A cryptographic solution for a broken international monetary system
The international monetary system is broken. Helping to solve it poses a great opportunity for the cryptographers behind the cryptocurrency and blockchain technology.
Now they have one of the administrators of that system in their corner: Mark Carney, the outgoing governor of the Bank of England.
A week ago in Jackson Hole, Mont., Carney said in the annual Federal Reserve talk that Central Banks could develop a network of national digital currencies to create a new “synthetic hegemonic coin” managed by baskets.
Carney’s proposal was primarily a reflection exercise to inspire a conversation about solutions to the dangerous imbalances fostered by the dependence of the current dollar system as a world reserve currency. The details were necessarily scarce: any solution will be technically and politically complicated, and although it will leave the BOE in January, the state of Carney as a public official demands caution.
But I don’t share those limitations. So let me present my own modest proposal for a cryptocurrency based solution to a broken global financial system. Suggestion: it is not “buy bitcoin”.
I am not a trained economist or a cryptographer, so I know that this act of arrogance will appeal to detractors. I appreciate the criticisms and suggestions. I am also quite sure that I am not the first to think about this, so I am eager to hear from others working on similar projects.
The point is that I have been obsessed with the structural failures of the global financial system and cryptocurrency for many years. Three of my five books have covered those topics. It’s hard to bite my tongue.
Fixing the global monetary system
I believe that instead of creating a completely new global currency, Central Banks should work to develop the interoperability of the digital currency. We need a decentralized exchange system through which companies in different countries can use smart contracts to create automated custody agreements and protect against exchange rate volatility. With algorithms that achieve atomic exchanges now available and with other advances in interoperability between chains, I think we will soon have the technology to eliminate the exchange risk of international trade without relying on an intermediate currency such as the dollar.
This is how it could work: a hypothetical importer in Russia could reach an agreement with an exporter from China and agree on a future payment, called in Chinese renminbi, based on the prevailing exchange rate of the latter with the Russian ruble. Relying on an interoperability protocol that is commonly integrated in each party’s preferred digital national currency, either in privately managed stable currencies or in digital currencies issued by the Central Bank, the two companies could establish a smart contract that blocks ” no trust “the renminbi payment required in a decentralized trust. If delivery and contract compliance is confirmed, the payment is released to the Chinese exporter. If not, the funds are reverted to the Russian importer with the same initial conversion rate.
In this scenario, both parties are protected against adverse movements of the exchange rate. However, despite the trust gap between them, there is no need to intermediate payment through dollars, nor is it necessary for either party to sign a term contract, an FX option or other type of coverage. expensive change.
Of course, the importer would suffer the opportunity cost of enclosing otherwise valuable working capital for a few months. But private banks could mitigate that with short-term collateralized loans in terms that would be much cheaper than the current cost of currency hedging. Alternatively, if the smart contract is executed in a blockchain of proof of participation, the blocked funds could be used to obtain cryptocurrency stake rewards.
What would be the roles of central banks?
Well, on the one hand, they could support the entire credit and / or participation model. Providing liquidity or guarantees to banks’ commercial financing businesses would be a more constructive use of the national money supply than to apply it to the lower funds of the US Treasury bonds and other dollar assets.
Second, they would be responsible for ensuring the reliability of the interoperability protocol. Whether the Central Banks support and regulate privately developed protocols such as Cosder de Tendermint, Polkadot de Parity Technologies or Interledger de Ripple, or if they would commission a multilateral agency to build and manage a single official system, there is no way to avoid Supervisory function for the public sector and policy makers.
(Don’t worry, crypto libertarians, nobody will take away your bitcoin in this scenario. In fact, given that Central Bankers will retain their own monetary sovereignty, with continuous exchange rates fluctuating, the attractiveness of bitcoin as an alternative to “digital gold “domestically, the coins could well be improved).
A broken system
Let’s be clear: if foreign trade no longer requires the intermediation of the dollar, the US-centered global economy. UU., Will suffer a massive impact, perhaps even bigger than the “Clash of Nixon” of 1971, when the dollar separated from gold.
The entire reserve currency system, in which foreign Central Banks hold US government bonds. UU. As support and multinational companies maintain large parts of their balance sheets in dollars, it is based on the need to protect against foreign exchange losses. If that risk is eliminated, the building, in theory, would collapse.
However, as Carney rightly points out, continuing with the hegemony of the dollar is also not sustainable. The system is broken. Every time global investors get nervous, they become dollar assets of “safe haven,” even when, as in President Trump’s trade war with China, US policy is the cause of his discomfort.
This process, which becomes increasingly acute with each financial crisis, causes major distortions, economic dysfunctions and political turmoil. And with the slowdown in economies and the global value of bonds with negative returns now at $ 17 billion, we now face worrying signs of another crisis. This time, the traditional policy of the Central Bank could be impotent.
When another crisis comes, the dollar-based system will generate a predictable vicious circle. The dollar will rise rapidly. This will hurt US exporters, which will further agitate the commercial instincts of anti-free traders like Trump and increase the risks of a destructive monetary war.
Meanwhile, emerging markets will suffer capital flight as a rising dollar increases the risk of debt default in those countries. Its Central Banks will respond by raising interest rates to shore up their national currencies, but this will strangle their economies at a time when they require an easier, no stricter monetary policy. Unemployment will increase and governments will collapse.
The current system engenders what former Federal Reserve President Ben Bernanke called the “excess global savings” as developing countries reduce money to dollar reserves that could otherwise be used for internal development.
In the United States, it creates the compensatory effect of massive deficits, in other words, a very high debt. Far from being the “exorbitant privilege” once described by French Finance Minister Valéry Giscard d’Estaing, the dollar’s reserve status is an American curse. It creates artificially low interest rates in the United States, which gives an incorrect price to credit risks and feeds the bubbles. See: the housing crisis of 2008.
Worst of all, the dollar system undermines democracy and lowers economic sovereignty. The performance of each economy depends on the policies of the US Federal Reserve. UU. However, the mandate of low inflation / maximum employment of the Federal Reserve is defined only by the economic outlook of the United States. This political mismatch makes it much more difficult for governments to seek effective measures to create opportunities for all.
When things really get ugly, the Fed belatedly and reluctantly becomes the last lender in the world, injecting dollars into the world’s banks through its New York subsidiaries. This is how we ended up with the excess of “quantitative easing” after the last crisis, money that went to financial assets, real estate in London and fine arts, but did little to increase the power of middle class profits.
These political failures have generated a populist reaction against globalization, which is manifested in the Brexit crisis in the United Kingdom and the adverse trade policies of President Trump. However, the reality is that capital flows are more globalized than ever and are increasingly hitting the US dollar drum.
So, yes, we need a change. The question is how and in what term
Violent or managed change?
The solution I described could be adopted abruptly and disruptively or it could be managed cooperatively for a smoother transition.
Under the first scenario, consider Russia and China, the two countries that I deliberately chose for my explanatory example, since they are believed to be more advanced than most in the development of fiat digital currencies. Both would love to end the dependence on the dollar. Could they go alone and jointly devise a bilateral cross-chain smart contract between a digital renminbi and a digital ruble? Of course. Would other countries do the same? Perhaps. Such uncontrolled withdrawal of dollars could cause great harm to the US. UU. And to the global economy in general.
That is why I believe that the Central Banks should answer Carney’s call and work together on a solution. They could coordinate the gradual introduction of digital currencies, selectively manage access and apply differential interest rates to discourage an exodus of unstable banks. They could also promote in the IMF in terms of seeking a global standard for interoperability between chains.
In any case, the disruptive technologies behind digital currencies, stablecoins and decentralized exchanges will advance. It’s a time bomb.
Some Central Bank executives, led by Carney, and now, Philadelphia Fed president Patrick Harker, who said in a Wharton Business School podcast that stablecoins are “inevitable,” some understand, others need to learn faster.
Disclaimer: This press release is for informational purposes information does not constitute investment advice or an offer to invest. The views expressed in this article are those of the author and do not necessarily represent the views of infocoin, and should not be attributed to, Infocoin.