, the ability to secure and prove
your ownership of assets without asking permission may become
invaluable.
Benefits of Digital Bearer Assets

Digital assets don’t have to only be useful assets for the end of the
world. The ability to trade assets globally without the involvement of
authorities and institutions means that unlike stocks, digital assets
can tap global liquidity and allow capital formation to know no
borders or class divides. It’s relatively easy for a rural Kenyan
farmer to purchase a dollar worth of Bitcoin. It’s nearly impossible
for the same person to acquire a dollar worth of Amazon stock.

There’s also the nature of blockchain infrastructure to consider. The
entire premise of token based blockchains is that they are financial
ecosystems that utilize tokens to represent ownership. This allows
blockchain systems to achieve near instant financial functions with
final settlement. A fundamentally different experience to using
something like the Visa network which can take days to settle. A
merchant would then need to ask permission from their bank to utilize
those funds again after that long lag time.

Ensuring that ownership of tokens is directly verifiable and
transferable by users is fundamental to using blockchains to power
finance. Blockchains would not be a useful innovation with bloated
middlemen getting in between transactions and adding the same delays
that we currently experience.

The design of cryptocurrencies with open ledgers that are verifiable
by anyone also removes some of the issues with old paper bearer
assets. Tokenholders can be identified and contacted significantly
more easily than the holders of paper assets. It would even be easier
than the methods used under the current system of share registries and
chains of intermediaries holding assets on behalf of others. This
tangled web of ownership often leads to shareholder voting being an
impossible to coordinate task. Instead asset holding mega-firms like
Blackrock vote on behalf of all of their clients. Digital bearer
assets could be a path back to functional shareholder coordination and
governance.
Return to Capitalism

Digital assets fundamentally change the nature of assets back to
something that looks more like traditional capitalism, where
individual asset owners can pool capital directly and efficiently.
Where people can truly own assets, not just be granted access to asset
markets by intermediaries.

The ramifications of this increase of speed and global access to
finance are staggering. We’ve really only seen the first stages of
what this technology can enable.

There will be growing pains along the way. Governments and
institutions will need to adapt to this paradigm shift. Just like
bearer instruments unlocked the power of capitalism in the 18th
century, digital bearer instruments could do the same for the 21st
century.
Scott Hill
Scott Hill
Scott Hill is a lawyer turned macroeconomics researcher in the
cryptocurrency media space. He holds a BSc in mathematics with minors
in cryptography and physics. He currently advises Coindesk and is a
contributing analyst to Bombthrower Media
4 Responses

    Avatar	Bill says:	
    June 23, 2022 at 4:56 pm	

    Great analogy to showcase use of bearer assets. I Home school my
grand kids and will use this to help them learn the power of
capitalism in modern day terms. They will be fascinated by the
comparison to bitcoin. Every Kid that plays video games, has a
distinct understanding of cryptocurrency. This should be interesting
to begin the discussion. The grand kids will be 13 in august and they
will get it!

    Then, after test drive on the Kids who will pick it up quickly, I
will try it on all my friends over 60. Wish me luck!

    Thanks
    B
    Reply
        Avatar	Ken says:	
        June 26, 2022 at 3:09 pm	

        Much luck regarding your aged 60+ friends. Their world views
are hard wired and neural pathways of their physical brains generally
are too ossified to allow the perspectival flexibility to explore
beyond the boundaries of their security. The West’s debt-based Fiat
system is their hard wired God and that won’t change. As an aged 60+
member myself with 35 years of banking/finance experience and as an
early adapter to crypto, I recommend you restrain your enthusiasm and
energy with them, if for no better reason than the continuance of your
friendships. They may have the great bulk of the world’s assets, but
time is not on their side and their assets that survive the many
changes ahead will all be absorbed into the emergent new ecosystems in
due course anyway, so there’s no reason to push them beyond the limits
of their personal security, especially with crypto’s volatility in its
present stage of development. Especially with its challenges ahead,
and particularly from the emergence quantum computing and its greatly
elevated cybersecurity risks and safety requirements.
        Reply
    Avatar	S Stackmore says:	
    June 23, 2022 at 7:29 pm	

    We talked about and imagined Digital Bearer Assets/Instruments
back in the late 90’s. Now we have them. While I am not an “everything
on the blockchain” kind of guy–more of a maxi– in principle messaging
via public/private keys tied to UTXOs should allow for some kind of
voting structure. Maybe that is what the proof of stake guys are
working on? I haven’t really paid attention to them. I mean if you
wanted replicate some form of the capital structure with rights
attached digitally to facilitate pooling of capital for actual
enterprises, ownership of which could be traded on unregulated
markets….
    Reply
    Avatar	David Tea says:	
    June 23, 2022 at 10:26 pm	

    Great article. One could even issue promissory notes against the
value of the digital bearer bonds…to help discharge the current debt
created by those fools/tools purportedly actiing as public servants…in
name only


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