National money on Blockchain is a reality

Here I translate an article posted on the argentinian newspaper El Economista:

https://www.eleconomista.com.ar/2020-03-el-dinero-nacional-sobre-blockchain-es-una-realidad/


The country Marshall Islands announced this week that they will issue their national digital currency on top of Blockchain Technology. Here I tell how it will work and why it could be a good idea for Argentina.

On November 22 of last year, I wrote on El Economista an article called "A Cryptopeso for Argentina?". In that article I pointed out the advantages that national money launch on top of blockchain technology for countries like Argentina, with high inflation and low confidence in its currency. The Blockchain platform I suggested at that time was Algorand.

This past week , Marshall Islands announced that they will launch their currency, the SOV (Sovereign), with a design very similar to that proposed in the article and on the same platform mentioned

Just as an introduction, Marshall Islands is a very small country, with just 50 thousand inhabitants distributed in more than 1000 islands left in the middle of the Pacific. They  achieved their independence in 1979.

Why do it on Blockchain?

As I explained in another article, published on February 26 and for the same paper: "Are cryptocurrencies money?", Blockchain are nothing more than decentralized ledgers that no one in particular manages and therefore cannot be altered a piacere by a central entity such as a government.

For economies with little confidence in their currency such as Argentina, issuing their money on that technology may be a good idea since it would allow them to maintain their monetary sovereignty, eliminating the government's main incentive to issue money, the Seigniorage ( see “A Crypto Weight for Argentina?”).

How will it work in Marshall Islands?

The idea of ​​the Marshall Islands is that the quantity of money (monetary base) grows at 4% per annum, distributing 75% of that issuance daily, proportionally to the stake each holder has in his wallet. The remaining 25% will be used to pay for the maintenance of the system (Algorand network validators, supervisory parties, etc.).

This issue of 4% and the proportional distribution of 75% to the holders of that currency will be coded in the “Smart contract” that launches this new currency and therefore cannot be modified by a central entity. This is the property of blockchains that gives meaning to its use and that would generate confidence for the holders of that currency.

Milton Friedman

The fact that the issuance rises by 4% per year is based on a famous Milton Friedman proposal. He used to say:"The issuance of money is very important to be left to central banks" (memory quote). That 4% is, according to Marshall Islands, the estimated average global GDP growth for the coming years.

Friedman's idea was that if the quantity of money did not adjust in some way to the demand for that money, that would generate a volatility that would make it a bad currency. Think for example, of a debt in gold that can rise or fall in price vs the rest of the goods.

On the other hand, if the speed of minting was left to the free will of the government, they would be tempted to mint in excess to finance themselves, generating inflation (as he used to say: "Inflation is always and everywhere a monetary phenomenon").

His idea was that, since GDP growth could be a good proxy for the growth of nominal demand for money, an increase in its amount could be set in advance based on GDP estimated growth for the medium term.

A critique of the "Friedman" approach on the Marshall Islands proposal

Beyond whether or not Milton Friedman's proposal is good, the fact is that when you issue money on blockchain technology, it makes no sense to predefine the currency minting.

In Friedman’s times, the increase in the monetary base was always a type of seigniorage (all net issuance of money at some time had to be fiscal deficit), and therefore it might be tempting for the government to increase the supply generating inflation.

But with blockchain technology that restriction no longer exists. The mere fact that the distribution of the issuance is made proportional to the stake of money that each user has and that such property cannot be modified by a central authority, makes the government incentive to issue excess money to disappear. If it did, all holders of that currency would be compensated for the loss of purchasing power due to inflation with a greater quantity of money in their wallets.

As I proposed in the November 22 article, the most efficient thing would be to modify the amount of money based on inflation data to avoid price volatility. This possibility is one of the reasons why several countries are analyzing the CBDC (Central bank digital currency).

Why Algorand?

To serve as transactional money, it is essential to be able to pay for coffee quickly, safely and at a low cost, as we do today with a credit card. 

Algorand uses the “Pure Proof of Stake” technology designed by Silvio Micali, Turing Award winner (equivalent to the Nobel Prize in computing). 

Unlike Bitcoin or Ethereum, which use “Proof of Work” technology, Algorand enables access to cryptocurrency payments to microtransactions. As I mentioned in the article of February 26: “According to Coindesk magazine, Algorand will allow Tether to enter the world of micropayments: “This broadens the options for stablecoin users and boosts the potential use cases for tether. Tether users gain fast confirmation times (under four seconds) and low fees, which could enable micropayments.”"

This Marshall Islands initiative could be the beginning of an increasingly common reality for countries with little confidence in their currency. We shall see how it works. In case it does, I think it should be considered by our country to issue its own "Crypto Peso".