We live in exciting times: When we think about the future, we are confronted with catastrophes and inspiring utopias at the same time.
On the one hand, it looks very much as if the world community will not achieve the goals agreed at the UN Climate Change Conference in Paris. It is essential to avert a climate catastrophe and politicians are increasingly aware of this. Greta Thunberg has triggered a worldwide movement that is increasingly setting the political agenda, especially in Europe, and is intended to show us all a still utopian way through the climate crisis.
On the other hand, the global banking and financial crisis, as part of the global economic crisis from 2007 onwards, has made it clear how fragile the financial sector is. A utopian answer to this instability comes from the mysterious persona Satoshi Nakamoto. He presented the solution for a computer network that generates and manages a currency in a self-organized way. The infrastructure is called Blockchain, the currency Bitcoin.
What do both topics have in common? The respective utopia has the potential to replace the current model, which is partly responsible for the disaster, with a healthier and more sustainable one. This text explains exactly what this could look like for the financial market. Because sustainability and economic efficiency are not mutually exclusive – everyone should be aware of that by now.
Cryptocurrencies: Fantasy and reality of a great idea
In the meantime, cryptocurrencies have long become part of everyday life. Then why are we still talking about a utopia? A utopia today means an unreal wishful thinking but comes from the ancient Greek ou topos (οὐ τόπος): something that has no place, that cannot be located. So as long as Nakamoto’s vision is not reconciled with the economic conditions of the world economy, a delta remains between utopia and reality.
This gap is beginning to close. Recently, ECB chief Christine Lagarde stressed the importance of virtual currencies with fixed exchange rates (stablecoins): in view of the development of the crypto world, “we’d better be one step ahead, because there is clearly a demand out there to which we must respond”. The ECB thus sees a potential for the global economy in the currency that the current value system cannot cover: A more sustainable approach.
Sustainable financial systems – is that possible?
The term sustainability does not only refer to climate change. What values do the supporters of Fridays for Future, i.e. the Generation Greta, represent? Together with deutz produktionsstudios GmbH, we took a look at the living environment of these people in the social media and calculated the social genome, the digital image of their living environment. The mood board shows the essential features:
This board shows: We are dealing with people who are intensively engaged in serious sources of information and who are not only talking about sustainable consumption, but are actually adapting their behaviour. Although the focus is still on the implementation of the Paris Climate Agreement, the discourse is already focusing on the sustainability of the global economy and the financial system.
So, how sustainable is “the” financial system – and how sustainable can it become? To do this, we need to approach the concept of sustainability. It means that all interrelationships in healthy self-organized systems must support and feed each other. One such self-organized system is our bloodstream, for example: In a healthy body there are no surpluses or shortages that endanger the entire system; the system regulates itself.
Anyone who thinks of sustainability when it comes to cryptocurrency will initially think of the energy consumption of computer networks for the production and maintenance of the value system. Bitcoin, for example, is often criticized for this, but there have long been better alternatives. TEAL, by the way, relies on these mechanisms. But if we really transfer the idea of sustainability to the global economy, we can identify much more far-reaching misguided designs. One of the most interesting thinkers in this context, in my opinion, is John Maynard Keynes. Among other things, he presented an alternative to one of the most legendary failures of a financial system.
Failure is inevitable: The unsustainable financial system in Bretton Woods
In 1944, a global monetary system with the dollar as the anchor currency was adopted in Bretton Woods in the US state of New Hampshire. For decades, the price of gold was fixed in US dollars. The other member states undertook to keep the exchange rates of their currencies within fixed limits.
For various reasons, this approach does not reflect thinking in self-organised systems: Gold is a stable currency base. However, this basis is firmly tied to a single, national currency. Between the dollar and any other currency, the exchange rate is not decided in a market where supply and demand play a role. Real economic conditions such as the balance of trade are also neglected. In short, major influencing factors are subject to major fluctuations over time, but the system does not adapt to them.
In the 1970s, the mistakes of the system showed their consequences. In December 1972, the dollar was rapidly devalued. As a result, the Deutsche Bundesbank saw its security deposits devalued – and was suddenly, without any action on its part, over-indebted. Within a week, from February 2 to 9, 1973, the Deutsche Bundesbank had to buy about six billion dollars for about 20 billion marks in order to support the US currency. This foreign exchange sum protected the Bundesbank from bankruptcy (source: DER SPIEGEL 12.02.1973).
Keynes sustainable alternative
However, this and other financial collapses need not have happened, because John Maynard Keynes had presented an alternative at Bretton Woods. He presented a plan for a world currency (bancor) that had the function of a unit of account. The idea was to reduce imbalances between the partner countries through a symmetrical mechanism involving both creditors and debtors. Surpluses, i.e. excessive success, would have been punished in the same way as underperformance. Keynes Bancor’s plan pursued the goal of a stable world economy and only made sense from a global perspective; at Bretton Woods, existing economic powers were the main beneficiaries. For the world power USA, this proposal was unattractive from a national perspective in 1944. The Bancor model was therefore never applied.
Although we cannot say what would have become of the Bancor Plan, the question remains whether the mechanism would have been sufficiently flexible to actually absorb global real economic fluctuations.
Jump into the now: The Token Economy as a self-organized system
But: the Bancor model, unthinkable at the time, is possible today, in the Token Economy. Today, money can be equipped with intelligence that automatically allows imbalances to be corrected. There are already numerous solutions of this kind, in which crypto-currencies are combined with computer programmes that execute contract-like rules (so-called smart contracts).
Let’s look at an example: China is exporting an electric car to the United States. This transaction increases China’s foreign trade surplus. However, this has no consequences for the exchange rate between the dollar and the yuan. Today, one yuan is equal to 0.14 US dollars.
It would make economic sense for the export currency, for example a crypto-yuan, to appreciate in line with the foreign trade surplus. As a result, Chinese products will become more expensive, and US products cheaper. The chances of exports from the USA are increasing in the global economy. So, let us allow the price to rise minimally: One crypto-yuan is now equal to 0.140000000000000000001 crypto dollars. The buyer of the car ties the purchase price in crypto-dollars to a smart contract to which the seller is also bound with crypto-yuan. The transaction fee between the two parties now functions like a customs duty. This sounds complicated, but it is much more stable in value than our fragile economic system. And from a technical point of view it is surprisingly simple.
The result would not be stablecoins in the strict sense, but rather fluid equilibria between crypto-currencies. But perhaps this too would only be a transitional phase towards a global crypto-bancro currency. Transferred to the bloodstream, the two currencies would be like red and white blood cells. If there is an imbalance between the two, the smart contract programmes will switch on and regulate it like enzymes in the blood. In this way neither one, nor the other side wins – the blood neither coagulates nor becomes too thin.
So, we see that cryptocurrencies can make a new, sustainable economic system possible – and one that is even far more autonomous than John Maynard Keynes would ever have dreamt of. In any case, according to Keynes, we are getting closer to the solution of a central problem:
“We need an appropriate and recognised method for determining the relative exchange rates of the national currency units, so that unilateral action and competing devaluations are prevented”. (JM Keynes, Collected Writings Vol. 25, Cambridge 1980, pp. 168 – 195).
More on the topic: Keynes Money.