THOUGHT EXPERIMENT: A Globally Recognized Cryptocurrency?
Dhruv Garg
A certain cryptocurrency has been unanimously approved by all nations of the world as the new legal tender assuming that the convertibility of current liquid assets held by all the different stakeholders of the society into the new legal tender has no costs and is effortless.
For anything to be recognized as a legal tender or ‘money’ which is a medium of exchange, measure and store of value, three key elements are required. (1) It must be universally recognized by everyone in the community, (2) all members must have confidence in the currency and, (3) there must be stability in its value. Cryptocurrencies perform poorly in all these areas, however, a unanimous approval by all nations would solve the problem of universal acceptability which, in its ripple effect could help bolster confidence in digital currency and stabilize its value. Most of the price shocks cryptocurrencies like bitcoin face today are from market speculation about their acceptance. As the currency would be recognized as legal tender, all parties would have to accept settlements via cryptocurrency which would lead to stabilization in value. As the value of cryptocurrency that can be mined is finite (because of its technical design), a globally accepted mathematical model can be devised to accurately forecast its values at different time points in the future (this forecasting already exists in certain cryptocurrencies), further stabilizing its value and avoiding sudden market shocks. The currency would be given a status of a cash equivalent and not an investment-like asset.
An imperfect substitute to this question of analyzing the macroeconomic consequences would be to ask what would happen if there was a singular global currency in co-circulation with hundreds of individual national currencies. Fiscally speaking, due to the efficiency, transparency and level of international collaboration brought forth by this cryptocurrency, entrepreneurs will be empowered to set up new ventures and could lead to a boom in small and medium size industries. As per the Keynesian theory of income and employment, this would lead to an increase in national income. Governments may set up their own crypto-mining departments in the rat race to accumulate more cryptocurrency for themselves. They may use this addition to increase government spending which again raises aggregate demand and has a multiplier effect which could increase the national income. Due to the anonymity cryptocurrencies offer to their users, there are concerns over cryptocurrency being used for the wrong reasons.... Their decentralized nature could make tax evasion and fraud easier which could gravely eat on government revenue. Therefore there is little doubt that crypto-legalization won’t be unaccompanied by heavy regulations either on a global level by the World Bank/International Monetary Fund or by legislation in individual nations or a mix of both. The global block chain of these crypto-transactions would be monitored closely by global financial institutions and central banks of individual nations alike.
Assuming that after legalization the cryptocurrency doesn’t replace the original legal tenders of individual nations, but acts in competition with the currency, its presence could end up undermining the national authority and economic sovereignty over one’s monetary policy. The widespread adoption of this novel payment option would limit central banks’ abilities to control inflation, like they do now, because actors in the economy would be buying, selling, borrowing, and settling in cryptocurrency. Central banks might have to make larger adjustments to their fiat currency to have the same effect as previous adjustments. They could have to start open market operations in this cryptocurrency in an effort to affect the availability of these currencies in the economy. In the long run the use of a nation’s domestic currency may ultimately be phased out as more and more transactions happen via this cryptocurrency due to its convenience, reliability, and safety.
Poorly managed states would have little means to get back on their feet without grants in cryptocurrency from developed ones. Another challenge in an economy with dual currencies—as would be the case in an economy with a fiat currency and cryptocurrencies—is that the existence of multiple currencies adds difficulty to buyers and sellers making exchanges; all parties must be aware of and continually monitor the value of the two currencies relative to each other.
An issue that rises in the foreign exchange market would be determining the rate of conversion of each domestic currency to the cryptocurrency. The cryptocurrency could be pegged to the dollar or some other currency. A fairer way to derive this crypto-rupee exchange rate could be by the regression slope coefficient of the exchange rate of the rupee to every single other foreign currency. Undoubtedly the biggest change this legalization would make is the rapid increase of cross border transactions as there is no exchange rate fees. People would prefer trading internationally using cryptocurrency as it is assumed that the convertibility of current liquid assets held by all the different stakeholders of the society into the new legal tender has no costs and is effortless. In the short run businesses would continue to benefit from the devalued exchange rates of Asian economies. However in the long run producers would shift their investment (production, research and development) spending back to their home countries as it would be equally expensive in cryptocurrency to produce a pair of shoes in the USA as in Bangladesh.
Countries like India, China, Mexico, Eastern Europe and other countries which are popular outsourcing destinations could suffer from this provided they don’t adapt to this sudden crypto-revolution by fostering domestic entrepreneurship. The world may move away from globalization in terms of movement of people and capital but the exports and imports of goods and services will have a larger proportion in the Gross Domestic Product of a country and in the long run economies should become more specialized in producing their goods and trading them as the fabric of the global economy gets more interdependent in terms of the product market, distinctly banal in terms of capital and labor market all the while retaining the ease to transact across borders.
Crypto-mining is an expensive process requiring high computing power, skilled programmers and infrastructure which reduces its inclusivity. The already rich have been the first ones to gain from this triple-entry revolution due to the digital divide. Fortunes had been made overnight. They have successfully leveraged the informational asymmetry to add billions to their net worth. If proper regulation or efforts to redistribute wealth are not made, this could further widen the already growing gap between the poor and the extremely rich. It must be noted that basic banking facilities are also unavailable to 1.7 billion people in the world today. The formal financial system has failed to serve the poorest who need it the most and is hesitant to serve them as it is riskier and not as profitable. But the proportion of people with access to the internet has been increasing at a rate of 950,000 new users a day. If the reform brought forth by cryptocurrency manages to penetrate the lowest economic strata of the society it could fill in the gaps left by the formal banking systems.
References:
1. Perkins, David W. “Cryptocurrency: The Economics of Money and Selected Policy Issues.” Congressional Research Service. Working Paper: series R45427. 9 April 2019. Online: https://fas.org/sgp/crs/misc/R45427.pdf.
2. Chiu Jonathan, and Thorsten V. Koepp. “The Economics of Cryptocurrencies – Bitcoin and Beyond.” 2018. Online: https://www.bis.org/events/eopix_1810/chiu_paper.pdf.
3. Richard Wright et al. “Less Cash, Less Crime: Evidence from the Electronic Benefit Transfer Program, National Bureau of Economic Research”. Working Paper 19996. March 2014. Online: http://www.nber.org/papers/ w19996.pdf