Our CEO Arjeh van Oijen will be answering today’s question.
Bitcoin and other crypto currencies caused a complete paradigm shift in the way currencies (and other tokenized assets) are issued and kept in custody. In the traditional world, the issuance of currencies are controlled by central banks that are assigned by governments to regulate the value of value of the currency. This value is measured against the price of products and services. The change in value of a currency against products and services is called inflation (increase) and deflation (decrease).
A key task for most central banks is to keep the inflation/deflation rates of the concerning currency within a pre-defined bandwidth. If the inflation/deflation rate exceeds this bandwidth, the Central Bank has a couple of intervention instruments to move it (back) within this bandwidth. This can be done by increase/decrease of interest rates or by changing the money supply by buying/selling bonds. The purpose of this policy is keep the economy, and subsequently also society, as stable as possible on the short as well as long term.
Crypto currencies and (utility/security) tokens are not issued by designated and regulated parties, but by a community, company or
foundation. In case of Bitcoin, the issuing of the coins is embedded in the software on which the Bitcoin blockchain network is running. Every ten minutes, when a new block of transactions is added (mined) to the ledger, a certain number of Bitcoin tokens is issued. This number was initially 50 Bitcoins and is halved every 157,500 blocks (in August 2019 this number is 12.5 Bitcoins). This controlled supply makes that value of the Bitcoin is mainly driven by the demand. There is no authority or other type of (central) organization that has the official task or authority to stabilize the value by intervention.
The result of no regulation vs regulation
As a result, the value of the Bitcoin can be very volatile and unpredictable, which makes it very vulnerable also for market speculation and manipulation. This makes Bitcoin and other crypto currencies less suited for regular economic purposes where for stability of the currency value is essential for the stability of the economy and also society. In cases where a fiat currency is subject to high inflation/deflation rates, such as the Pesos in Venezuela, crypto currencies may become a safe haven. At the moment central banks are investigating/considering the use of blockchain as a technology to transfer fiat currencies. The use of blockchain can eliminate the bottlenecks and limitations in the settlement of financial transactions that exist in the current infrastructures.
Stable coin & Libra Coin
A coin that has a one-on-one relationship with a fiat currency is also known under the term ‘stablecoins’. In order to receive a certain amount of a stablecoins, the receiving party (e.g. a bank) needs to make a deposit of the same amount in the fiat currency on an account with the issuer of the coin, the central bank. In this way the money supply does not change, only the appearance (from regular ledger account to blockchain account) is changing. The stablecoin has a one-on-one relationship with the fiat currency and therefore its value is determined by the monetary policy of the central bank. It is possible that a stablecoin is issued by commercial bank or even non-banks. Also in that case the receiver needs to make a deposit in the related fiat currency on an account of the issuer first, before the stablecoin is received. An example of a stablecoin issued by non-banks is the Libra, which is an initiative of Facebook with 27 other companies. Critical is that the issuer (in case of the Libra the Libra Foundation) has still the funds in deposit when someone wants to exchange its stablecoin back in return of fiat currency on a bank account. This is one of the key worries of central banks and other regulators with respect to the Libra initiative.