Friday, February 1, 2013

Hackers and the Alternatives to the Global Financial System

You can bet that whomever developes a new global financial system that would replace the U.S. dollar will be the focus of the highest level hackers..... of  the Federal Reserve.  
Politics / Global Financial SystemJan 29, 2013 - 04:34 PM GMT

Keith Hilden writes: We find ourselves as a world currently at a pivotal point where the current maligned global financial system is falling way to multiple alternatives as new global financial system models emerge as solid competitors. Hackers will undoubtedly prove themselves as a disruptor to the alternative new financial system frameworks that emerge, and will sculpt the initial framework into its matured institutional state. Due to the leverage that hackers will possess, emerging alternative global financial system frameworks will be heavily influenced by hackers. Simply said, regardless of which global financial alternative is chosen, hackers will own the day. And investment into cybersecurity firms products and services will absolutely skyrocket.

The current stresses on the global financial system are tearing global frameworks at their seams and sparking the emerging of alternative global financial system frameworks to replace them. These stresses are in turn being responded to by multiple converging forces delineating the structure of a new global financial system. These are the forces around the world that will compete against one another to gain influence and acceptance in the rush for the next global financial system consensus.
Gold currency
Kota Bharu, Malaysia: In this small border town on the Thailand-Malaysia border lies a city that already offers the alternative to get paid in gold and silver coin, and thousands of shops accept this coinage as a payment option. This small town and its successes or failures may very well be the catalyst spurring the world into a gold-backed global financial system. The World Islamic Mint in concert with the Kelantan government of Malaysia have issued Gold Dinars and Silver Dirhams that with the blessing of the Kelantan government have been approved as legal tender. The Kota Bharu gold dinar initiative also has the unofficial backing of the Malaysian central bank through their limited production of the Kijang Emas, a legal tender gold coin for transactions within Malaysia. Workers have the option of being paid in Dinars and Dirham or the traditional Ringgit Malaysia currency. The Kelantan government is the first in the modern world to offer gold and silver coinage as alternatives for payments of goods and services. The Malaysian gold legal tender status in 2010 spread to Utah in 2011 and South Carolina in 2012. If the Kota Bharu gold rollout is successful, expect all of the provinces of Malaysia to get the nod from Bank Negara Malaysia to get full central bank sanction of gold coin as currency within Malaysia. 

The World Islamic Mint is based in Dubai. This is a country that already has gold bars in vending machines. If the Malaysian experiment proves successful, we could be looking at a gold-backed Middle East along with Malaysia and Indonesia. We could very well be looking at the return of the global Islamic gold dinar throughout the entire Muslim world if Kota Bharu succeeds in its aims.

Yet the gold standard will also be susceptible to cyber attack its goals potentially impeded. A cyberattack campaign on countries that go the way of gold-backed currency will be no different in structure than a traditional cyberattack today. Digital 1's and 0's can be pilfered the same way they are with the current financial system. We live in the age where the server where the cyberattack comes from is more important than the location of the printer, whether it be a paper currency, gold coin, or digital currency. And a state-sponsored directive with the goal to weaken a country's currency via cyberattacks designed to cripple the banking process and its resultant commerce would be just as effective in its goal in a gold-backed currency system versus a fiat incumbent one. Only a full gold non-fractional financial system would not be vulnerable. However, the current price of gold makes full gold currency systems for now an unrealistic proposal until the price for implementation of a full gold financial system is a reasonable amount. Thus, hacking efforts in a gold-backed currency system will not be able to shield itself from cyberattacks, ATM 'glitches' and other financial digital calamities.
While currency in circulation would not be affected directly by a state-sponsored thousand grains of sand persistent cyberattack, the currency would still be vulnerable within a fractional reserve banking system. The appeal of gold in circulation is its perception of a stable store of value.  And that perception of stability is just that, a perception, when the gold in circulation pales in comparison to the digital 1s and 0s that comprise the majority of the financial system today. Add in derivatives and other financial instruments that dwarf the amount in currency, and we see that simply having a gold currency does not shield against a debilitating cyberattack against its foundation.

There is about $17 billion dollars in circulation in Malaysia, so to replace that currency circulation with gold at the price of $1700/oz would require about 312 tons. Malaysia has around 36 tons of gold as of 2012, and those holdings of gold is insufficient to be able to transition to a fully gold ringgit. Therefore, the system would be at most a gold-backed ringgit in which there would still be fractional reserve banking practices, and as such, the digital money on ledgers not callable by either paper or gold monetary instruments would still render Malaysia or the United States vulnerable to a cyberattack on its banking system, gold-backed or not. There is in contrast$1.13 trillion US dollars in circulation, of which it would take a whopping 20,772 tons of gold to replace U.S. currency in circulation at a gold price of $1700. 

Clearly, there is not enough gold available through current price levels to fully replace either the U.S. dollar or the Malaysian ringgit with a gold currency, and so the move would be a gold-backed fractional reserve currency model. This means that there would not be enough physical currency- gold backed or not- to be able to cover a traditional run on a bank. Hence, a digital snatch and grab on these banks without enough in fractional reserve to cover the losses would still leave them vulnerable to cyberattacks, gold-backed or not.

However, Switzerland is a country to watch when considering the emergence of the next global financial system. Consider that exports in recent months to Switzerland from Thailand are up dramatically. And most of it is gold and other numismatic stores of value:

"Switzerland bought $1.17 billion of Thai goods in September, ten times more than a year before. Of that, 95% was gold, precious stones and jewellery."

Certain countries might be able to pull off a gold-backed currency, but there are clearly some countries who will be stuck out in the rain having to use fiat or one of the alternatives to gold as their country's currency.

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