Charter Currencies: Designing A Future of Competitive Monetary Policy
Today, your citizenship determines the currency you hold, earn, and spend. As an American, you use the US Dollar; as a German, the Euro; as a Korean, the Won. Our current financial systems are predicated on this assumption, and it has held for several centuries.
But now, there’s a glimmer of a new paradigm. A paradigm of competitive monetary policies, where individuals can exercise autonomy and choose their currency — or currencies. It isn’t principally a matter, though, of moving between the Dollar and the Euro and the Won, but rather between those fiat currencies and a new class of charter currencies.
Here, we’ll first examine an emergent taxonomy of currencies and describe charter currencies in the abstract. Then let’s look at a possible case study — Amazon issuing a proprietary charter currency to compete for market share — and its implications. We’ll touch on the secular tailwinds driving the concept as well as some history, and then discuss what competitive monetary policy could do for the world.
A disclaimer: this article is intended purely as a thought experiment about an economic future that is showing hints of beginning to unfold. There are myriad reasons this reality is far, far away — or perhaps even impossible — ranging from regulatory to moral to practical. But it’s worth examining regardless as it demonstrates concepts that are being brought to light by recent developments.
A Taxonomy of Currencies
I first started to explore this taxonomy with Mike Maples and he deserves much of the credit for this concept. We considered three rough categories of currencies:
- Fiat currencies
- Charter currencies
- Commons currencies
You can imagine these existing on a spectrum, from maximally centralized and anti-competitive (fiat currencies) to maximally decentralized and competitive (commons currencies).
A fiat currency is exactly what we know today: e.g. the US Dollar or Korean Won. It is managed by a government and its associated central bank. Monetary policy is determined centrally and it’s generally socially or legally¹ mandatory to accept it for all transactions under that government’s jurisdiction.
Before touching on charter currencies, we’ll define commons currencies. Without meaning to apply any sort of legal “currency” definition here — purely talking about them as potential mediums of exchange — many of today’s digital assets and cryptocurrencies fall into this category. Imagine Bitcoin, Monero, Zcash, and many others. These are (ideally) decentralized and distributed — managed by the commons. There’s no human-controlled central bank and acceptance is decided on a vendor-by-vendor basis rather than being mandatory.
We’ll largely leave commons currencies aside for the purpose of this post, although many of the same arguments and futures we’ll discuss for charter currencies could apply equally well to these.
Charter currencies are the third — and least explored — group. Charter currencies are currencies where the monetary policy is defined by a private issuing institution, rather than a government. Much like commons currencies, acceptance is decided by individual vendors — but unlike commons currencies, a charter currency often comes with an initial use case: spending at the institution that manages it.
Charter Currencies
Paul Romer has suggested that all charter cities share three elements in common:
- An uninhabited piece of city-sized land, provided voluntarily by a host government.
- A charter that specifies the rules that will govern the new city.
- The freedom for would-be charter city residents to move in or out of the reform zone.
We can fairly neatly re-apply these concepts to a currency rather than a city. A charter currency requires:
- Transactions available to be completed with the currency, at least initially provided voluntarily by an issuing institution.
- A charter — monetary policy — that specifies the rules that will govern the new currency.
- The freedom for would-be charter currency users to transfer in or out of the currency from fiat.
Charter cities enable the concept of competitive governance — allowing residents to move between cities, forcing the jurisdictions to compete on quality of governance. In much the same way, charter currencies enable the concept of competitive monetary policy — allowing individuals to move between currencies, forcing the currencies to compete on quality of monetary policy.
A note on this: monetary policy is of course a component of governance as a whole — and one could suppose that charter cities and their associated competitive governance would also include, as a component, competitive monetary policy. But the concept of a charter currency separates out the monetary policy, allowing for competition between currencies without forcing individuals to exit their existing jurisdiction. The status quo is just that: to change currencies, you must change governments. That is incredibly high friction and hurts competition. Instead, you should be able to change currencies and maintain your citizenship.
One key difference between charter cities and charter currencies is the idea of partial exit. Here, we’re using “exit” in the Hirschmanian sense: generating and destroying one’s relationships with other participants in the market, e.g. emigrating from one country to another.
With charter cities, this exit is generally total. Once you move and change citizenship, you no longer have any affiliation with your old home. But with charter currencies, you can partially exit — that is, you could move just 10% of your wealth from your fiat currency to a new charter currency. Your financial status becomes a constant state of equilibrium between various charter and fiat currencies, rather than being a black-and-white decision to go with a single one.
The Practical: AmazonCoin
Thus far, we’ve been exploring these concepts in a purely theoretical sense. Let’s make this more concrete.
Enter AmazonCoin (AZC). This would be a charter currency issued by Amazon.com, Inc., and for the sake of simplicity, we’ll suggest that initially Amazon will allow you to pay for items with equivalent quantities of USD or AZC — a $10 item would cost 10 AZC.
At this point, the fictitious Amazon Central Bank can run this currency however it wants, pulling any of the traditional levers of monetary (and perhaps even fiscal) policy. Now, suddenly, consumers have a choice. They can leave their money in USD, or, if they like the monetary policy or trust the stability of Amazon more than the United States, they’re welcome to move some or all of their wealth to AZC. They can exit USD and enter this new charter currency.
Now, because Amazon has such a massive inventory, assuming that Amazon wants AZC to track the dollar, we can easily imagine it doing so. The value discount assigned to any currency would likely be a function of its acceptance (or “spendability”) in addition to the merits of its monetary policy and the trust in its institution. That is, if your local pizza joint offered JoeCoin, only spendable there, it would likely trade at a massive discount to USD given how unusable it would be.
In fact, we have some empirical evidence of this already: gift cards. If you look at popular gift card marketplaces online, you’ll see that Amazon gift cards typically trade at around a 1–3% discount to their USD value (in fact, sometimes at a small premium, for reasons outside the scope of this article). But retailers with smaller selections — clothing stores, restaurant chains, etc. — tend to trade at around a 10–20% discount.
Gift cards are reasonably close to charter currencies, but with a few differences: first, there’s no central bank setting an actual monetary policy. It’s merely tracking inflows and outflows. Second: there’s breakage — the full value of gift cards often goes unspent because they typically have to be bought in specific denominations. Third: there’s no truly liquid market for moving between gift cards and other currencies. And fourth: there’s no effort to make the gift cards spendable elsewhere. For example, Amazon could try to make AZC spendable at a larger variety of merchants in order to increase adoption.
As we consider how charter currencies could evolve, we should look closely at gift cards and the economies that have developed around them — but we shouldn’t become complacent and think that these are good enough. The differences outlined above drive towards a singular point: gift card economies aren’t intended to compete with each other. The idea behind these charter currencies is that they can drive competitive monetary policy and services and bend the arc of money towards higher quality.
Why now?
Why is it that charter currencies can and should emerge today? A number of factors are driving this change.
First: the internet. The internet has allowed for a global exchange of value and information in a way that simply wasn’t possible before. Extending the reach of AZC or other charter currencies across borders is what allows for this true option of exit. And more broadly, being able to globally and instantly publish prices and build markets between fiat and charter currencies is crucial for the success and efficiency of these systems.
Second: digital assets. The emergence of the crypto industry is demonstrating to consumers that using more than one medium of exchange isn’t just doable — it’s often advantageous. Crypto has done this by enabling different types of money (cf. privacy coins, fast-transacting coins, stablecoins, etc.) and allowing those categories to compete for market share — and that then opens the door for allowing competition within a specific category.
Third: trust structures changing. Trust in governments is eroding and individuals are increasingly believing in the value of privatized services and decision making. Allowing for competition between currencies seems like a natural resolution to the shifting landscape of trust.
Some history
Aspiring currency historians might call out scrip (company or otherwise) as a parallel to — or even an example of — the charter currency concept; but I’d reject that comparison. The most famous use of scrip came in the United States in the 19th and 20th centuries, where corporations — primarily lumber and coal producers — paid their employees in company-specific tender. This company scrip could generally only be used in company stores. This is widely considered a blemish on the economic history of the United States and the practice became illegal there in 1938.
There are two key differences between scrip and charter currencies: one definitional and one intentional. If we return to the characteristics above, we see that scrip fails on the third element: free transferability into or from fiat. Scrip was intentionally built to restrict movement of wealth, thus enforcing employee loyalty. And on that point: charter currencies would have an intention to spread usage as broadly as possible, allowing as many transactions as possible to flow through them, rather than restricting them.
Perhaps an even more relevant bit of history: this imagined future would not be the first time that individuals would hold a variety of currencies. For example, were you to be in the middle- or upper-class in Europe in the 17th or 18th centuries, it’s likely that you’d hold a variety of currencies from different nations. But instead of being by choice (as we’re outlining here), it would be by necessity. At that point, money was metal and the flows of that metal were inconsistent — so you’d be required to earn or spend whatever was available. One year that might have been a pile of gold Portuguese cruzados, and another it might have been silver Spanish reales.
But even though this was a different situation — again, necessity rather than choice — it demonstrates a key component of our charter currency system: discounts. As the metals and currencies ebbed and flowed³ in Europe, the exchange rates between coins fluctuated wildly. Sometimes, based on the strength of a country or the trust in its bank, a coin would be worth nothing more than its constituent metal and would be melted down to arbitrage into more valuable tender. Other times, the currencies of a nation on the rise would jump in value.
In much the same way, we can imagine the AZC to USD — or any other — pair exchange rate varying as the respective institutions rise and fall, making good decisions and bad. The markets would determine the discounts or premiums for each currency, driving towards a world where good monetary policy decisions are rewarded and the bad are penalized — as opposed to our world today where value is largely invariant with respect to such decisions.
Competition
At the end of the day, the concept of charter currencies hits on perhaps the the core idea of the cryptocurrency ecosystem: competition. The allocative and productive efficiency that free markets yield could benefit everything, all the way down to the most basic level of value exchange.
Today, if you disagree with the monetary policy of your government — or, worse, you don’t trust its stability or ethics — you have three choices: remain silent, exercise your voice, or exit your government.
Silence is the most common path and least effective; voice rarely drives change of the necessary magnitude in a reasonable timeframe; and citizenship exit is a painful, high-friction, and often simply untenable approach.
In a world of charter money where any institution — public or private — could issue a competitive currency, you could exit your monetary system without exiting your government. Or — better — you could partially exit and hedge your bets.
This individual-by-individual currency equilibrium and market could drive us towards a better world: one where institutions are incentivized to issue the best currency and policy they can. And for the first time in history, this possibility seems to be within reach.
Questions
A few outstanding questions I haven’t fully addressed here:
- From a regulatory and legal perspective, how could this world exist? Might it first happen in permission jurisdictions and then spread? Could or would a larger nation take the leap and create a framework for this? Why?
- What would issuers compete on? Within monetary policy, perhaps modifying interest rates, modifying reserve requirements, or buying or selling currency-backed bonds? Outside of that, perhaps adding vendors to the acceptance network, building better UIs for usage, or offering performant investment products? Stability relative to various indices?
- How might relative discounts between charter currencies or charter and fiat currencies be calculated? What might the contributing factors be?
- Which issuers would be good? Amazon? Facebook? ExxonMobil? What makes a good issuer? Broadest consumer base? Massive transactions?
Further readings and credits
If you’re interested in exploring any of these ideas further, below are some selected sources on related topics (each of which deserve much, much longer reading lists!):
Charter Cities: All of Paul Romer’s writing, including this archived page for an overview.
Voice and Exit: Shot: Albert Hirschman’s Exit, Voice, and Loyalty. Chaser: Balaji S. Srinivasan’s Silicon Valley’s Ultimate Exit talk.
Just a really great book recommendation: The Baroque Cycle series by Neal Stephenson. It’s fiction, but covers monetary policy, currency, politics, and more.
“How does a poor country defeat rich ones?”
“Indeed, the answer is not by acquiring wealth in the sense that France has it.”
“Meaning vineyards, farms, peasants, cows?”
“But rather to play a sort of trick and redefine wealth to mean something novel.”
“Currency!”
“Indeed.”
— Neal Stephenson, The Baroque Cycle
Managing Commons: Elinor Ostrom, especially Governing the Commons.
Fiat vs. Private: Aaron Batalion’s The Sovereign Protocol War.
Trust in Institutions: Edelman’s annual trust studies.
Markets and Competition: Endless directions to look here. A severely abbreviated list includes: much of Adam Smith, including The Theory of Moral Sentiments and several of the Lectures on Justice, Police, Revenue and Arms. Lots of Milton Friedman, including Capitalism and Freedom. Greg Mankiw’s Principles of Economics. Hayek’s Prices and Production. And much, much more.
History of Currency and Money: Henry MacLeod’s The Elements of Economics.
One more book: Thomas Hobbes’ Leviathan. He beat us all to the punch, talking about exiting fiat in the 17th century:
And because silver and gold have their value from the matter itself, they have first this privilege; that the value of them cannot be altered by the power of one nor of a few Commonwealths; as being a common measure of the commodities of all places. But base money may easily be enhanced or abased.
— Thomas Hobbes, Leviathan
Big thanks to Mike Maples, Aaron Batalion, Henry Ault, and an array of others (Dan Elitzer, Jill Carlson, Charles Noyes, Richard Craib, Arianna Simpson, Rob Bent, Sina Habibian, Suna, Tara Tan, Ian Lee, Gavin, Joe Gerber, and many more) for conversations that led to many of these thoughts—and some of them for reading drafts of this piece.
Footnotes
¹ As an aside, the definition of “legal tender” is often misconstrued. You often hear it described as “currency that is mandatory to accept for all transactions in a given jurisdiction,” when in fact it is only “currency that is mandatory to accept as payment of debts in a given jurisdiction.” But practically, a nation’s fiat currency is typically accepted everywhere in its borders as a social matter.
² Hat tip to Matt Levine for discovering this gem of an image.
³ Fun fact: there are some (controversial) suggestions that the etymology of the word “currency” actually arises from coins and metals “flowing” as a current does. See: Latin currens, present participle of currere “to run.”
