A new terrain of monetary policy is digital currency. While still relatively unstable, and unproven in transactional utility, digital currencies offer several new and innovative functions for conducting business. These functions are listed below:
- A transactional history which is both immutable and flexible in terms of anonymity and personification.
- Vastly more operationally efficiency when the balance of accounts is automated.
- A far superior real-time store of value.
Digital currencies span the countless new currencies created by payments entrepreneurs ranging from Blockchain to Ethereum, but also include more traditional currencies now being created by technology firms and investment banks alike. There is really no better alternative to Nation-denominated currency as of now because the market and adoption percentage of digital currencies is still very nascent. It is still more of a hobbyist marketplace and many currencies, Ethereum for example, are heavily reliant on complementary technology deployments such as automated transaction settlement that might be used in ‘Smart Contracts,’ for example.
However, digital currencies represent promise for a future of sound currency and effective global monetary policy. The first promise is its technological nature. Immutability means that each transaction can be placed onto a historical record of the totality of all relational transactions. Advocates of digital currencies note their ability to fight racketeering crimes such as money laundering or other forms of fraud. However, an even greater use of the immutability nature of digital currencies is to use past transactions as the formulant for the prosecution of future criminal activity. For example, if a “boss” were to target certain markets for their nefarious activity, they would develop a pattern of activity. Investigators could identify future criminal activity, obviously not associated with a specific criminal outfit, but used as a predicative tool based on the past transactions of criminals, now on the permanent record thanks to the immutable nature of digital payments.
Additionally, digital currencies allow for a more flexible understanding of anonymity and personification whereas humans could establish anonymous accounts when it was economically advantageous to do so. Since criminal activity could be thwarted based on predictive intelligence, anonymous accounts could be used as a replica of cash, granting society the freedom to conduct business anonymously, just like cash, when the situation warranted. For everyday transactions, humans might prefer personification so they could benefit from the automated personal data that digital currencies can provide.
The second promise is the vast operational efficiencies created by using digital currencies. Virtually all accounting processes can be automatized or systematized from daily accounts reconciliation to taxation, and additionally this automation can be produced in real-time. We can get close to full accounts automation with our current cash system with the exception of a few areas. The key difference is not record-keeping, but accounts reconciliation because Blockchain-enabled accounts could sync with other Blockchain-enabled accounts. The accounts reconciliation process between two accounts is a vastly superior automation than our current digital cash operations that would only ever allow for the reconciliation of one account between there are currently no standards that can link transactions laterally. Of course, this poses as an incredible privacy risk for users of automated accounts reconciliation. One would surmise, however, that the cost efficiencies could be used to ensure privacy redundancies across the board.
The third promise of Blockchain-enabled digital currencies is how quickly the currency can be updated as a store of value. The currency’s value could be updated in real-time and transnationally. The value update would not be indirect, in other words not based off currency trading markets, but direct based off transactional data. Real-time updates to the currency’s store of value would greatly accelerate the price-setting function of goods and services. Theoretically, at least, goods and services could change in price accordingly.
This component of a digital currency’s value could be perceived as either a feature or a bug depending on your stance stand on the notion of ‘price arbitrage.’ Price arbitrage is a form of entrepreneurship where the businessperson purchases and then resells goods often with little value-add. The price arbiter capitalizes on information asymmetry. For example, a purchaser may not have as close access to very niche markets that the arbiter might provide. The arbiter’s market relationships allow her to sell goods and services to the purchaser with the only value-add being access to the market itself. Some find this form of entrepreneurship as a relative waste of time and effort, while others feel that the price arbiter provides a valuable price setting knowledge to the market clearing mechanism. Whatever stance one might take it is easy to perceive the power of real-time updates to the store of value, and subsequently, the price of goods and services.
Real-time price updates would eliminate the need for transnational “supra-currencies” such as the Petrodollar, the benefit here being clearly obvious in how trade is conducted. Consumers could quickly judge the prices of goods and services transnationally, purchase these goods and services, then rely on increasingly inexpensive and globally capable suppliers to deliver their product. Digital currencies are needed to facilitate a healthy transition to a truly global marketplace from the perspective of supply-demand equilibrium.
Each of these promises culminate in the grand efficiency of how digital currencies could transform the balancing of payments of Nations. It is possible to envision how digital currencies could eliminate National borders. However, that would be disadvantageous both politically and economically. A far more expeditious solution is to simply apply digital currencies in the reconciliation of the National accounts.
Are trade deficits actually legitimate? A key political illusion over trade policy, since around the Bush-era, has been the assertion that a Country can run National deficits. They can and they cannot. They can because theoretically the debtor, in America’s case as the World’s Reserve Currency, is facilitating global trading markets through high levels of consumption. American consumption lubricates transnational trade because it allows more currency to enter the system. America is, on one hand, obligated to supply the world’s reserve currency through its willingness to pay higher prices for consumer goods and services. On the other hand, America is running a trade account just like any other Nation. America must service debts, including interest, and inhibit National spending as a result of her responsibility to National trade.
Digital currencies eliminate the need for a supra-national reserve currency and thus the need for a Country-level balance of payments scenario. Countries would still monitor their trade deficits and surpluses; however, the key Innovation is that cross-border consumer transactions could also be factored into the equation.
In our interpretation of digital currencies, It is worth specifying that we distinguish digital “cash” or Country-denominated currencies from Blockchain-enabled digital currencies. When we think of digital currencies, we are connotating the latter. Whatever your view of digital currencies, they represent one of the most significant commercial Innovations in the history of the world akin to the creation of currency to begin with.