Stablecoins: Should we privatize money supply?

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Bitcoin privatized currency, or at least made it possible to do so.  Currency can now be used without the government entanglements of bank credit risk and printing by profligate regimes.  The question now is, do we also want to privatize the management of the amount of money in the system. 

Bitcoin left this question open. Bitcoin is beautifully simple. It is just a fixed amount of digital value to be managed for the public good as we see fit.  Credit worthy governments can easily create synthetic bitcoin with fractional reserves to increase the supply of bitcoin or buy synthetic or real bitcoin to reduce the supply. See The supply of bitcoin is not capped - but that's a good thing.  So the management of the supply of money is still in the hands of governments if they want it.  (Yes, there is a bigger difference between real bitcoin and synthetic bitcoin than there is between real dollars and synthetic dollars, but this will not matter to a large part of the population who are OK with a centralized component of their money.  See Bitcoin banking - a better monetary system).  

The problem for bitcoin is that governments have not jumped in to help manage its supply and orderly distribution. Governments are not yet ready for the decentralized privatization of their currency, so they are not supporting it. As a result, bitcoin is highly volatile and is being distributed solely to investors rather than to the public at large.  

So do we also need to privatize the management of the government's role as a stabilizer of currency value?  This can be done in two ways:  A new currency can be created with automated adjustments of supply (Algorithmic Money Supply) or private parties can play the role of a central bank with respect to an existing currency such as bitcoin (Private Sponsors).  Each approach is briefly discussed below.   

Algorithmic Money Supply:  There are several new currency project that include automated money supply adjustments designed to maintain a price pegged to a reference rate.  Examples include Basis and Carbon. In these projects investors play the role of the government. If the price of the coin rises, new coins are issued to investors, thereby increasing supply.  If the price of the coin falls, investors use the coins to buy rights to future coin issuances, thereby reducing supply. The terms are preset and execution is through one or more separate tokens.

These approaches are clean in that they attempt to create a new stable currency, but there are several major concerns with using investors as the mechanism for adjusting supply:  

First - Market forces are working against the goal of the program.  Investors only make money when the price is not stable.   

Second - Investors earn all of the network benefits. People who are loyal to the currency should naturally expect to earn a return as it is their loyalty that creates the network effect that drives up the price. In the algorithmic money supply protocols, these benefits are shifted to investors. It is questionable whether such a transfer of value will be acceptable to currency users at scale.

Private Sponsors:   Private entities can manage the price of bitcoin just as a government would. These sponsors would create notes backed by a variable amount of bitcoin and commit to stabilize the value of the note through its own buying and selling. This approach is similar to the issuance of Bitcoin Notes described here. These notes may be called Stable Bitcoin Notes (SBNs).  

A sponsor, such as a retailer or finance company, would create a branded SBN.  The note would have value added features provided by the sponsor, such as fast low-cost transactions, deals, rewards, etc. The sponsor would be expected to maintain a price floor through purchases and would be allowed to issue additional SBNs at its discretion as the price rises.  These new SBNs could be held in reserve or given to customers or the general public.   

Such programs could be very profitable if managed properly.  The value of the upside in this synthetic bitcoin position is likely much more valuable than the cost of hedging the downside. The sponsor also benefits from the marketing benefits of the coin and any premium paid for the value added features.     

As bitcoin matures, these SBN programs would become easier to administer.  At some point governments may create their own SBNs having learned from the private programs.

Third Alternative - Do nothing

The other alternative is to simply ride the wild price swings of bitcoin as a speculative investment and wait for governmental adoption. This might be possible with a currency that has broad distribution, but with bitcoin the wealth concentration is only going to continue, making it harder and harder for governments to adopt.   

So what does this mean for bitcoin?  We can assume that governments are not going to assist any time soon.  Bitcoin could reduce the wealth concentration problem by changing the protocol to distribute bitcoin to a global user base, but considering how hard it is to make small changes, this major change does not seem feasible in the near term.  This leaves private sponsor programs as the only option. It will be interesting to see how these develop over the next several years.  

By Shane Hadden, CBP, CFA;

About the Global Currency Group:  The Global Currency Group promotes the adoption of a decentralized global currency through investments, advisory services, new currency creation and advocacy.  

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