Currynomics, a new way of thinking money
The history of money is a thrilling, colourful story of human civilization and its everlasting creativity in economic activity. While most of us associate the history of money with precious metals, above all gold, we tend to overlook that other forms of money have also existed. In his brilliant book “The Ascent of Money”, the historian Niall Ferguson draws our attention to Mesopotamia, considered by many o be the cradle of modern civilization:
“In ancient Mesopotamia, beginning around five thousand years ago, people used clay tokens to record transactions involving agricultural produce like barley or wool, or metals such as silver. Rings, blocks or sheets made of silver certainly served as ready money (as did grain), but the clay tablets were just as important, and probably more so.”
Essentially, these tokens were commodity based promissory notes to bearer, which is basically the same concept bank notes are based on. Today’s Bank of England banknotes still read: “I promise to pay the bearer on demand the sum of …”. While the Mesopotamian tokens were representing real goods or, in other words, were fully backed by commodities, banknotes used to be by and large backed by gold. In the late 19th century, the “gold standard” became the basis for the international monetary system.
The aftermath of World War I, the Great Depression, and the work of economists like John Maynard Keynes, showed the inefficiencies of the gold standard as a monetary principle for national banks in managing an economic crisis. Its successor, the Bretton Woods system of monetary management, which ultimately was also gold-backed via the US Dollar, also proved to be unsuitable for the global economy, and thus was abolished in the 1970s.
Today’s money is fiat money. It is not backed by any commodity nor does it have any intrinsic value. It has value because it is typically declared by the governments to be legal tender and the people who use it agree on its value. But as fiat money is not backed by anything, the supply of such money is in principle unlimited. Oversupply of money typically leads to inflation, or in extreme cases to hyperinflation. And while the task of national banks issuing fiat money is typically also to fight inflation, we see that the political interests might compel a national bank to abandon its inflation containment goal to a lesser or larger extent.
Inflation is destroying one of the main functions of money: a store of value. This is the reason why some, like the Austrian School of Economics, represented by Nobel Memorial Prize in Economics laureate Friedrich August von Hayek, and others, challenge the concept of inflation as a monetary policy instrument. In 1943, von Hayek suggested a commodity reserve currency based on a basket of various commodities, as an alternative to the gold standard. And several decades later, in 1976, he published an even more interesting paper called “Denationalization of Money: An Analysis of the Theory and Practice of Concurrent Currencies”.
The question, whether on the level of national economies a certain loss of value caused by tolerated inflation is acceptable, might be answered in different ways, and the academic debate will continue. However, on the level of the individual, it is obvious that store of value is of prime importance. The aftermath of the 2008 financial crisis and increasing government deficits have led to an expansionary monetary policy with extremely low interest rates, with a substantial risk of high inflation. In such an environment, the store of value has gained even greater importance.
Looking back at the Mesopotamian clay tokens, one immediately notices that they were a tool to avoid inflation: if the value of silver went down, because a new source for silver appeared (and this happened quite often in history), then it was better to hold a commodity token, rather than a few sheets of silver. Hence it made sense to have the clay tokens in circulation in parallel to the silver sheets, or money. However, with the growing complexity of economic activity, it was difficult to match demand and supply with clay tokens for less frequently demanded goods like a flock of sheep or a sledgehammer. At the same time, gold coins proved to be stable in value over centuries, due to a limited supply, and thus served sufficiently well as a tool to preserve value – and so the clay tokens disappeared.
The challenges of the modern global economy and the temptation (or need) for politics to sacrifice the value preservation of money and to utilize monetary policy for various other goals, calls for new solutions; the last two decades have shown tremendous new possibilities with the advance of digital technology, specifically with the adoption of blockchain applications.
Friedrich von Hayek’s vision of denationalized money and concurrent currencies has become de-facto reality today. The appearance of digital currencies, with Bitcoin as the frontrunner, has fundamentally reshaped the global money market. And while von Hayek still envisaged private currencies as classical bank money, the reality of the 21st century produced a currency out of a few lines of computer code, with no bank or any other intermediate party involved at all. Digital currencies in their short time of existence have proven to be easily transferable at low cost (mostly) and opened many doors to various new forms for financial activities.
However, even though Bitcoin is the prototype digital currency, it has failed to serve as a currency in its original meaning: only very little commercial transactions are paid for in Bitcoin. It has mostly served as a speculative investment and as a tool for anonymous transfer of funds. The speculative investment character has led to a situation where prices for goods expressed in Bitcoin are extremely volatile. A car costing 1.0 Bitcoins today might cost 1.1 Bitcoins tomorrow. It’s obvious that volatility prevents a digital currency from being universally accepted for exchange of goods, if a fiat currency exists in parallel with the function of a legal tender, because the reference pricing will always occur in the fiat currency. While inflation is a sometimes more, sometimes less gentle slope downwards, volatility is a roller-coaster ride with an unclear ending – both are undesirable.
See money differently.
When Bitcoin became a thing, some were hailing it as the ultimate defeat of the national fiat currencies and the true alternative to them. Saifedean Ammous, in his book “The Bitcoin Standard”, has taken a more objective approach, and posits thar Bitcoin in the long is the global unit of account, as gold used to be in the past, somewhat a supranational money. However, when looking at China’s complete ban of digital currencies and the various attempts of governments around the world to come up with their own national digital currencies, it seems that we are more likely to see a world of concurrent currencies as envisaged by Friedrich von Hayek. It is quite safe to assume that national fiat currencies and monetary policies, influenced by governments, will still be around for a long time. So, seeing money differently means thinking of “new” money as a supplement to fiat currencies, not a replacement.
Transferring functionalities of money to the digital world has without doubt its merits. Transactions on the blockchain make transfers of money much faster than regular banking or the physical moving of banknotes. However, improving the functionality does not make money really “different”. Take for example stablecoins: they are pegged to fiat currency (typically USD) and they do enable the users to make fast transactions and utilize opportunities in the blockchain world, but they still do not solve or at least mitigate the main problem: inflation and the resulting loss of value of fiat money.
During the last 50 years the periods where bank interests were below inflation substantially exceeded the periods where the bank interests were above inflation. But the negative spread between bank interests and inflation was never as big as it is today – and there are good reasons to believe that this will not change in the coming years.
The only alternative to holding cash and losing from inflation used to be to invest: in bonds, securities, commodities, real estate, private equity, etc. All these investments offer investors different qualities of returns, often exceeding inflation and generating a positive real return on investment. However, they also bring several detrimental features into the game: risk, volatility, lack of fungibility, holding and transaction cost, lack of transparency, and many more. Long-term oriented investors typically find a suitable balance between these detrimental features and the return on investment. Investment in real estate, for example, combines low volatility and low risk with low fungibility and a moderate return, making it a popular investment category. However, in a short-term perspective the detrimental features regularly outweigh the advantages, making investments not an alternative to holding cash.
When thinking money truly differently, what features would “new” money as a supplement to fiat currencies have?
If “new” money is meant to be a supplement, then first it must reference to a fiat currency, as only then it can be put at use the same way as fiat currency. A simple example are vouchers, as issued, e.g., by mobile network operators or shopping centres. They display a value expressed in fiat currency and are typically not personalised, i.e., they can be used by any holder. Therefore, in principle, they could be used as means of payment, if both parties to a transaction agree. Paying the hairdresser with a voucher from the local shopping centre might make sense for client and customer and would not leave anyone worse off. However, it is obvious that on a larger scale, vouchers are not a practicable solution.
However, while referencing to a fiat currency is necessary, such “new” money should not be pegged to a fiat currency like many fiat based stablecoins are, because the problem of inflation remains unsolved. It should be instead linked to an asset or asset category that preserves real value, i.e., increases in value in relation to fiat at least by the amount of inflation. Theoretically, any asset category could be chosen. The benefit is that while such “new” money remains actual money (i.e., it does not represent an investment itself), its value is defined by the link and thus by the performance of the asset category chosen as a peg.
In the past, many currencies were linked to gold and therefore stable in value. Nowadays, with gold being traded as an asset in large volumes, the volatility of the gold price in relation to a fiat currency is not making gold a suitable short-term store of value. This means that for linking “new” money an asset category should be chosen that is not volatile. Low volatility is often associated with bonds, but there are other suitable asset categories. A good example is commercial real estate, such as office buildings or warehouses: while their value does not stay stable over multi-year periods (it often tends to increase), it typically does not change much, if at all, over a period of a couple of months. An asset category that has little short-term volatility and gains in value relative to a fiat currency more than the inflation, is perfectly suitable for “new” money to be linked to.
But whatever link is being chosen, “new” money will only find acceptance and therefore be used if it is transparent and trustworthy. A fiat currency has trust because it is legal tender and issued by central banks. However, fiat currencies are influenced by monetary policy and thus the store-of-value function tends to become difficult to predict. Today, non-alterable protocols like blockchain are enabling new levels of transparency and trust, and therefore money, that is not created by central banks, is becoming increasingly relevant and popular.
So, is there a way to reasonably combine the above features and create “new” money as a supplement to fiat currency? The answer is: yes.
The Currynomics concept.
Currynomics is the concept of creating various “little” digital currencies (hence the name Curry), whereby all curries are designed and issued under the same principles and differ only in one aspect: each of them is based on a different combination of specific asset category and specific fiat currency, to which it is referenced to.
As a fundamental principle, a Curry is linked only to such asset categories, which are generating a continuous positive cash-flow, have little volatility in value and are based on physical long-term fixed assets. Such assets can be commercial real estate, agricultural land and forests, PV power plants and wind parks, electricity or gas distribution networks, toll highways or railroad tracks, and so on. A Curry is not linked to any traded securities or other financial instruments, or any other volatile asset class. And a Curry is not linked to assets which do not generate a positive cash-flow or even generate a negative cash-flow (storage cost) like precious metals, commodities, art, etc.
A link to such long-term assets is not as trivial as a 1:1 peg to a fiat currency, as with stablecoins. For the link to work, it is necessary that each Curry has the assets, to which it is linked, effectively in its own treasury, in full amount. The Curry is then not pegged to an abstract number, but linked to an objective and clearly defined reference number: the net asset value (NAV). The NAV of each Curry shall be defined as the total net value of its assets in the treasury (expressed in the reference fiat currency, e.g., Euro) divided by the number of Curries issued. The NAV functions then in a way similar to the face-value of a banknote: it expresses the value of a Curry. However, while the face-value of a banknote does not change, the NAV of a Curry does change if the value of the assets in the treasury changes.
The NAV reference requires that a Curry is non-inflationary in relation to its NAV: each Curry may be issued only at the current NAV and the proceeds of such issue must go in full to the treasury and be used for the acquisition of assets of the respective asset category, by which the Curry is defined. By this, any new supply of curries does not have any impact on the value of the Curry itself. The volume growth of a Curry is limited, both in relation to the speed of growth and to the total volume, as the volume growth depends on the availability of assets to be purchased to the treasury. Therefore, a Curry is indeed a “little” currency in volume, in comparison to fiat currencies. While the money supply of EUR or USD is in many trillions, the supply of a Curry can only be a small fraction of this, staying in the billions at most.
The combination of the NAV principle with the described cash-flow generating asset categories leads to a unique behaviour of the development of value of a Curry:
The supply of curries has zero impact on the value of Curry: any new Curry supply leads immediately to an increase in assets in the treasury and thus the NAV, that expresses the value of a Curry, stays unchanged. Curries are non-inflationary.
Unlike a commodity-pegged currency, the NAV of a Curry is not volatile: the market price of assets like, e.g., agricultural land or PV power plants, is barely fluctuating and exhibits long-term rather linear price developments. Curries are price stable.
The NAV of a Curry is continuously increasing even if the underlying assets are not changing at all in value or are even slightly decreasing. The reason is that the treasury of a Curry is not only receiving cash from issuing of Curry but also for the commercial operation of the assets in the treasury: real estate produces rent income, PV power plants sell electricity, etc. This income stays in the treasury and is reinvested into further assets, thus automatically increasing the NAV. Curries are appreciating in value.
In times of inflation of the fiat currency a Curry is referenced to, it may be expected that the value of the assets in a Curry’S treasury is increasing, but also the income generated by them, providing a double protection against inflation. Curries are resistant to fiat inflation.
As each Curry has to have its own treasury of specific assets, each Curry must be issued by a different legal entity that is selling the Curry as a utility token to the public, and that is investing all proceeds into assets of the specific asset category. The assets purchased by the Curry-issuing legal entity are in the ownership of that legal entity, the Curry holders do not have any rights to these assets. Therefore, the ownership structure of each Curry-issuing legal entity is identical: they are fully owned by the Currynomics Foundation, which itself is structured as a non-profit legal entity. No one benefits from the assets of the Currynomics ecosystem, only the curries themselves.
Due to the long-term nature of the assets in the treasury, each Curry must be issued non-redeemable. Like many stablecoins, a Curry does not entitle its holder to demand redemption of a Curry against fiat currency. However, the treasury of each Curry is entitled to purchase back Curry tokens at the current NAV and destroy them. This principle enables the Curry volume in circulation to grow (issuing new curries and purchase of additional assets) or shrink (buying and burning curries financed by the selling of assets) depending on the development of demand. Beyond that, the Currynomics principles require that each Curry-issuing holding must ultimately (i.e., before being liquidated) purchase and destroy all Curries that it has ever issued and that are still in circulation.
The watchdog and guardian of the Currynomics ecosystem is the Currynomics Foundation. It is to be structured as a non-profit organisation with the sole purpose to maintain and promote the ecosystem of Curries issued by its daughter companies. The Currynomics Foundation has to have an independent management board dedicated to protecting the Currynomics principles and ensuring their proper application. The daughter companies of the foundation must be managed independently by professionals experienced with the assets of the respective Curry.
Curry – a new asset class.
Curries are not just a digital currency; they are rather a new asset class closing the gap between cash and securities. Curries are not a replacement of fiat currencies; they are powerful supplements to them. Curries are not securities; they are utilising the benefits of investments for the store-of-value purpose of curries.
Curries have many useful applications: they can be used like any digital currency for payments, they are a practical solution to park liquidity for short- to mid-term and they can be used for savings. Many more useful applications for curries will be found once they come into circulation and are accepted by the market.
Beyond that, the Currynomics non-profit structure opens the doors for a new form of ownership of assets for the common good. Assets owned by the Curry-issuing legal entities will not be managed to maximize short-term profit, but to maintain a long-term stable cash-flow with little volatility, where more attention would be paid to sustainability. This aspect might make it more attractive for a community to sell its public infrastructure to a Curry-issuing legal entity than to an investment company.
Holding a Curry can also be a statement. A Curry having organic-production farmland or sustainably managed forests in its treasury is combining a store-of-value function with a commitment to protection of our environment or support for rural communities.
The concurrent currencies, that Friedrich von Hayek envisaged in the 1970s, have come into existence. Currynomics is the next step to widen the horizon of money, powered by blockchain technology and dedicated to making the world a bit better for everyone.