Cryptos Creating Harmony: Cryptocurrencies as Ideal Money vs USD or CNY
By Michael A. Verlezza
This article was published by the Adrealm think tank, the AEIOU, and it does not reflect the point of view of The Adrealm Foundation. You can read more articles published by the AEIOU here.
John F. Nash, Jr. first posited the idea of Ideal Money not long after being awarded the Nobel Memorial Prize in Economics for his development of equilibrium theory. While money in the traditional sense is expected to have the so-called “Functions Four,” (medium, measure, standard, and store of value), Ideal Money (and more specifically, asymptotically ideal money) is an attempt to address the Griffin Dilemma. Any nation (or other entity, as we will soon see) wishing to produce the ideal money serving as the sole global reserve currency must be willing to issue what is effectively an infinite amount of said currency.
As such, there is no fixed global reserve currency. Instead, a blend of national currencies exists. With that in mind, this article examines the distinct advantages of both the United States Dollar and the Chinese Yuan as potential reserve currencies. Incidentally, while the Yuan has historically not been a component of Allocated Reserves, the aftermath of the global downturn of 2008 has seen an erosion of the Dollar’s representation in this mix. This is particularly interesting, given that the rate of deterioration is proportional to the newfound prominence of the Yuan.
Money and monetary policy should not be exciting. It should be expected, predictable, and mundane. It is the foundation, the bedrock, the antecedent upon which any financial system is predicated.
Oversight of monetary policy is allocated to the Federal Reserve System and its Board of Governors. The Federal Open Market Committee holds dominion over not merely the quantity of money in circulation, but also the price of said money in the form of interest rates. While the dollar is “free” in the sense that FOMC inflation and rate targets are set in a more anticipatory manner, one cannot overlook the relationship between the Fed and their overseers in Congress. As they are beholden to the legislature, it is immediately obvious that the international reliance on the Dollar uniquely positions the US to use currency as a weapon. As we have seen in recent years, unilateral sanctions — as well as the punishing fines associated with any violations of such sanctions — afford the United States this disproportional geopolitical power. Furthermore, it has been shown since 2008 that the Fed will use extraordinarily technical (and admittedly brilliant) measures to avoid simply issuing more currency.
By contrast, while the Yuan is notionally free of overt political pressure, it is generally seen as riskier than the Dollar in terms of corruptibility. While this has largely been addressed in recent years via several high profile arrests, China continues to face repeated questions around the artificial suppression of currency values. Such concerns arise from People’s Bank of China’s efforts to utilize “banding” to manage (directly or indirectly) a surging economy’s Current Account.
One cannot help but wonder if the result of what are clearly mindful and tight controls, coupled with the implications associated with a perpetually Rising China, will lead the Yuan to continue to erode the Dollar’s position as the dominant global reserve currency.
In terms of Ideal Money, the only remaining element would be the People’s Bank of China’s willingness to provide sufficient global supply. This begs the question — through the use of more direct controls, could the PBOC ably manage value and supply? This has not been sufficiently tested.
This brief analysis is simply to serve as a contrast to a hypothetical world where Bitcoin enjoys broad adoption (perhaps alongside a variety of altcoins). We will show, quite convincingly, that cryptocurrency serves as a sort-of “best in breed”, addressing the Dollar and the Yuan’s shortcomings while surpassing them in each meaningful category.
First, the decentralized nature of cryptocurrency has clear advantages. While it may be said that the manner in which mining resources are allocated are effectively a “voting” system, this is more akin to a Board of Governors steering monetary policy than a single person noodling with economic levers.
This aspect of cryptocurrency also addresses a second concern: that they enjoy a measure of insulation from political forces. Indeed, governments cannot stop Bitcoin; they may only hope to contain it. Laws and regulations weigh on the secondary market and broader ecosystem, but not the viability or sustainability of Bitcoin itself.
Third, the total supply of Bitcoin is fixed, with a maximum theoretical limit of 21 million. Moreover, the rate at which supply increases is publicly understood and asymptotic, with the only variance around an estimation of how many coins have been permanently “lost.” It should also be noted that the volume of coins in circulation is far lower than the quantity in existence, as one would expect from any reserve currency. Thus, there is no question around the willingness to create additional supply — it is a programmatic feature of the technology. Around 2140, when supply is capped, we approach the notion of willingness from the perspective that more coins cannot be created. This is not through lack of will, but rather the stark absence of capacity.
This leads naturally to the fourth aspect of ideal money — stability. While recent months have seen reasonably stable price floors and ceilings (stable for Bitcoin, at any rate), it is entirely plausible for speculation or adoption to drive appreciation in the near term. Over the same time horizon, regulatory challenges may engender bearish sentiment. At any rate, as conservative regulators — emboldened by a vocal component of classical economists — drag their feet in creating a framework around cryptocurrency, rate of adoption is similarly retarded. In the case of Bitcoin, as the supply approaches 21 million coins and, in parallel, regulators finalize their influence on the space, it is reasonable to expect a dramatic uptick in adoption.
Taken together, it’s clear that various cryptocurrencies, and Bitcoin in particular, have the potential to serve as Ideal Money. Evolving into this paradigm will take decades (a short- and medium-term realization of this hypothesis should not be expected), but in the eyes of this analysis, has an air of inevitability.
A recent Axios report noted that the buzz around crypto has largely subsided. Good. Money and monetary policy should not be exciting. It should be expected, predictable, and mundane. It is the foundation, the bedrock, the antecedent upon which any financial system is predicated.
Written by Michael A. Verlezza on November 13, 2018.
ABOUT THE AUTHOR
Michael A. Verlezza is a Fulbright Scholar, having conducted research in game theory and comparative economic policy at Queen’s University in Kingston, Ontario. His research has touched an array of fields, including finance, healthcare, human resources, and academia itself. His interest in Blockchain and Cryptocurrency goes back to 2012. An associate of the AEIOU, Michael resides in Raleigh, NC with his wife and two daughters.
The AEIOU is the independent think-tank of The Adrealm Foundation, creators of a blockchain-based digital advertising ecosystem. The observations and commentary published on AEIOU-curated platforms and channels do not necessarily reflect the point of view of The Adrealm Foundation. We welcome thoughtful, well-written articles that are directly or conceptually related to blockchain technolgy, cryptocurrencies, and ad-tech.
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