Terence Zimwara
Opponents of pure crypto-currencies including those
supporting stablecoins have consistently used the tokens’ perceived lack of
intrinsic value as their main line of attack. Stablecoins are backed by
‘stable’ fiat currencies like US dollar and Euro or alternatively with
commodities like gold. Fiat currency itself is stable because it has state
backing, it’s the legal tender.
Ordinarily this lack of intrinsic value means a pure crypto-currency
like Ethereum is not really backed or tied to anything of value. Matters are made
worse by the fact that few countries have given recognition to Bitcoin or any
of the so called alt-coins.
Without official or legal recognition as well as real assets
to back them, growth and acceptance of crypto-currencies will remain stymied we
are reminded. But just how far this intrinsic value argument goes is unclear. Most
government issued currencies are also not backed by underlying assets, they
have no intrinsic value but they remain in play.
Legal tender status
Indeed, prior to 1971, the world was accustomed to a gold
standard; the US dollar was redeemable for gold. The world has since moved away
from that system to one where value of the currency is determined by the forces
of supply and demand. Under such a system, it is the central bank that is entrusted
with the task of maintaining or stabilizing the value of a currency by either injecting
or limiting the amount of money in circulation.
The abandonment of the gold standard meant a central bank
issued currency was now just a token with no real value. Besides the legal
tender status that is assigned to it by a government, it has no intrinsic value
per se, the currency only functions because it has state backing. Logically people
will have confidence in that currency’s ability to act as a medium of exchange
or a store of value simply of because it has the legal tender status.
It is this confidence that matters particularly when a
currency has nothing backing it. Pure crypto-currencies like Bitcoin are not
backed by anything nor do they enjoy the legal tender status but have exhibited
signs of a fully functioning medium of exchange. That is only possible because
early users have confidence this novel currency.
In 2018, when Bitcoin’s value began heading south, critics
began predicting a total crash but that has not happened just yet. After
peaking to just under $20 000 in late 2017, Bitcoin value fell to below $4000 by
late 2018 but only to stabilize around that price. The so-called analysts
pointed to the price of $3600 being the resistance level; Bitcoin could not
drop further than that, the only direction was up.
That assessment seems correct for the moment because Bitcoin
has since rallied, briefly peaking at $13 000 in July 2019. Some are predicting
that it will breach the $20 000 barrier later this year with reports suggest
that institutional investors have joined the club.
Why the confidence in
Bitcoin
Bitcoin and alt-coins have maintained their values precisely
because users have confidence in the mathematics behind the creation of such
tokens. The Blockchain— the technology that underpins
crypto-currencies—occupies the role usually reserved for a central bank, it
ensures the currency in circulation is immutable, it cannot be duplicated and
more importantly, it allows users to verify if the founding rules are being
adhered to. In other words there is no debasing of currency through over
printing or uncontrolled borrowing as is the case with fiat currency because
the Blockchain pre-empts this even if that were the only ‘options’ left .
As a growing number begin to understand this about the
Blockchain, more people get attracted to Bitcoin even as it has no intrinsic
value. As often is the case with currencies, it is confidence that translates
to a strong and stable currency. High confidence means a strong currency and
vice versa. Backing a currency or even a stablecoin with gold or oil might not
be enough to sustain or support a currency when there is no confidence. That is
what Venezuela has learnt with its petro crypto token.
Oil not enough
Venezuela is in the midst of a crippling economic crisis;
its currency has all but collapsed and generally the country is short of
confidence. In response, the government launched its own crypto, which it said
is backed by oil or gold. However reports coming from that country indicate
this project may have suffered a stillbirth; few people are accepting this as a
means of payment. Instead, Venezuelans have placed trust in Bitcoin, a privately
issued crypto-currency with no intrinsic value. Reports suggest many are using
Bitcoin to settle transactions as well as to hedge against runaway inflation.
This example proves that while precious resources or
commodities are important in backing a currency, confidence in the process of
issuing that currency remains paramount. Venezuela is a renowned oil producing
country and backing the petro token with oil made all the sense, yet for citizens
of that country that is simply not enough. Reports of abuse of national
resources as well as corrupt practices by government officials are some of the
factors that drain confidence in a currency as well as the economy in general, and
this may have contributed to the petro failing to take off.
Legal tender not
enough
Zimbabwe is another example that has proven that without satisfying
certain conditions like confidence, a currency cannot stand even as it enjoys
the so-called legal tender status. When the Zimdollar collapsed in 2008, the
country adopted the popular and stable US dollar as the new legal tender or as the
process is known, Zimbabwe dollarized. It was during this dollarization era
when officials repeatedly complained that the US dollar had curtailed the
central bank. The central bank could not issue out effective monetary policies
without a local currency.
Things like inflation targeting and foreign exchange
controls were not possible without a domestic currency was argument.
Sometimes the arguments had little or no economic rationale.
For instance officials averred that a country just had to have its own currency
for the sake of it. A local currency was a source of nationalistic pride. Local
currency supporters did not want to be reminded why the currency had collapsed
in the first place.
Consequently, in late 2016, the government reintroduced the
Zimdollar, then initially disguised as the so-called bond notes, which were supposed
to be at par with the US dollar. The Zimdollar was brought back to ostensibly
enable the central bank to positively tackle monetary issues.
Of course, this is not the only reason. With capacity to
mint your own currency comes the ability to print money well beyond a country’s
economic means. With printing money comes power, an entire population is at the
mercy of a few central bank appointees who are in fact more subservient to their
appointers than to the interests of the masses.
In countries with weak governance systems, such an
arrangement enables corrupt politicians to finance expensive but ultimately
unviable public projects and Zimbabwe is no exception.
In early 2017,Zimbabwe launched Command Agriculture, an
ambitious but costly agriculture funding initiative and this expansive exercise
gobbled $3 billion between 2017 and 2019. Government had initiated this in
order to bolster the country’s agricultural output and food security after
years of grain deficits. Two years later, government now says Zimbabwe needs to
import at least 800 000 metric tonnes of maize in order to avert a famine
following a poor agricultural season! In other words, the giant agriculture project
has failed even after the central bank created or printed money to fund this.
Just recently, the country’s auditor general produced a report
which exposed the rampant abuses that plagued Command Agriculture leading to
its now apparent failure.
It is imperative to note that this kind of unrestrained
spending coincided with the return of a local currency. Command Agriculture would
not have been possible without the fictitious money coming out of the central
bank.
Now ordinary people are paying the price, a legal tender
status or state backing will not save a currency from collapsing. The new
Zimdollar has depreciated by 900% against the US dollar since its
reintroduction in late 2016 and looks destined to fall even further. With
official inflation figures now at 175%, ordinary Zimbabweans are dumping the
currency in favor of the USD and Bitcoin.
The growing interest in Bitcoin by some Zimbabweans is
particularly important as it is happening despite public warnings against the use
of crypto-currencies which were issued by the country’s central bank.
Bitcoin’s popularity in Zimbabwe underlines the importance
of transparency in managing a currency. This crypto-currency has a known number
of coins in circulation as well as the total number that will be issued. There
is no possibility of reneging on this because this is already wired in the
Blockchain and no one party can alter this. Knowledge of this creates
confidence, a key attribute for anything that functions as a medium of
exchange.
Intrinsic value matters yes but on its own it cannot sustain
a currency. However, with just confidence, a currency will survive as Bitcoin
and alt coins have shown us. Bitcoin opponents may have to look for another
reason to attack the crypto, the intrinsic value is argument does not stick
anymore.
No comments:
Post a Comment