Amid Lira’s Lurch, Blockchain As Monetary Policy Fix?

Might it be blockchain’s turn to shine amid pockets of economic turmoil?

It’s no secret that blockchain is becoming ever more divorced from bitcoin, with which it has been traditionally associated.

And as a form of data sharing, a form of record keeping, a direct conduit in transactions, some proponents say that decentralized ledger technology (DLT) can be a salve for an issue front-and-center, as Turkey proves a recent example of daily life roiled by rapid currency devaluation and panic:

Namely, monetary policy.

The Turkish lira has continued to collapse, down more than 25 percent against the dollar as of this writing. The freefall has come despite actions and promises by the government to stanch the hemorrhaging via boosting liquidity. The inflation rate in Turkey has topped 15 percent. Depreciation, of course, leads to inflation, and inflation to depreciation. The spiral can be tough to overcome.

Some of the root causes of this latest crisis are political ones, where, as The New York Times reported, there have been disputes between the United States and Turkey over who was behind a failed coup (and individuals detained on both sides in its wake) a few years ago.

Central banks can manipulate interest rates and can control monetary supply, to an extent. But those levers can prove ineffective, as recent events show. The actions that are set in motion by the banks are also slow to ripple through a given economy — and in times of crisis, speed might be of the essence.

In examining blockchain’s use in a central banking world, some fundamental challenges to the nature of currency itself (as it exists now) arise. At its most basic form, monetary policy resides in the hands of governments, and currencies are rooted in the notion of “fiat.” Accepting that premise means accepting currency that is, in turn, not backed by a commodity such as gold. Fiat rests on the notion of trust, accepted for the exchange of goods and services. When trust in the government, or specific policies, falls, so can trust in the monetary system.

Feeling the Money Burn

Broadly speaking, amid panic, one salve might be (in addition to interest rates) to throttle back on the monetary supply — or specifically, any excess supply. As noted before, it takes time for policy to take effect, and central banks try to gauge the demand for money itself, and may increase or decrease the amount that banks are required to hold in reserve.

Welcome to the concept of money burning.

In an interview with PYMNTS conducted by written exchange, Eiland Glover, CEO of Kowala, which makes stablecoins that peg to the U.S. dollar, stated that “centralized authorities are fallible and may not always engender trust. Blockchain allows us to program monetary policy into decentralized, trustless networks with public, secure record-keeping functionality.”

Blockchain, he said, can offer accurate and up-to-date figures on the money supply within a given network. He conceded that blockchain, working alongside an economy that still (at least) partly relies on hard currency, would prevent the monetary tally from being exact. “The future rise of cashless societies could change this,” he said.

But one advantage looms, according to Glover. Blockchains can be programmed to adhere to certain rules, and the rules, in turn, can instantly implement money control mechanisms. Governments have an incentive to utilize blockchain in a way that helps them maintain monopolistic power on money supplies — and can leverage other advantages, according to Glover.

“Imagine taxes being automatically charged appropriately and immediately on every single financial transaction and transported seamlessly, at no cost, into the tax authority’s crypto wallet,” he projected. “Imagine the ease with which a government could ‘follow the money’ in a financial fraud investigation.”

The intersection of blockchain and monetary policy, he said, can be seen in the concept of stablecoins, a crypto that is pegged to, say, gold or the dollar — and, Glover said, allow for money burning (Kowala is a stablecoin project).

“In the event of declining demand for a stablecoin, new protocol rules allow the creation of network-wide transaction fees that can instantly remove money from the money supply. Unlike money removal policies that central banks typically use, the ability to impose ubiquitous fees during times of crisis is a fast-acting solution to falling demand,” he said. Those fees, which tie to sending value over networks (such as, say, lira versions of stablecoins), work across several avenues, as Glover explained:

“Proof-of-work networks like today’s Ethereum and bitcoin are expensive to mine, and so miners demand transaction fees to send value over the network. Our proof-of-stake consensus protocol all but eliminates these fees under normal circumstances. When the money supply is too great, however, small fees automatically reappear, and the proceeds of this ‘tax’ are destroyed forever, reducing money supply.” Traders may profit around movements in the stablecoin, but that currency stabilizes amid ample liquidity, and amid such burning, he contended.

Asked how this might have worked in Turkey, Glover stated that a lira version of the stablecoin would indeed have fallen with the “hard” version of that currency. But the transition into a more stable currency, such as the dollar, would have been smoother.

Moving beyond the confines of traditional monetary policy might take some time, said the CEO.

“The marketplace operates a little bit differently for privately issued currencies. You will still get a lot of failures, but it will be failure on the level of individuals and private enterprises instead of the government,” he noted. “Failures will still be there, but limited to smaller scale.”