Cryptocurrencies Are Just Another Form of Parallel Currency
Parallel currencies have existed long before cryptocurrencies and will likely continue to exist well after.
Stacey Morgan (not her real name) fumbles with a cigarette, hands visibly shaking, Morgan, a transgender prostitute is covered in a cold sweat despite the fifty-degree weather outside and she’s desperately looking for a hit.
Walking the streets of Cicero Avenue on Chicago’s west side, Morgan understands the dangers,
“Walking the streets is scary. I’ve been robbed. I’ve been raped… crack cocaine makes me feel good.”
But tonight, as on almost every other night, Morgan throws caution to the wind, because she needs to get high.
And instead of selling her body for money tonight, she’s going to cut out the middleman and sell thirty minutes of pleasure for a toke directly.
Whilst most drug dealers would always prefer to receive cash, there are many who will accept other forms of currency as well.
Bartering, is one of the oldest forms of currency and the currency which Morgan deals in, may well be the oldest.
Not Legal Tender But Tenderly Legal
So when the Italian government considered the idea of introducing mini bills of treasury, also referred to as “mini-BOTs” to help it pay its debts to private sector businesses, one of the criticisms leveled against it was that since the mini-BOTs were not legal tender and Italy is part of the eurozone, such an issuance would be “illegal,” without departing the common currency zone.
When asked about Italy’s proposed mini-BOT plan, European Central Bank (ECB) president Mario Draghi noted,
“They (the mini-BOTs) are either money and then they are illegal, or they are debt and then that stock goes up.”
But Draghi’s view may be misguided at best.
Just because Italy’s proposed mini-BOTs could be considered a parallel currency, does not automatically make them illegal in the eurozone.
According to such a view, ECB members are obliged to hold the euro as legal tender in their respective sovereign states and by issuing the mini-BOTs, Italy would in effect be issuing its own currency — something that it could not do unless it was prepared to leave the eurozone.
But this view overlooks the fact that parallel currencies can and have circulated without legal tender status. It also ignores the fact that parallel currencies (even of the sort issued by Morgan in Chicago), none of which constitute legal tender, have always been with us.
What is Not Illegal is Not Forbidden
In most western and market economies, there is no prohibition on settling commercial debts in other forms of mutually agreed securities or assets — not even in the eurozone — and this can include almost anything.
And while legal tender status helps in establishing and popularizing a currency, it is by no means a prerequisite for a currency to function.
Take Hong Kong for instance — the Hong Kong dollar is not legal tender but a promissory note issued by various commercial banks, including the Hong Kong and Shanghai Banking Corporation, the Bank of China and Standard Chartered Bank.
The global monetary system as it stands allows for and features a plethora of parallel currencies, none of which are legal tender, but all of which seamlessly interact with each other without any legal contradiction.
As the Bank of England points out, checks, debit cards, and contactless payments don’t constitute legal tender either, yet they too are a form of parallel currency and function just as effectively.
And one of the reasons why we may have possibly forgotten the extent and breadth of the pre-existing parallel currency network — which includes everything from airline miles to store-issued prepaid cards, bank money like the Hong Kong dollar to the eurodollar market — is because in recent years, the parallel currency network has been overshadowed by the emergence of cryptocurrencies, which have hogged the debate.
Cryptocurrencies Are Parallel Currencies
And while most cryptocurrencies differ from traditional parallel currencies in that most do not have an overt issuer or guarantor, that distinction is gradually being whittled away with the emergence of stablecoins (backed by bank deposits) as well as cryptocurrencies such as Facebook’s Libra, which is to be backed by a basket of fiat currency bank deposits as well as government debt.
Italy’s mini-BOTs have one key advantage over cryptocurrencies (as they currently stand) for now — their ability to be used to pay for taxes. Being issued by a national treasury, Italy’s mini-BOTs in that sense have a far better chance of succeeding as a more liquid currency than perhaps your average parallel currency system such as Ripple (a cryptocurrency meant to facilitate interbank transfers).
But simply because a currency can be used to pay for taxes in and of itself is not a benefit, it’s a feature.
Although the day may never come (or may come very much later), if and when cryptocurrencies are widely accepted as currency for the purchase of goods and services and employees are willing to receive their salaries in cryptocurrencies — then the “benefit” of a currency being able to be used to pay for taxes is not much of a benefit at all.
People pay taxes because they have to, not necessarily because they want to and the argument that cryptocurrencies will never succeed because they cannot be used to pay for taxes ignores this fundamental cornerstone of economic life — taxes are a necessary evil and most people would rather avoid them.
Even today, there are many employees at some of the top cryptocurrency and blockchain firms who elect to receive their salaries in a mix of both fiat and cryptocurrencies, with some electing to receive only in cryptocurrency.
By electing to receive salaries in cryptocurrencies, employees can effectively bypass the tax system entirely in many jurisdictions, excluding perhaps the United States.
And given the ambiguous legal status of cryptocurrencies in many countries, billions of dollars of tax revenue may be forfeited by governments who have yet to properly regulate or cater for cryptocurrencies.
If cryptocurrencies do acquire the property of “moneyness,” they have the potential to upend the concept of currency altogether.
Consider the IOUs California began issuing in 2009 which helped to inject enough liquidity to spare the state from bankruptcy. Those IOUs were a form of debt, which also worked as a currency with a very positive impact.
Parallel currencies have existed for as far back as trade has existed. Whether a bushel of wheat or a cryptocurrency, their legal status, or lack thereof has not inhibited their proliferation — instead practical reasons have either led to their growth or decline — it’s not easy to bring a herd of a goat to trade for a few sacks of grain.
To that end, cryptocurrencies are for now, still cumbersome to use. Digital wallets and the need to protect and maintain private keys to these wallets remain relatively cumbersome for most average users.
The ability of cryptocurrencies to be used in a variety of transactions is still limited and in its infancy.
If and when these challenges are addressed, cryptocurrencies have a real shot at becoming for all intents and purposes a full-fledged parallel currency, legal status notwithstanding.