the plan for the future
3 August 2021 (last revision: 14 September 2021)
Cryptocurrency advocates promise that cryptocurrencies can eliminate banks from the financial system. It is possible to make payments with cryptocurrencies, but this hardly happens, except for dubious transactions. Over the years, a few dozen people have approached me. Often they were interested in starting a demurrage cryptocurrency. Natural Money is an economic research project, and the research suggests that the future of cryptocurrencies is not promising.
Perhaps the biggest problem lies in their promise of eliminating banks in the financial system. The capitalist economy depends on credit, so eliminating credit is likely to collapse the economy. Money in bank accounts performs a productive function in the economy. Natural Money comes with a design for the financial system to prevent abuses of the public guarantees, as explained in Two Types Of Banks.
Another obstacle is that cryptocurrencies usually do not come with a holding fee. If the equilibrium interest rate in the market is close to zero or negative, this can cause currency hoarding and economic depression. Some cryptocurrencies like Freicoin feature a holding fee to avoid hoarding. These cryptocurrencies are unattractive to hold, while most people own cryptocurrencies for speculative purposes.
It is the prerogative of governments to issue currencies and stipulate which types of money we can use for payment. Legal tender laws usually state that government currency and bank deposits denominated in government currency serve that purpose. Governments can even choose to make payments in cryptocurrencies illegal. There are reasons to do so. For instance, cryptocurrencies undermine the influence of governments on the financial system.
In a negative-interest-rate Natural Money financial system, the amount of currency in circulation might be close to zero. Natural Money currencies will probably be accounting units only. Holding currency is unattractive for banks because of the holding fee, as explained in Permanent Liquidity. Hence, currencies may disappear from bank balances once capital requirements have replaced reserve requirements.
Many people have no access to banking services so they can benefit from digital cash. With Natural Money, governments issue cash backed by government debt, as explained in Cash for Negative Interest Rates. This cash can be physical in the form of coins and banknotes. It can also be digital and even a cryptocurrency. And so, people without access to banking services can make payments.
There is no need to forbid holding cryptocurrencies for a Natural Money financial system to operate. People might see them as a store of value like gold or silver. It is better to discourage their use for payment and make them unattractive to hold. In a global Natural Money financial system, only government currency and bank credit denominated in government currency should be legal tender. And so, the future of cryptocurrencies might not be so bright after all.