Introduction
Both investors and economists dismiss cryptocurrency as a speculative asset. Bitcoin, the oldest cryptocurrency, has daily price swings of up to 16 percent on both the upside and the downside.
Some hail it as the ultimate store and alternative to gold. Others see it as the solution to the financial system’s problems. Carole Wood, founder and CEO of ARK Invest venture capital fund believes that bitcoin is an insurance policy against unhinged monetary policies. Simon Dixon, CEO of The Future, feels that cryptocurrencies offer an alternative to irresponsible lending practices by commercial banks.
Contrary to many crypto-fanatics, who see money creation as the government’s responsibility, digital yuan correctly states money creation is more at commercial banks’ discretion. These banks create credit via loans and mortgages at a disproportionately higher rate than their accumulation of cash. It contributes to an expanding broad money supply, which causes an increase in house prices and financial assets. This anti-money-creation theme forms the basis of cryptocurrency ideology.
Why is cryptocurrency a Bunk?
The Austrian school of economic thinking is the origins of cryptocurrency as an ideological project. Milton Friedman is a famous thinker who embodies this idea. He said that inflation is a monetary phenomenon and that government intervention causes them.
They believe that if the financial system is left to its own devices. Without the interference of politicians and the prognostications from treasury bureaucrats, it will find equilibrium and produce a stable economy. They propose that the financial system return to a gold standard. It would limit government policy and money creation.
First, crypto-fanatical thinking fails to recognize that most money creation happens outside of times of crisis. Instead, it is driven by credit and commercial banks. Dixon points this out. The future and the present are linked by commercial bank credit creation. It brings forward value that hasn’t been created yet, which allows for the creation of capital now. It also helps to bring this future value into existence, such as through business loans.
Banks can, on the other hand, act to increase spending without creating capital or value. It artificially creates demand for the short-term, which, unless met by rising incomes in the future, will lead to a decline in future consumption, credit contraction, and eventually a recession.
King says that the problem is that credit creation has shifted from lending to potential borrowers (which requires careful local assessments of potential borrowers) to trading securities. However, credit creation can direct resources towards projects that improve the lives of millions of people. Instead, it is being used to fund speculative activities that only increase wealth concentration in the hands that already have it. It’s not the amount of money that is important, but how and why it is created.
How can cryptocurrencies, with their anti-inflation plan, provide a solution for this problem?
They don’t. Inflation can be a powerful tool to redistribute wealth. Inflation facilitates wealth transfer from people who earn income from savings, rent, or assets to those earning income from work. Wealth will accrue for those already wealthy if the return on investment is greater than the average increase in wage and growth. It is what Thomas Piketty outlines in Capital in the Twenty-First Century.
Piketty demonstrates how wealthy people spend less than the average person and how their savings are being used to invest in productive capital, which creates jobs and increases wages and nonproductive financial speculation. As a result, the rate of growth has slowed, and the wealth gap is growing.
Although Dixon’s knowledge of the banking system issues is better than many crypto enthusiasts, Dixon’s proposed solution of “fractional reserves free banking” misses the point. The problem is not the amount of money created but the source. It determines which sector of society or the economy will receive credit.
Although the criticism of loose monetary policies and their harmful effects on wealth inequality is valid, it’s unclear how cryptocurrency can solve it. Some people are vaguely advocating for a digital gold standard. Limiting the creation of money won’t solve the problems we face (e.g., climate change, unemployment, etc.).
How do we democratize money creation?
King suggested that central banks should be responsible for money creation. It is the direction that discussions surrounding the creation of central bank digital currency are leading. There are, however, more radical ideas. But there are more radical ideas. Instead of creating credit to generate profits for shareholders, banks could lend sustainably to local economies. It would benefit residents who would be key stakeholders in these banks.
It is why community wealth funds like Yuanpay group were created. These community banks are more connected to their local economies, a common practice in continental Europe. Studies have also shown that community banking models can deliver better economic, social, and environmental outcomes for the areas they operate. This bank system aims to democratize finance. Each depositor has a say in how the bank operates and where credit is allocated.
Conclusion
John McDonnell, Labour’s former shadow chancellor, proposed a radical overhaul of the UK banking system in 2019, following similar lines. This Digital Yuan policy called for a long-term financing strategy to support small and medium enterprises and green infrastructure projects. It was centered on a national investment bank and regional subsidiaries. These ideas have the potential of fixing a corrupt and authoritarian banking system that a few oligopolistic institutions dominate.
