The Separation of Currency & State — Part 2
Money, or the lack of it, underpins almost every interaction in society.
As we saw in our last article, the government uses money to pay for services (roads, education, hospitals, to name a few) and curry favor with citizens. By keeping voters happy, politicians hope to get re-elected. But all too often, governments spend money they don’t have to fund these services. They go into debt, then raise taxes and mint more money.
It’s hard to escape such a vicious cycle of overspending and inflation.
Money is involved in every part of our governmental systems, and this isn’t going to change anytime soon. In order to understand how to improve it, we need to look at how the government uses money today, and how stable cryptocurrencies could play a role in solving a lot of our problems.
Here’s an exploration of how currencies work today, how cryptocurrencies can work better, and how the ultimate solution may be stablecoins.
Here’s how fiat currencies (“Government”) work.
Unlike a commodity such as gold or silver, fiat currencies (read: cash) don’t have any intrinsic value. Rather, the government decides how much of it to create.
When the government competently and cooperatively manages monetary policy, it can foster economic growth and prosperity.
But the problem is many countries’ governments aren’t able to combat the selfish or corrupt motives of certain individuals. So when politicians abuse their power, we see things like hyperinflation and outrageously high tax rates.
In order to function properly, fiat currency depends on a combination of carrots and sticks. Let me explain:
The market dangles carrots (read: goods and services) to encourage people to earn fiat currency. The government uses sticks (read: laws and consequences) to keep people in line. For example, if you counterfeit a bunch of $100 bills, you have to pay a large fine or go to prison. This threat of punishment discourages most people from breaking the rules.
This system has facilitated the basic functioning of many developed societies, and has persisted relatively successfully for hundreds of years.
But here’s how cryptocurrency (“Anarchy”) can work better.
Because it’s decentralized, crypto doesn’t require oversight by the government. Which means it also can’t be corrupted by governments. The code is immutable and the cryptography is impenetrable, so bad actors simply can’t take advantage of the system.
Since it’s impossible for anyone to create more money, there’s no need for the sticks (punishments). Accordingly, a world that required no government oversight of currency would be a system of all carrots and no sticks.
That’s the brilliance of Bitcoin, for example: it’s held together only by the positive selfish economic incentives of all the participants.
It’s hard to know what the most effective solution is.
Most people assume mass-adoption of cryptocurrency might increase violence: without government oversight, who would make the rules? They believe there will be less violence and uncertainty if one central organization manages the currency.
But in reality, it’s the opposite. The government monopolizes the use of force (the stick), but technology has the potential to reduce our dependence on the government and its stick.
Not needing to rely on the government to dictate our currency is a positive thing.
After all, government is flawed and allows perpetual co-option — being used towards the selfish ends of bad actors. Conversely, crypto precludes any co-option (at least after the early adopters have bought coins, convinced other people they’re valuable, and profited off their initial investment).
Because crypto minimizes the potential for corruption, it’s already one step ahead of fiat.
And stablecoins — digital currencies designed to have a stable price and to hold real-world value — combine the reliability of fiat with the immutability of crypto. Which is why we see them as the best solution to the flaws in our currency system.
Money’s not going anywhere, so we have to figure out how to use it for good: to make our societies better and give power back to the people. Here at Reserve, we believe stablecoins are the most viable way to do that. For more on our particular approach to stablecoins, check out this overview.
Got feedback or want to discuss? Join our conversation on Telegram.