Digital cryptocurrencies had a wild ride in 2017. The massive run-up in bitcoin's price generated a mania that spilled over into lesser-known virtual currencies, sparking a larger debate over whether these alternative payment systems are at all valuable to society. I've argued that bitcoin itself isn't, but some constructive criticism is in order.
If bitcoin is largely useless, then what would a useful cryptocurrency look like?
We should start with how bitcoin went wrong. Steve Randy Waldman has a good presentation on that subject. But the short version is that bitcoin's creators completely misdiagnosed the actual problems with more traditional currencies.
The U.S. dollar, the pound, the euro, and so on are all called "fiat currencies." They aren't tethered to anything objective, like gold, so the government can adjust the supply of currency up or down as it sees fit. Critics think this is a terrible idea. They say currencies run in this manner inevitably fail both as mediums of exchange and as stores of value: Instability and collapse become inevitable, and the long grind of inflation harms savers and debases the value of people's money.
All of this clearly influenced bitcoin's design. The cryptocurrency has no governing body and is run over a decentralized network. Creating new bitcoins is a cumbersome computational process undertaken by "miners," and the whole potential supply is ultimately capped at 21 million.
Waldman points out this diagnosis is almost entirely backwards. Fiat currencies can respond to changing circumstances and keep the economy on an even keel. America experienced severe recessions more often on the gold standard than off it. Plus, the price of bitcoin itself has been wildly unstable relative to the U.S. dollar. Indeed, the solution to this year's price boom would've been to rapidly and massively increase the bitcoin supply until demand had been soaked up and the price stabilized. But bitcoin's very design philosophy prevented this.
The real problem with fiat currencies is thus not a failure of effectiveness but a failure of ethics, as Waldman puts it.
While they perform pretty well as mediums of exchange and stable stores of value, major fiat currencies like the U.S. dollar and the euro are managed in ways that systemically bias economies in favor of big business and financial interests. Chronic underemployment, wage stagnation, and semi-permanent slumps in aggregate demand are all tolerated to keep inflation low. Central banks are shielded from the pressure of democratic politics, leaving them vulnerable to capture by the financial industry. If anything, there is not enough currency "debasement," and enthusiasm for hard money and austerity are still far too influential.
Bitcoin's creators imagined that what people need is a digital cryptocurrency removed from human judgment or error. What they really need is a digital currency governed by pro-worker values: things like a commitment to full employment and high aggregate demand.
So how you go about building such a progressive cryptocurrency?
At its most basic level, the process of adjusting the supply of this hypothetical progressive currency should be as computationally simple as possible. With bitcoin, the "mining" process that creates additional coins is bound up with the blockchain work of confirming the legitimacy of transactions, which vastly complicates the computations involved. These issues should be disentangled, and there should be no ultimate cap on the currency's supply; it should be adjusted as need dictates.
But that brings up an obvious problem: Who would make that kind of decision?
One option would be to just have a board elected from among the currency's users to manage the supply. The members of this governing body could receive pay incentives for hitting both price stability targets and full employment targets. (The Federal Reserve has a similar dual mandate, but Fed officials decide for themselves whether or not they're meeting their two targets.) And they could be dismissed for failure.
Alternatively, if you wanted to hew a little closer to bitcoin's libertarian ideals, you could fully automate adjustments to the supply of the currency into its software. Such "rules based" monetary policy is usually associated with right-wing ideology, but you could just as easily institute a rule that tolerates higher inflation in the name of maximizing employment as a rule that does the opposite.
This leads to another big challenge: data. Whether run by a governing board or software, the currency would need constant information on employment, wage growth, inflation, incomes, and more from among its users. Otherwise supply wouldn't properly adjust to need. This would probably require some sort of human-run bureaucracy: our hypothetical cryptocurrency's non-governmental equivalent to the U.S. Bureaus of Labor Statistics and Economic Analysis. Conceivably, you could try to build that information into the blockchain codes instead, but I have no idea whether it's feasible.
Finally, there's the issue of circulation. Governments can legally force people to pay taxes in the currency they issue, which gives them a huge natural advantage in getting their currencies into widespread use. Without such an impetus, getting people to adopt our hypothetical progressive currency would be a tall order.
But one thing our cryptocurrency could do is set up a kind of social responsibility function: A democratic process by which users decide what needs in depressed and downtrodden neighborhoods aren't being met by the government, and issue new supplies of the currency to fund them instead. That would both get the currency into circulation and promote goodwill and trust.
This brings us back to government. You may have noticed that much of the challenge of building a useful progressive cryptocurrency is the challenge of good governance. At some point, you have to wonder if all the energy and brainpower being poured into bitcoin would be better put towards reforming the governments and monetary policies we already have.
But if anyone wants to develop a digital cryptocurrency that succeeds where bitcoin failed, this is how I believe they should try to tackle it.
