Why We Need A Stable Currency and Financial Standard (D Popa)

DANIEL POPA, FOR COINCODEX
Why we need a stable currency and financial

standard
PUBLISHED ON APRIL 02, 2019
From individual households to national economies, obtaining financial stability is a commonly sought-after goal.
Families strive to create stable environments so that their children can feel secure just as politicians know that a
thriving economy is the best selling point for re-election. When people have dependable incomes that they can
count on to support their families, they are more likely to feel positive about their government’s actions and support
the existing administration.
To the contrary, when the economy falters, people begin to suspect their government is making poor choices and
seek a change in power. In extreme cases, economic instability can lead to riots, wars, and coups. Currency
inflation in Venezuela, for example, has led to violence in the streets and a mass exodus of refugees seeking better
lives in other countries. Crises such as this underline how crucial economic stability is when it comes to achieving
and maintaining peace and prosperity around the globe.
Given that the strength of an economy depends largely on the value of its currency, one would think that we would
have a more reliable way of measuring a fiat’s value. Perplexingly, this is not the case. We have meters for
distance, liters for volume, and Celsius for temperature, but we have no standardized unit of measure for value.
Part of the reason for this is that the most intuitive method of determining a currency’s value is to compare it to the
value of another currency. The US Dollar is frequently used as this standard due to its ubiquity and relative stability,
but USD is not in actuality an ideal standard of account for a number of reasons.
WHY WE CAN’T COUNT ON FIAT
A fiat currency, such as USD, is not backed by any asset. You may remember that up until 1933, the dollar was
backed by gold in what is termed The Gold Standard. Now, the dollar’s value is derived from the international
community’s trust in the United States’ ability to repay its debts. This is why the mounting national debt is of grave
concern to many economists. As the US debt accumulates, the more difficult it becomes to repay loans and,
consequently, the more the international community’s faith in the United States dwindles.
Fiat currencies, including USD, depreciate in value over time due to inflation. Essentially, as the government prints
more money, the supply increases, the demand goes down, and inflation increases. The dollar has inflated 113.07%
over the past 30 years (between January 1988 and December 2017). There are also many more reasons why the
dollar might lose value beyond the inevitability of inflation. For example, the advent of President Trump’s
administration led to a loss in value for the dollar because of his initiation of a trade war with China and the
uncertainty these actions introduced.
Instances of government decision-making negatively impacting national economies are unfortunately abundant.
Great Britain’s decision to leave the EU weakened the British Pound. In 2015, the Swiss National Bank’s decision
to end the 1.20 Swiss francs per euro cap led to a 30% increase in value of the franc against the Euro. This sudden
currency deflation sparked international concerns about Switzerland’s export-based economy, as it would become
more difficult to find buyers for Swiss luxury products.
CRYPTO TO THE RESCUE?
Clearly, governments are frequently to blame for making decisions that negatively impact their respective
economies. As long as markets rely on fiat currencies, governments hold the political power and upper hand to
influence their value with disregard to those individuals, families, and businesses they affect the most.
The recent rise of cryptocurrencies represents an alternative to the long-standing fiat model. Authentic
cryptocurrencies are decentralized, peer-to-peer, and, therefore, do not require backing by any government or
verification of transactions by banks.
The promise of cryptocurrencies is that they will allow people from around the world to participate in the global
economy regardless of nationality or whether they have a bank account. The idea behind cryptocurrencies is a
valid one, but the reality is that cryptocurrencies are incredibly volatile, which does not create a solid or stable
foundation for economic growth.
Bitcoin, for example, was valued at around $1,000 in January of 2017, hit $20,000 in December, and now hovers
around $3,900. The dramatic fluctuations do not offer a stable framework for an individual to store value, an
entrepreneur to build a business, or to use as a standard by which to measure the value of other currencies.
Then came the invention of stablecoins, an attempt to resolve the issue of crypto volatility by introducing backing to
supposedly more stable assets or currencies. Digix and OneGram, for example, are backed by specific quantities
of gold. The issue with this model is that the price of commodities like gold are entirely market-dependent and
fluctuate based on demand and perceived value (between 1980 and 2001 the price of gold dropped from a high of
$1502 to $372).
Venezuela attempted to solve its currency inflation issue by introducing Petro, a cryptocurrency tied to the price of
a barrel of oil. However, the Petro could not be found on any crypto exchange and doubts surfaced that the oil
supposedly backing the currency even existed. Thus, the launch of the Petro was deemed an epic failure.
Another example of a stablecoin plagued by scandal is Tether, which is supposedly pegged to the US dollar. A
recent update to Tether’s website sparked suspicions that the currency may not be 100% backed by the dollar after
all. Despite the flurry of bad press over the last year, Tether USDT, -0.05% continues to trade at a volume of
multiple billion dollars per day. The fact that demand for a stablecoin with such a poor public image remains so high
further underlines the market’s need for a truly stable currency solution.
HOPE FOR REAL ECONOMIC STABILITY
One of the best current examples of a financial index is the International Monetary Fund’s Special Drawing Right
(SDR), which was created in 1996 as an asset that could supplement the reserves of member countries. However,
the SDR is not widely referenced as an index because of its exclusivity since it cannot be used as a stable store of
value by individuals, businesses, or anyone other than IMF government members.
In other words, the need for a stable financial standard that is inclusive and freely available persists.
The question remains, how can we combine the knowledge we’ve accumulated from both fiat and crypto markets
to develop a real solution for stability that individuals, families, businesses, and governments around the globe
aspire to achieve?

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DANIEL POPA, FOR COINCODEX

Why we need a stable currency and financial

WHY WE CAN’T COUNT ON FIAT

CRYPTO TO THE RESCUE?

HOPE FOR REAL ECONOMIC STABILITY

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