Decentralised Cryptocurrencies may be the only way to save the World’s financial system from oversupply of fiat currencies

Decentralised Cryptocurrencies may be the only way to save the World’s financial system from oversupply of fiat currencies

Today it feels like the world is in a state of flux economically, politically, and climatically. Throw into this mix the Covid19 pandemic and it is difficult to find stability anywhere.

As the national powers that be seek to shore up their own economies and health systems with policies based in self interest it is almost impossible to see how the current global financial set up can be maintained.

In 1865 under President Andrew Jackson’s stewardship the United States national debt stood at zero (the last time it did so). Since that time the US, along with just about every other country on the planet, has increased its borrowing. By September 2001 the figure had risen to US$3.34 trillion, by December 2008 this had almost doubled to US$6.4 trillion, and today the US national debt stands at aroundUS$27 trillion (the number is rising too quickly to accurately keep up with).

Alarmingly, as we look forward, it is considered that US national debt will grow to exceed US$48 trillion by 2024. That’s an increase of over 20,000,000,000,000 US Dollars added to the debt in only 4 years. Where does this ‘money’ come from? Historically, currency has been “backed”, or readily converted into, some material good. Even though money is created by debt, we can say that it is “backed” by the value of all the goods and services that we use that debt to produce - ergo. If we do not add to the ‘backing goods’ and we double the amount of currency we effectively halve the value of the currency. The relationship between currency and ‘backing goods’ is referred to as monetisation.

Obvious question coming up - In whose interest is it to control Monetisation? A country with its own fiat currency and driven by its own financial imperatives can always simply create as much currency as it owes in order to pay its debts if those debts are denominated in its own currency. This is referred to as debt monetisation and means that a country with its own currency is able to avoid defaulting on its financial obligations simply by printing more money. A convenient way to pay your bills is to just print more money.

Sounds great, however, there is a limit to how much debt can be monetised before a country starts suffering from inflation, or even hyperinflation due to the imbalance this creates with the relationship the currency has with the value of the ‘backing goods’ or asset base. Policies to monetize debt have often pushed countries well past that point and this makes creditors less likely to lend to that country as the future repayment of the debt will be devalued. Example - holders of Venezuelan Bolivar in 2017 would have been disappointed to find that their holdings were worth only 1/650th of their value at the start of the year. Perhaps this is the reason that world-renowned investor Warren Buffett recently sold all of his holdings in debt holding stocks. He did this reasoning that debt based in fiat currencies will lose value, possibly becoming worthless as the burgeoning supply of newly created money catches up with a relatively static backing goods resource.

A common worry is that excessive government debt levels can impact economic stability with ramifications for the strength of the currency felt in trade, economic growth, and unemployment. Driven by US financial imperatives The US Federal Reserve Bank creates money through open market operations, i.e. purchasing securities in the market using new money, or by creating new bank reserves which are then issued to commercial banks. Bank reserves are then multiplied through fractional reserve banking, this is a handy process whereby banks can lend in excess of the newly created deposits they have on hand. In plain speak this means that the newly created money can be further multiplied by the commercial banks and released into the general marketplace without any change to the value of the backing goods. Excessive reliance on this process can however lead to a situation whereby;

Too much money V too little goods = inflation = currency devaluation = destruction of savings and destruction of debt.

This is in stark contrast to decentralised Cryptocurrencies which have a finite supply which makes them inherently deflationary and more akin to gold. The added benefit of them being decentralised also means they are beyond manipulation by self serving national bodies with their own specific financial imperatives, and are solely driven by the marketplace.

The flip side to the increasingly unstable fiat coin story is decentralised cryptocurrencies and in particular Utility based cryptocurrencies. Utility based cryptocurrencies such as Chailify’s CFY give the added security of the guarantee that the currency will be accepted in payment for goods and services within the issuer’s community. In Chainlify’s case the company plans to accept payment for goods and services in CFY’s at an initial value of around GBP.25. This means that developers signing up to use Chainlify’s blockchain service platform can future proof their costs by purchasing CFY tokens at the current low issue price. The early purchase of CFY also means that the purchaser gets in ahead of any potential upwards pressure placed on the value of CFY by speculators.

At the time of releasing this blog Chainlify are seeking Blockchain Developers to register at to participate in a closed launch of the newly developed platform. As the big bang which will accompany the launch of our Blockchain-as-a-Service Platform becomes imminent we look forward to the creation of the Chainliverse which will follow.

By Glyn Craig on 12 October, 2020

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