Whose stability?

Reframing stability in the crypto economy

Dick Bryan and Akseli Virtanen

There is growing concern about the unstable value of cryptocurrencies, and hence a growing appeal of mechanisms to stabilize coin values; invent mechanisms for a ‘stablecoin’. See, for example Haseeb Qureshi: “Stablecoins: designing a price-stable cryptocurrency” and a very interesting thread on ethresearch on “Collateralized Debt Obligations for Issuer-Backed Tokens”.

The goal of stability

The impulse for stability is clear: trust and reputation mean that people should know, in broad terms, the value of what they are holding. While cryptocoins remain relatively minor currencies (where, for example, the US dollar is deemed to be the benchmark of stability) this volatility exists as a major problem impacting on reputation and coin capacity. We may imagine a world in which cryptocurrencies are deemed the benchmark and the US dollar is depicted as volatile by comparison. It is some way off still…

But here is the question: is this form of stability really the goal?

If we think of money as having three basic functions (means of exchange, store of value, unit of account), then there are three different answers to this question. But the fundamental issue is that cryptocurrencies are not just ‘money’ — they are part money, part asset and part political organization — and these other dimensions must impact the way we see ‘stability’.

To develop this proposition, we can look at ‘stability’ in the context of each money function.

Means of exchange

A unit of value that preserves value over time is desirable in executing exchange: it gives predictability and constancy. The problem arises when there is more than one unit of currency and there is the belief that they can operate as a unity. History shows that it is almost impossible to sustain, for different monies are not readily commensurated. We have seen in the whole history of capitalism just a brief period — 1944 to 1971 — where the world pursued the goal of stable relative values of national currencies (fixed exchange rates). That it was so short attests to its unsustainability and moreover, in the process, the regime served as a tool of global domination by the proxy anchor: the US dollar and the Federal Reserve.

Exchange rates change for a reason: different social and economic circumstances that apply in the territories of different currencies. And even as currencies have to be to some degree de-territorialized, they still remain variable and sometimes volatile because they reflect social and economic fractures. The simple point is that money is a social relation, not just a technical mechanism. The question of currency instability is about social-economic non-commensurabilities: divisions that are not solved by market prices alone.

What are these divisions? Economists used to think it was about reconciling the past: balance of payments deficits and surpluses that had to be paid for. Economists now think the divisions are about the future: especially interest rates. The reality is way more complex: so much so that what we see is not rapid adjustments to take account of these fractures and divisions, but a continual arm wrestle, manifesting as volatility driven by speculative, ‘noise’ trading.

Store of value

Advocates of stablecoins might say that the volatility of crypto-currencies stops them operating as a store of value. This is a little outdated idea. Traditionally, ‘cash’ (meaning fiat money) was posed as the safest store of value because it is definitionally the most liquid asset and the state underwrites its value. States cannot preclude inflation and deflation, so it is not possible to secure absolute stability (the social intruding) but they can spend massive resources attempting to. And treasury bonds were, by the same reasoning, the longer-term safe store of value.

But those are dated notions, and not just from the perspective of cryptocurrencies. While cash and treasury bonds are always elevated in safety status because of state backing, they have of recent times been attached to negative returns (deflation; negative interest rates). To put it bluntly: the old definitional privileging of state cash and treasury bonds as ‘safe’ and hence desirable to hold is being challenged.

Increasingly, financial markets understand stability in a different way:

  1. Not looking for stability in the value of individual assets in isolation, but in holding a portfolio of non-correlated assets, none of which is individually stable, but where volatilities of different assets follow different patterns, balancing out the different volatilities, as it were, and
  2. Holding derivative positions to hedge against the portfolio’s overall volatility.

In this framing, crypto-currencies take their place in a spectrum of asset classes that, in combination, simulate a chosen level of value stability. The role of crypto assets in this approach to stability is still evolving and depends on:

a) Crypto assets having a volatility that cycles differently from, say, the stock market, property and the values of asset-backed securities

b) Crypto assets being integrated into the portfolios of investment banks, hedge funds and pension funds.

Each of these dimensions requires greater maturity in crypto asset markets. We are not there yet, but it will happen.

Unit of Account

But now to our actual point in this text: as units of account, is it even desirable for cryptocurrencies to be stable with respect to the US dollar? The answer is no. Because their roles and goal are different.

The US dollar (fiat currencies generally) is ‘stable’ because it reflects and enforces socially-dominant ideas of what constitutes ‘value’. Money codifies existing systems of ownership and hence distribution. This is the deepest sense in which money is social, and not just a technical mechanism. So in capitalist economies, it is clear that fiat monies as units of account are designed to measure equivalence in exchange, and in the process embed the virtue of the social relations that actually created the goods and services and brought them to market. It embeds an economic culture that frames the economy by reference to profits and losses, income and expenditure and applies these benchmarks to governments, companies, households and even to individuals. As a society, we may seek to qualify these measures (support loss-making activities, discount profits with respect to human rights and environmental criteria, etc.) but the primacy of individualism, private property and the pursuit of profit is embedded in current fiat monies.

Wherever those social ideas are deeply contested, fiat money becomes unstable. If we demand ‘massive’ income redistribution between rich and poor; ‘major’ shifts between profits and wages; ‘reasonable’ payments for non-wage human activities; ‘significant’ environmental and other social criteria to drive production decisions — the reply will come from the state that it is not affordable: it will create government deficits; it will mess with incentives to invest and work, and cause inflation. And it is sort of true, on its own bubble! The problem is not the implied expenditure, but the social upheaval. The bailouts of financial institutions in the context of the 2007–2008 global financial crisis was not deemed unaffordable or inflationary precisely because it was posed as ‘necessary’ to restore the old order.

Now, what makes cryptocurrencies so powerful is that we can use them to express different social and economic agendas and to measure things differently; to implement different incentives and record their effects. Economy opens as a design question. This is the precondition for building different social and economic agendas and de-naturalising the rule of private and individual measures of social contribution, materialising in concepts like ‘profit’ and ‘efficiency’.

In this context, cryptocurrency ‘stability’ has nothing to do with the US dollar. Stability here means that a crypto-currency operates as:

a) A reliable measure of the value attributed of those activities and outcomes that a currency nominates as its raison d’être (that the currency performs as promised) and

b) The social validation of those activities and outcomes (that the promised performance is deemed socially useful, as verified by the fact that people want to hold the coin).

Framed this way, any correlation with a fiat currency will be coincidental. But we must also be aware that cryptocurrency valuations may not simply reflect these two criteria: ‘speculative’ trade, no matter what its motivation, will challenge the way in which cryptocurrency prices move.


From the above, it seems that ‘stability’ in cryptocurrency has 3 different meanings, associated with three different objectives:

Stablecoin in the light of these differences

Advocates of stablecoin seem to frame cryptocurrencies as direct analogies with fiat currency. Accordingly, they privilege the means of exchange function and see stability in the store of value as being a direct consequence of stability in exchange.

It is not surprising, therefore, that their goal is to (re)invent stability mechanisms that rely on either a central bank role (a body that buys and sells reserves to stabilize coin price) or on private underwriters who consciously take on default risk in return for a profit.

We have just challenged that framing conceptually, but also history teaches an important lesson. We saw in the Asian financial crisis of the 1990s that hedge funds took on national central banks that oversaw exchange rates tied to the US dollar. The central banks lost, despite their enormous reserves, because they were defending indefensible exchange rates. By their defence of fixed rates, they offered guaranteed arbitrage opportunities to hedge funds which, while lacking the sovereign power of central banks, were using lines of credit and short positions in derivative markets to give them leveraged means to force the central banks to float.

It is a lesson with future application. When the crypto stablecoin valuation raids start because it is believed that a cryptocurrency cannot sustain par with the US dollar, we have absolutely no reason to believe that the reserves held by, or accessed by, stablecoin companies will perform better than the reserves held by those sovereign central banks in Asia. When the market assesses that fixed exchange rate is unsustainable and they are targeted for a raid, they will fall.

But there is a simpler issue here. If the goal is to have a cryptocurrency that is stable with respect to fiat currencies, then why not wait a short time for state central banks to issue their own cryptocurrencies, as they seek to incorporate the capacities of blockchain in facilitating trade?

If the objective is different — to utilize cryptocurrencies separated from the state — then the question is: what is the goal of being separate? If the goal is simply to facilitate exchange, then we should acknowledge that private cryptocurrencies will always be less stable than state ones. There needs to be a better reason. And we think there is. It is about building a different sort of economy. An economy that operates in a different way.

The reason for building a crypto economy is certainly that we understand that finance is moving beyond a discretely-delineated category of money as an ‘independent’ measure of the so-called ‘real’ economy. With financial innovation, many assets acquire the liquidity of ‘money’, and the distinction between money and other assets is breaking down (See more on this: What is a crypto economy?). As a consequence, the sociallness of money, once hidden by the belief that there are objective units of measure, starts to reveal itself. Cryptocurrencies are about exploring and re-engineering that sociallness; building alternatives of how a different economy might be. How to do economy differently.

This re-framing doesn’t mean we ignore ‘stability’, but we define it with reference to the performance of a newly-conceived crypto economy; not with reference to a system we seek to transcend.

What do you think?

(We are working on these issues this week at the Cryptoeconomics Working Sessions at NYU/Stern.)

*Dick Bryan is a prof. of political economy (University of Sydney) and Chief Economist, Economic Space Agency. He is one of the key theorists of the derivative value form, and the author of Risking Together and Capitalism with Derivatives (together with Mike Rafferty). Akseli Virtanen, PhD, is a political economist, the author of Arbitrary Power. A Critique of Biopolitical Economy and Economy and Social Theory (Vol 1–3, with Risto Heiskala), Co-founder at Economic Space Agency, and at the decentralized hedge fund Robin Hood Minor Asset Management