Crypto-not-Currencies Crypto natives refer to Bitcoin as “sound money,” and Ethereum supporters take it a step further and call Ethereum “ultrasound money” … … except neither of them is really “money.” And that’s okay. In economics, an asset that can serve as a medium of exchange, unit of account, and a store of value is bestowed with the label of “money.” You can buy a banana and pay a plumber in your country’s version of money - which we call “currency” - in a very straightforward way, because the prices of those goods and services are denominated in that currency to begin with, and because the people you’re transacting with agree that it has value.
sorry to steal the wind out of your sails, but I would’ve expected your first post to be about the quite lofty ‘manifesto’ (https://unpegged.substack.com/p/coming-soon?s=r), namely that: “It is our strong conviction that stablecoins and cryptocurrencies will have an indispensable part to play in the future of financial intermediation, holding significant promise in improving the traditional financial system.”
Even as a layman I would have doubts about such a stance, given that the crypto-space is up and running for a good decade and it hasn’t crowded out virtually anything in TradFi. So what exactly is your “strong conviction” based on? How would you address, for example, the assertions of @smdiehl (https://www.stephendiehl.com/blog/against-crypto.html)?
Now on to this, your first post. Just a few critical thoughts:
1. There are other reasons why a currency has value, besides taxation. For example, the fact that legislation requires (not necessarily in the US) that pricing for certain transactions happen in the national currency. For example, that there are institutional guarantees to ensure a relatively low volatility in the value (the purchasing power) of the currency. For example, that the rulebook for this environment is reasonably stable over time and cannot be easily amended at the whim of someone (read: politician). For example, that processes (from decision-making to money issuance and many others) are transparent and decision-makers can be held accountable. – I fail to see any of this in crypto. In fact, what I see is that most of these things were never desired in the crypto-sphere and, therefore, were excluded by design.
2. Later on you write that “The asset has value because other people agree that it has value. Otherwise, your $100 bill isn’t even worth the paper that it’s printed on.” – Well, not really. Partially, maybe. The 1 dollar bill isn’t worth 1 dollar only because people believe in it. It’s because it is well enforced that it is so (see my point 1 above) and there are many indirect reasons, as well (the quality of US financial markets, i.e. how active, liquid, competitive they are; quality of market oversight and legal settlement mechanisms; foreign trade and other balance of payments transactions; US diplomatic prowess and military might; historical reasons; etc.). A dollar is a dollar because all of this, too. People’s belief in it is but one factor.
3. While the FED usually refrains from using the term, only number [1] from your list would unequivocally qualify as “cash”. Cash usually means physical money, i.e. coins and notes. All the rest is not cash. Anything beyond number [5] wouldn’t even be in the monetary aggregates of the FED.
4. Private money doesn’t really exist. Even if it (or should I rather say “they”?) would, in a large and highly complex economy it could never become prevalent. The fact that money works as well as it does today (which is not to say that it’s perfect), is because the state is up to its elbows in it. If you remove the state (which is one of the central tenets of all things crypto) it won’t work. If you believe that somehow the AI or the technical solution behind a certain crypto asset or the blockchain will substitute the myriad functions of the state in the financial system, you’re chasing a mirage. If you think that we haven’t had this before (i.e. private money), you don’t know economic history.
Guys,
sorry to steal the wind out of your sails, but I would’ve expected your first post to be about the quite lofty ‘manifesto’ (https://unpegged.substack.com/p/coming-soon?s=r), namely that: “It is our strong conviction that stablecoins and cryptocurrencies will have an indispensable part to play in the future of financial intermediation, holding significant promise in improving the traditional financial system.”
Even as a layman I would have doubts about such a stance, given that the crypto-space is up and running for a good decade and it hasn’t crowded out virtually anything in TradFi. So what exactly is your “strong conviction” based on? How would you address, for example, the assertions of @smdiehl (https://www.stephendiehl.com/blog/against-crypto.html)?
Now on to this, your first post. Just a few critical thoughts:
1. There are other reasons why a currency has value, besides taxation. For example, the fact that legislation requires (not necessarily in the US) that pricing for certain transactions happen in the national currency. For example, that there are institutional guarantees to ensure a relatively low volatility in the value (the purchasing power) of the currency. For example, that the rulebook for this environment is reasonably stable over time and cannot be easily amended at the whim of someone (read: politician). For example, that processes (from decision-making to money issuance and many others) are transparent and decision-makers can be held accountable. – I fail to see any of this in crypto. In fact, what I see is that most of these things were never desired in the crypto-sphere and, therefore, were excluded by design.
2. Later on you write that “The asset has value because other people agree that it has value. Otherwise, your $100 bill isn’t even worth the paper that it’s printed on.” – Well, not really. Partially, maybe. The 1 dollar bill isn’t worth 1 dollar only because people believe in it. It’s because it is well enforced that it is so (see my point 1 above) and there are many indirect reasons, as well (the quality of US financial markets, i.e. how active, liquid, competitive they are; quality of market oversight and legal settlement mechanisms; foreign trade and other balance of payments transactions; US diplomatic prowess and military might; historical reasons; etc.). A dollar is a dollar because all of this, too. People’s belief in it is but one factor.
3. While the FED usually refrains from using the term, only number [1] from your list would unequivocally qualify as “cash”. Cash usually means physical money, i.e. coins and notes. All the rest is not cash. Anything beyond number [5] wouldn’t even be in the monetary aggregates of the FED.
4. Private money doesn’t really exist. Even if it (or should I rather say “they”?) would, in a large and highly complex economy it could never become prevalent. The fact that money works as well as it does today (which is not to say that it’s perfect), is because the state is up to its elbows in it. If you remove the state (which is one of the central tenets of all things crypto) it won’t work. If you believe that somehow the AI or the technical solution behind a certain crypto asset or the blockchain will substitute the myriad functions of the state in the financial system, you’re chasing a mirage. If you think that we haven’t had this before (i.e. private money), you don’t know economic history.
Need I say more?