The Holy Grail of Crypto Currencies: Ready to Replace Fiat Money?

Revised version published in the Journal of Economic Issues: Richard Senner & Didier Sornette (2019) The Holy Grail of Crypto Currencies: Ready to Replace Fiat Money?, Journal of Economic Issues, 53:4, 966-1000, DOI: 10.1080/00213624.2019.1664235

39 Pages Posted: 23 Jun 2018 Last revised: 15 Feb 2020

See all articles by Richard Senner

Richard Senner

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss National Bank - Financial Stability

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology

Date Written: April 1, 2018

Abstract

The rise of crypto currencies, notably bitcoin, has fueled new and old debates about money. We discuss attempts to complement or replace fiat money by ‘stablecoins’. In a first step, we review today‘s endogenous and debt-backed money. Second, we analyse attempts to use stablecoins in order to overcome the inherent speculative and deflationary design of fixed supply coins like bitcoin. Building on theories stating that economic and liquidity expansion go hand in hand we find that stablecoins have flexible supply designs. However, we also find that the algorithmically planned allocation of new coins, that is characteristic of stablecoins, is inferior to contemporary ways of money creation for two reasons: (i) it is not market-based and (ii) it is not backed by a ‘We Owe You’. Moreover, it builds on outdated monetarist theories in an attempt to control prices. We predict that crypto-monetarism in its present formulations will fail because quantity adjustments are not a sufficient condition for stable prices. Finally, regarding price stability, we suggest the importance of overcoming the illusionary dichotomy between the real and the financial circuit in (crypto) monetary policy. We show that, in the real world, firms set prices according to cost-based pricing rules, so that changes in unit labour costs correlate well with inflation. As a consequence, and in line with a path-dependent and institutional perspective on the labour market, coordinated wage bargaining appears vital to achieve price stability. Against this backdrop, we propose that wages have to grow in line with productivity plus the inflation target. Such an approach, if properly complemented with fiscal, interest rate and fx policies, would not only benefit price stability, but also financial resilience and economic development at large.

Keywords: Crypto Currencies, Endogenous Money, Monetarism, Blockchain, Post-Fiat World, Unit Labour Costs, Coordinated Bargaining

JEL Classification: E32, E51, E64, G21

Suggested Citation

Senner, Richard and Sornette, Didier, The Holy Grail of Crypto Currencies: Ready to Replace Fiat Money? (April 1, 2018). Revised version published in the Journal of Economic Issues: Richard Senner & Didier Sornette (2019) The Holy Grail of Crypto Currencies: Ready to Replace Fiat Money?, Journal of Economic Issues, 53:4, 966-1000, DOI: 10.1080/00213624.2019.1664235, Available at SSRN: https://ssrn.com/abstract=3192924 or http://dx.doi.org/10.2139/ssrn.3192924

Richard Senner (Contact Author)

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

ETH-Zentrum
Zurich, CH-8092
Switzerland

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Southern University of Science and Technology

1088 Xueyuan Avenue
Shenzhen, Guangdong 518055
China

Tokyo Institute of Technology

2-12-1 O-okayama, Meguro-ku
Tokyo 152-8550, 52-8552
Japan

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