Facebook, Telegram and Signal aren’t happy with the 2,500 or so cryptocurrencies that currently exist and are currently building their own. These new cryptocurrencies will allow users to send money to contacts on their messaging platforms, like a Venmo or PayPal that doesn’t mind international borders. According to recent reports, Facebook is working on a ‘coin’ that users of WhatsApp, which is owned by Facebook, could send to contacts instantly. FaceCoin, as it’s being called, is reportedly a stablecoin backed by a basket of fiat currencies, like the SDRs of the IMF. The backing of fiat currencies makes it stable, but can it really be called a coin?
Let’s take a look at the proper definition. For something to be called a ‘currency,’ it needs to act as:
- A store of value
- A medium of exchange
- A unit of account
To date, none of the 2,500 cryptocurrencies – or to give them a more accurate name – crypto assets, have been able to meet all of the criteria above. Just because we call these assets ‘currencies’ or ‘coins’ doesn’t mean that this is what they are. Let us examine each criterion in more detail:
A Store of Value
To be classed as an effective store of value, a currency needs to have real economic value. Cryptocurrencies are known for their volatility – most can change the price by five percent overnight (on a good night) – which is a good sign that it’s not a very useful store of value. We also measure if something is a good store of value in dollars – why are we measuring it with fiat currency if that’s what we’re trying to move beyond? If money is the
measure of value, then it needs to be able to store value so that it can measure value. Money has to have value in and of itself to measure value. If the prices of all goods around the globe were denominated in BTC, then Bitcoin would offer a better store of value then the dollar, yen, and yuan combined. This is not the case for any cryptocurrency, yet.
A Medium of Exchange
So how is it that with such a broad fan base, no token has become true currency? One common argument is that once digital tokens become a means of exchange, they will finally transform into real currencies. While the statement is probably true, it is somewhat misleading, as becoming a means of exchange is a result of something much deeper, not something that comes into existence on its own accord. Here we find cryptocurrency’s catch-22. A coin can’t be a medium of exchange and serve the economy if it’s not a good store of value. And it can’t be a good store of value unless it is being used and serving the economy. Fiat currencies serve the old economy well because they are in wide use and acceptance. Now that we are in a new economy, is it still relevant to use the ancient medium of exchange?
A Unit of Account
Being a unit of account is one of the key functions of money. By measuring the value of something in a specific currency, you allow different things to be compared against each other; for example, goods, services, and assets. Across the globe, we have many units by which the value of a thing is accounted for and compared, but the economy has changed, and these many units act as a barrier to what is increasingly a borderless global economy.
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These are the criteria for a true currency but to have a truly global currency, we believe in the importance of a fourth criteria: “independence.”
Saga Foundation’s Founder and Foundation Council President Ido Sadeh Man will be speaking at the upcoming Barcelona Trading Conference.
A truly global currency is one that is accepted throughout the world. Some of the world’s currencies are accepted for most international transactions. Of these, the US dollar is the most popular. At the end of 2018, it made up nearly 62 percent of all known central bank foreign exchange reserves. That makes it the de facto global currency, even though it doesn’t hold an official title. The new economy needs a new currency, but just like the new economy, it needs to be independent of a nation-state. The Federal Reserve issues money for the US, and therefore it has those nation’s interests in mind by design. For something to be truly global, it needs to have global interests in mind – unbiased to any territory/nation-state and transparent to all territories that it serves – or have global governance to match the new global economy.
If a new global currency wishes to find broad acceptance, it must combine the above, and comply with financial regulation. If we want to improve currency as we know it, it must be able to either adjust itself to changes in regulation or provide self-regulation that will complement current regulation where necessary.
If we understand that current crypto tokens are inherently detached from the economy, then it’s easy to see they are not a very good store of value. That said, it is not clear how they can theoretically become an effective means of exchange. On the other hand, stablecoins are a good store of value and means of exchange, but suffer from the ailments of fiat currencies, as they are subject to central bank policies which serve the state and political goals.
We see that the economy is changing and we see the promise of digital currencies for fulfilling the need of a new global currency, but in order to create a real digital currency, we have to address the core issues that make it superior to fiat currencies.
Shai Kritz is VP Product at Saga Foundation