What is the ideal reserve asset? Throughout human history, there has been a constant need to preserve the value of the goods that have be...
What is the ideal reserve asset?
Throughout human history, there has been a constant need to preserve the value of the goods that have been found, produced, manufactured, and stored. How can this problem be solved?
An obvious, but not always practical, solution is simply to accumulate the assets of value. Simple because the accumulation of an asset automatically implies the storage of its value, but often impractical because often these assets are difficult to store directly, can lose their usable value during storage, could be difficult to preserve, and can be easily stolen.
Since mankind invented the universal instrument of exchange, money, which is also automatically a medium of value (an instrument of expressing value), the utility has also appeared, with which, it is easy to store any kind of practical value. Money is a concentrated instrument of value, easy to store, and difficult to steal when kept in a safe place. However, money, the universal medium of exchange, is not an ideal store of value. Because money does not have intrinsic value and can be produced artificially, its quantity is not inherently limited, not limited in a generic way. Since the function of money became to generate value directly, since money can produce money, and its quantity can be artificially modified, money is not suitable to fulfill the function of the ideal reserve asset.
The artificial regulation of the money supply can have both positive and negative effects. There is a branch of science that deals with the role of money as an instrument of regulation of the economy. The issuers of money, the state, can manipulate the economy by artificially regulating the quantity of money, but this disconnects it from the quantity of value actually present, making money unsuitable as a reserve asset.
Traditional money can be easily manipulated artificially by the issuer because its quantity, and therefore its value, can be artificially influenced. For example, conventional money provides a means to inflate the value of the money held in reserve, creating an unjustified reduction of debt. Conventional money is a suitable medium of exchange, but under the influence of politicians, it is an unreliable reserve asset. If the amount of money were tied to the amount of real value actually existing, then money could be, even if not ideal, a suitable reserve asset.
Gold can be a suitable reserve asset. Gold naturally exists in limited quantities, it carries value directly through the cost of its production and the different ways it can be used, it is relatively easy to store, and it is durable, time does not affect its existence. For a time, the dollar itself, one of the currencies used as a universal medium of exchange, was tied to the amount of gold held, thus ensuring the dollar's role as a reserve asset. Gold is a near-ideal reserve asset, but its biggest drawback is that it is quite easy to be stolen because gold is not explicitly tied to its owner.
Land is also a widely used, almost perfect reserve asset. Land is generically limited, directly carries value, and is clearly linked to its owner. Currently, land ownership is also often used for the purpose of accumulating reserve assets. The disadvantage is that land is not easy to handle and cannot be moved.
What are the characteristics of an ideal reserve asset?
- It holds its value, retains its value over time, and represents value directly.
- It is limited in quantity, or the value it represents multiplies as it multiplies.
- Easy to handle, easy to store.
- Durable, time does not affect its existence.
- It can be easily exchanged for goods of value.
- It cannot be stolen.
Does an ideal reserve instrument of value exist?
The integration of information technology into society, its role as a tangible asset, has created a revolutionary new kind of abstract value instrument. The actual social-scientific-historical situation has created a suitable substitute for traditional money, cryptocurrencies. The first and classic example of these instruments, Bitcoin, was created to replace conventional money in circulation by correcting the flaws of fiat money.
Bitcoin was born to create an open, decentralized, and therefore less artificially manipulable, universal medium of exchange, money, with a limited amount of supply to be safe against inflation. We are currently in the initial, formative period of its use after the invention of crypto-assets.
The tool of cryptocurrencies, from a technical point of view, is suited to take over the role of traditional money, but its practical application created social problems. Cryptocurrencies are linked to the concrete economy in far fewer ways than traditional money, so their practical, concrete value is much more based on the subjective perception of society. If cryptocurrency generally takes over the role of fiat money, social judgment would provide stability to the value of the cryptocurrency. As long as this widespread adoption is realized, as long as society uses the cryptocurrency as an exchange instrument only in a narrow range of areas, and in the absence of strong and direct economic affiliation, social perception is based only on speculation. Another problem is that although the amount of most crypto currencies is limited by software programmers, due to the open-source code of cryptocurrencies, there is no limit to how many different cryptocurrencies exist. The development of technology and financial benefits have created more and more cryptocurrencies.
(The interesting twist of the situation is that the actual benefit of cryptocurrencies is materialized in traditional money. As long as a cryptocurrency is not able to completely replace traditional money, this backhand situation persists.)
The symbolic value of a cryptocurrency, similarly to gold or land, is implemented by its limited volume, but the current situation of cryptocurrencies is like a gold mine that can only produce a limited amount of gold, but there is no limit to how many mines can exist. The different cryptocurrencies cannot, of course, be mixed up, they remain distinct and unique, but their function and nature are similar. At present, the value of a cryptocurrency is determined primarily by popularity and fashion, by society's subjective judgment of its worth, rather than by its nature as a concrete value, which is actually represented primarily by the speculative amount of conventional money invested. As long as society does not choose a single cryptocurrency, or until a cryptocurrency is created that has a uniquely usable function and character, has the characteristics of a medium of exchange of value and best suited to the role of a reserve asset, we will be in a period of initial chaos in the use of cryptocurrencies after the revolutionary idea of decentralized money.
If cryptocurrencies survive as a kind of store of value, among the many cryptocurrencies already in existence or yet to be created in the future, which is the most suitable, which one will persist?
The historical answer is, that the first, Bitcoin, which is also currently the most valuable because of its firstness. There could be a scientific answer, as the most technologically advanced, the most versatile, the most feature-rich, which is probably Ethereum at the moment. Or something similar, or even better. Only a limited number of different ones can remain, of the unlimited variety that is currently possible.
Obviously, the instrument that will survive as a medium of currency is the one that is best suited to fulfill the role of the expected medium of exchange and/or reserve asset, technically, functionally, according to social acceptance, and historically according to tradition and prevalence.
Social and historical acceptance is the most subjective. Objectively, however, the cryptocurrency most likely to survive is the one that is functionally best suited to the role representing value.
The obvious usefulness of cryptocurrencies lies in the simple, secure and reliable transfer of value. However, this function can also be performed by other tools and services based on information technology, including traditional money. Traditional money is already present mainly in digital form.
Some of the cryptocurrencies, of which Ethereum is a typical example, are evolving in a direction that provides new features to the digital asset that are difficult or impossible to implement with traditional money, the possibility of smart contracts. With the programmability of cryptocurrency, the medium of exchange can have virtually unlimited additional functionality. The evolution of cryptocurrencies in this direction could revolutionize business processes. This path of development of cryptocurrencies could bring unforeseen changes and can create radical transformation of the processes that use money as a medium of exchange. However, this direction of development does not affect the basic function of currency, but creates new functions for money. It is possible that the historic role of cryptocurrencies will be fulfilled by this development and this development will create a kind of transformation in society similar to that caused by computing or the internet. However, this development is aimed to make the digital form and use of money as a medium of exchange more efficient, and not to eliminate the inherent flaws of traditional money that gave birth to cryptocurrency.
If we keep in focus the original intention of the birth of cryptocurrencies, the historical necessity, the absence of a value asset having the expected characteristics, and the ability of cryptocurrencies to potentially fulfill their purpose, the greatest potential use of cryptocurrencies as a representative of value would be in their role as a reserve asset. The most suitable cryptocurrency of monetary denomination will be the one that is technically, socially and historically best suited to the role of the reserve of value asset, the store of wealth in the form of digital money.
At first glance, cryptocurrencies seem to be well suited to this role. However, let's examine in more detail the characteristics that a cryptocurrency should have in order to be able to fulfill the role of an ideal reserve asset.
In principle, it should have the characteristics of the ideal reserve asset listed before:
- It holds its value, retains its value over time, and represents value directly.
- It is limited in quantity, or the value it represents multiplies as it multiplies.
- Easy to handle, easy to store.
- Durable, time does not affect its existence.
- It can be easily exchanged for goods of value.
- It cannot be stolen.
Some of these, such as being easy to handle and store, and persistence is an inherent characteristic of cryptocurrencies due to their non-material existence. An example of the characteristic that is generic but not inherent, is the limitation, the property that depends on how the cryptocurrency is designed. However, non-alienability is only half true for current cryptocurrencies, because while the contents of a cryptocurrency wallet are always real and can only be modified according to the rules, the owner of the wallet is not inherently fixed, and therefore anyone who knows the right key can own or access the contents. And perhaps the main problem with the current cryptocurrencies is that, although a system is forming in which they can be exchanged for other assets that have value, they have little or no direct value, and therefore their actual value is highly speculative.
Current cryptocurrencies also have drawbacks due to their operating nature; their large-scale practical application leads to extreme computational demands and resource consumption. This disadvantage, in fact, is a direct consequence and manifestation of its value, since, if the value of a cryptocurrency is higher, there is also greater computational competition to exploit it.
What are the characteristics of an ideal reserve value asset that exists in digital form?
As a value asset:
- The quantity in circulation is inherently limited
Its quantity is not an artificially, subjectively determined value, but follows from its operation. (The quantity of current cryptocurrencies is a decision of the programmers, and therefore artificially determined.)
- Reliable
The asset's digital ledger system must be reliable, reflecting reality.
- Easily exchangeable for other assets of value
The operation of the asset must carry its trading system.
As a reserve asset:
- Value-retaining, with balanced valuation
The value of the asset is protected and free from significant volatility, and stability is implied by the operation of the asset.
- Its value cannot be manipulated and is protected from speculation
The asset should express value in a generic way.
- Operate in a way that is connected to society. The reserve asset is personal property.
The ideal reserve asset should be an integral part of society.
As a digital instrument:
- Does not require extreme computational power
Its use should not involve an increase in computing capacity, its spread should require only a directly proportional increase in computing capacity. The operation of the system should not require or lead to competition.
- Operate on a peer-to-peer computational system
A simple client-server application should be sufficient to operate the system.
- Be completely distributed
There should be no functional difference between the nodes of the system. It should have the inherent property of being decentralized (current cryptocurrencies lead to centralization at least at the operational level.)
- Low data storage and computing requirements
The client-server application should be implementable on portable devices (for example on a smartphones)
Safety, security, and privacy requirements:
The asset and its owner must be inherently and privately connected.
- Invulnerable to theft
The asset of value and its owner must be uniquely linked.
- Private
The relationship between the intangible asset and its owner should not be public, and only the owner of the value may know the quantity of the asset.
Some of the listed properties are realized in today's system of cryptocurrencies, but they are not entirely specific to any cryptocurrency. Can the ideal reserve value utility be realized digitally? Can an ideal digital reserve value instrument be created?
No comments