Tag: Bitcoin

A digital money rush is great. A run, not so much. A statement that reflects that digital currency like Blockchain-based tokens is in trend now. However, in long term, this charm may fade due to the acceptance of these token may not be uniform.

Blockchain-based stablecoins such as Tether and the upcoming Diem are the new form of private money. These digital money Tokens don’t offer Bitcoin-type speculative thrills, however, seek acceptance instead as one-to-one clones of national currencies. This means that the market value of these tokens stays equivalent to its counterpart in physical currency. Such tokens have the potential to become a powerful part of the modern digital economy, provided we know how to prevent a run on them.

Trust in physical cash is because of the support by regulators. The currency notes in our wallet are a promise from the central regulatory authority of the issuer country to pay the value written on it. In accepting it, we do not pay any thought to the creditworthiness of the lender. Whoever it’s passed on to will also take the banknote at face value. Not requiring due diligence on banknotes sounds common sense. However, this is actually a highly valuable property of money everywhere.

It is to be noted that as the digital stable coins proliferate globally, NQA may not hold. During the free banking era in the U.S., something similar was happening, when notes issued by a lender in Tennessee would sometimes be discounted by 20% in Philadelphia. There was constant haggling and arguing over the value of the issued notes in transactions. Therefore it was very hard to use private banknotes in transactions.

Things finally changed because of the Civil War. President Abraham Lincoln of America desperately wanted to raise money for the war effort. The government thought of raising money by selling bonds to newly chartered national lenders. Thus a law passed by Congress in 1863, this law also ushered in a uniform currency in the country.

Thereafter, tariffs were levied on banks for paying out other types of notes, driving them out of existence. The researchers argue whether stable coins are in a similar situation. In the current regulatory vacuum, these tokens will struggle to become no-questions-asked money. For NQA, they require the backing of the country including the necessary oversight. However, the rapid growth of the novel product has taken regulators by surprise. And the likelihood to attain the legal backing of the countries is very low.

Money in the 21st century may not need to be the official currency of a State. However, it still has to be no-questions-asked, like US Dollars. But that’s a power that only regulators can bestow and they should use it well.

For more updates like this, keep watching this space!