A Cryptocurrency that can coexist with Fiat Currencies
- By Lead Economist Jay Jung
In September, Barry Eichengreen, Professor of Economics at UC Berkeley, criticized the stable cryptocurrency as merely a myth in a project syndicated article. According to his article, whether or not it is backed by a collateral, the stable cryptocurrency that is currently being issued is nothing more than an illusion that goes on without knowing anything about the central bank of emerging economies to defend the exchange rate from attacks with speculative purposes. However, we cannot help but ask here whether the belief in such a stable cryptocurrency is just a myth?
As long as we live, protect and pay taxes in a sovereign state system, we cannot live without the fiat money. Unlike Eichengreen, Narayanana Kochirakota, who was the governor of the Federal Reserve Bank of Minnesota, in 1998, wrote that if all economic activities in an economy system could be recorded, the money would be useless because all transactions in the economy system could be cleared by offsetting the records. However, it is impossible to record all of these economic activities, thus the money could be used as an auxiliary means of memory. Thus, according to Kocherlakota, “Money is Memory.”
Money as such memory is also associated with the blockchain technology. By considering characteristics of the blockchain which solves the Byzantine Generals problem, it is possible to record all activities in an economic system in a form that cannot be erased due to the nature of the technology which is difficult to hack or forge in the network. Even if we do not refer to the project in the Swedish central bank report where all citizens have an account at the central bank, the blockchain technology could be used as a payment instrument using records.
In addition to this blockchain technology, what we are considering is a reverse ICO. Unlike a normal ICO, which creates a platform, the purpose of reverse ICOs which creates dApps and make connections to off-line businesses with blockchain is not only to make a universal payment alternative to the current fiat currency but to create a tokens which could be used in restrictive areas in their original business. To ensure the smooth operation of these tokens, a token economy that applies the basic principles of economics to the operation mechanism of tokens is being actively researched.
Above all, we have seen many successful cases of tokens replacing the role of money in a limited ecosystem. For example, gift cards also have stable values and function within an economic system with fiat currency.
The cryptocurrency substituting the fiat currency is myth. There could be no cryptocurrency to replace the role of a fiat currency that functions as a measure of value in a store of value, a medium of exchange, and a means of payment to the state in the system of sovereign state, and if exist, it would be a cryptocurrency published by the central bank. Thus, the projects that many blockchain startups are promoting is not a cryptocurrency but a token that plays a limited role in their own ecosystem. These tokens are likely to operate reliably if their economic mechanisms are well designed and operated credibly.
If so, then this question could come to the contrary. If the goal is to create a token that functions reliably in a limited business ecosystem, rather than a cryptocurrency as a payment instrument replacing fiat currency, and if startups could finance for that purpose, what is the difference between the conventional capital raising of startups? The difference is in the blockchain.
Existing mechanisms must have a reliable intermediary. In other words, there must be a broker who is responsible for establishing the trust and executing the contract in each area of the business, such as signing a contract or paying for a payment. Finding such trustworthy brokers or doing transactions with these brokers has increased transaction costs. Blockchain can reduce transaction costs because transactions are concluded without a reliable intermediary.
Eichengreen critique on stable cryptocurrency is certainly worth a consideration. However, the goal of many of blockchain projects are not to create a stable cryptocurrency which substitute fiat currency, but to create tokens that operates reliably within its own ecosystem, which is similar to a gift card. In other words, fiat currency and tokens could coexist in any way. Of course, the presence of a token could lower the transaction cost, which is definitely a progress made. According to the book of Douglas C. North who received the 1993 Nobel Memorial Prize in Economic Sciences, “Structure and Change in Economic History,” the development of human history has been made to reduce transaction costs. Blockchain could also be a means to move in that direction.
Translated from Korean newspaper
http://www.edaily.co.kr/news/read?newsId=01331686619373904&mediaCodeNo=257&OutLnkChk=Y
