Can economic policy work in the new age of digital currency?
The modern idea of money is up for even more change. Digital currencies, the most common being Bitcoin, are forms of currency that aren’t backed by any physical or tangible qualities. They are an internet-based technology, as a form of currency or medium of exchange. There has been increasing interest from early adopters and now professional investors to investigate the role that digital currencies can provide. By eliminating the need of large institutions to proctor the exchange of value, this technology has the potential to provide an enormous amount of improvement in a firm’s efficiency. How and what we decide to utilize as currency is part of a huge movement to reinvent how modern economies structure their financial systems.
Our current financial system consists of incredibly large institutions: investment banks, consumer banks, The Federal Reserve, and multiple government entities. Macroeconomic theories ever more so have modernized as best as they could since the Great Depression and Great Moderation based upon these players. This includes the manipulation of interest rates and the monetary base to effect and drive (as best as we could) our entire economy. For a frame of reference, the U.S. is world’s largest economy, at $16.77 trillion dollars. Trying to steer that much momentum can be tricky. Especially in a time of crisis. Ask the central bankers to attest to that amount of difficulty.
The more I think, though, the more I wonder: what will macroeconomic policy look like under a digital currency platform? By definition, there is no central governing body over the currency. There will still be investors, banks, borrowers, and debt issued, which will still be subject to fundamental principles. Yet, what about recessions? What about exchange rates or pegged currencies? The government can still utilize fiscal policy but seems as if they are losing a majority of their monetary levers. It could be difficult to theorize how a decentralized currency can be manipulated and the ramifications of such a paradigm at a times of crisis.
Or will there be an ever present entity that engineers the monetary base of any given mass adopted digital currency? An IMF, but governing the world’s new financial system. In theory, as well, even inflation could be programmed into the underlying blockchain. While there have been enormous steps in 2016 towards the right direction for distributed technologies, cryptocurrencies face many roadblocks to finding their foothold into the digital wallets of all.
2017 seems to be a pivotal year for the technology as well. The Hyperledger Project proves that large banks and companies are interested. Distributed ledgers are now in the position to prove their value by running real-world tests under load. As for a currency though, blockchain and cryptocurrencies technologies could face a lot of pushback from the existing system. The very system they are trying to uproot. Regardless, the people of Yap would be so proud.