Forget bitcoins and other cryptos, a single stablecoin backed by government guarantees is the real future

In 1971, US President Richard Nixon abandoned the greenback’s peg on the gold standard so that the United States could increase the money supply to finance the Vietnam War. If Russia ran out of cash to service its debts, it would probably have to pull out of Ukraine.

In reality, if the West lost control of the money supply to decentralized finance (DeFI) and private cryptocurrencies, the outcome would be closer to war than the “world peace” narrative of cryptocurrencies. pumps. Notably, China banned crypto in order to tighten its grip on the supply of liquidity.

Cryptocurrency assets promoted by exchanges like Coinbase currently have a market capitalization of around $1.8 trillion. Bloomberg

A single unit of account is also essential for uniformity. Central banks provide a stable unit of account to set the price of goods and services. It’s common sense. There is no way a restaurant will accept payment in dozens of different currencies at dozens of different floating rates.

A landlord also wouldn’t sign a lease for 12 months’ rent in bitcoin if its value could be halved in six months. This is why a currency must be a stable store of future purchasing power.

Unique weights and measures such as tons and kilometers exist to ensure uniformity in trade. In theory, you could have hundreds of different private weights and measures to price commodities, but capitalism revolves around single units of account for utility.

All of this means that the likely future of crypto is a single government-backed stablecoin as a means of exchanging wealth, without banks as intermediaries. Bitcoin, as the current leader, ends up being a storehouse of wealth.

Alternative futures

Much of the thinking about the potential of central bank digital currencies (CBDCs) is also muddled, in part because central banks themselves remain unclear.

Private banks create money, but the amount of money in the economy is controlled by central banks which set interest rates – and more recently, via bond purchase programs to finance government deficits, known as Quantitative Easing.

As the Bank of England points out, each time a commercial bank makes a loan (such as a mortgage), it simultaneously creates a corresponding deposit in the borrower’s account to create money.

Therefore, any genuine CBDC should offer users a bank account with the central bank. Otherwise, it wouldn’t be a CBDC. It follows that if an employee could order his employer to pay his salary into a central bank account, it would cause massive disruption for private banks.

The main tools for acquiring and retaining bank customers are liquid accounts receivable as reserves of future purchasing power.

Retail and corporate banking systems also operate by offering competitive offers on products such as credit cards or loans to attract customers with central banks as liquidity providers. CBDCs cannot replace cash in this sense, as they would sacrifice the benefits of competition in the banking system today.

In 2022, cryptocurrencies really only exist for speculative purposes, with their surging prices being a symptom of excess liquidity injected into the financial system.

Bitcoin is too volatile to function as a means of exchanging wealth, and the proof-of-work system is too slow to process transactions.

The jury is out on the usefulness of blockchain technology. So far, it has largely provided synthetic asset price bubbles and other concepts such as non-fungible tokens (NFTs) as solutions to anything that cannot already be executed from a blockchain.

Whether the future of money includes a cryptocurrency for exchanging wealth will almost certainly depend on the willingness of governments to provide it.

Comments are closed.