Facebook is starting its own currency and the world is abuzz with it. The Chairman of the Federal Reserve received multiple questions about libra, as it is to be called and aside from calling it LIBOR (which stands for London InterBank Offered Rate, a key interest rate) by mistake the response has been somewhat unremarkable. Which is as it should be. A couple of my radio interviews focused on this issue at this point so I felt it time to put up a post dealing with questions I answered already so that we can get to newer questions.
Should the Fed be concerned with cryptocurrency?
From the perspective of managing monetary policy the answer is pretty clearly no. The general usage of cryptocurrencies, while a large amount, is not enough to warrant concerns on the policy front. There are three characteristics typically attributed to money (Money & Banking review for those that had the class in college, or primer for those that did not):
- Medium of exchange
- Unit of Account
- Store of value
Cryptos clearly really only satisfy the first characteristic. Some people accept them in exchange for goods and services. However this is not generally the case. If somebody asked me to accept shares of Apple in exchange for services rendered I very well might, as many others would too, but they are not generally accepted and nobody is suggesting the Fed, Treasury, or IRS crack down on all these other exchanges right now.
In fact the IRS would tell me to record the value of this transaction on my taxes anyway so there are regulatory institutions already in existence to deal with this as well as track the frequency. Therefore, not a problem for the Fed.
Some places record prices in terms of crypto currencies as well as other currencies. However this is essentially the same, right now, as prices being listed in euros as well as dollars. So what is the big deal? It is still the case that dollars, and other government sponsored currencies, are the primary unit of account. It is also the case that debts are recorded in these values as well and your tax bill from the government is listed in official government currency units. So again, cryptos are not a viable threat in that regard.
Cryptos are clearly not equivalent to government currency as a store of value either. Yes I am being biased towards developed economy currencies here in this discussion but so what? Dollars, pounds, euros, and the like are what we are really talking about in terms of a crypto “threat” anyway. Countries like Russia and China already manage and regulate currency values significantly and outlaw cryptos for the most part as a means to better control their currency value.
The Dirty Secret About Money
Fiat money is pretty much inherently worthless. That is, there is nothing about it specifically that has value. A fiat is a government declaration, and so fiat money is money by government declaration. In fact, most things used as money in history is money by declaration. Those calling for a return to a gold standard, as if it has some inherent superior properties to paper money, have chosen a different arbitrary standard than what the government declares.
Economists like Grubb, Michener, McCallum, Kiyotaki and Wright, and Wicker, and historians like Main, McCusker, and many others demonstrated that the only thing you need to make a currency inherently valuable is the notion that it can be exchanged for something. This could be tax payments, goods, services, or any number of things.
Who should be threatened by a Facebook currency?
The comments of the Treasury Secretary are off base and ultimately ill-informed (shocking). The U.S. government really has nothing to fear from this as of right now. If I picked on person/business to be afraid of this I would say it is Amazon. In the Internet age people are savvy shoppers and with Facebook you have over 1 billion users (I have no idea how many people are actually on Facebook) that might instantly be shoppers on the marketplace. Is it a great threat? Probably not in the immediate run, but it is there.
I think some old friends of Mark Zuckerberg’s, the Winklevoss twins should be threatened. The twins were early investors into crypto currency and rode the mediums ups and downs. If Zuckerberg comes in with 1 billion users right away that will easily make a Facebook currency the most utilized cryptocurrency as currency, not investment or speculative tool.