Hayek Money : The Cryptocurrency Price Stability Solution

Presented on September 9, 2016
at the P2P Financial Systems 2016, University College London

paper available at http://ssrn.com/abstract=2425270

Bitcoin has enabled competition between digital cryptocurrencies and traditional legal tender fiat currencies. Despite rapidly increasing acceptance, so far the affirmation of cryptocurrency as better money has been thwarted by dramatic deflationary price instability. Successful at disposing of any central monetary authority, bitcoin has elected to have a fixed deterministic inelastic monetary policy, establishing itself more as digital gold than as a currency. Price stability could be achieved by dynamically rebasing the outstanding amount of money: the number of cryptocurrency units in every digital wallet is adjusted instead of each single unit changing its value. The apparent awkwardness of this unfamiliar paradigm is discussed at length, proving that its only real novelty is about fairness and effectiveness. Furthermore, suggestions are provided about how to ease the effect of contractionary monetary policy. The proposed monetary base adjustment has neutral impact on the overall wallet wealth, as it does not introduce any arbitrary distortion into the intrinsic value dynamics of the wallet. The adjustment is based on a commodity price index determined with a resilient consensus process that does not rely on central third party authorities. It is posited in this paper that a digital cryptocurrency adopting elastic monetary standard is Hayek Money, so named from the Nobel Prize-winning economist: a good money standard providing stable prices for a new economic era.

Transcript

1. Hayek Money The Cryptocurrency Price Stability Solution http://ssrn.com/abstract=2425270 Ferdinando M. Ametrano Bitcoin and Blockchain Technology, Politecnico di Milano Interest Rate Derivatives, Milano-Bicocca University ferdinando@ametrano.net https://onename.com/nando1970 https://speakerdeck.com/nando1970 https://www.linkedin.com/in/ferdinandoametrano P2P Financial Systems 2016 University College London London, September 9, 2016
2. Blockchain Needs A Native Digital Asset https://www.finextra.com/videoarticle/1241/blockchain-needs-a-native-digital-asset Ferdinando Ametrano, Head of Blockchain and Virtual Currencies, Intesa Sanpaolo, discusses the relationship between bitcoin and blockchain, and outlines how banks can stay ahead of this evolving landscape. Ferdinando M. Ametrano 2016 2/28
3. About Bitcoin, Blockchain and the DLT chimera • The slides of my recent presentation to Bank of Italy (Rome) and the European Banking Federation (Bruxelles): https://speakerdeck.com/nando1970/about-bitcoin-and-blockchain-1 • Joint answer with Barucci, Marazzina, and Zanero to the ESMA consultation on DLT for securities markets: https://drive.google.com/drive/folders/0B8tGDTaBY4-Nb3ZuRmgzRXJXOUk Ferdinando M. Ametrano 2016 3/28
4. Money As A Social Relation Instrument 1. Human beings are born into a gift economy 2. Enlarged relationship circle requires exchange economy 3. Barter economy: coincidence of wants 4. Trade economy: money as medium of exchange 5. Global information economy: supranational digital money Ferdinando M. Ametrano 2016 4/28
5. Trade Economy From gold standard to fiat money • Gold: the commodity money standard – resistance to corrosion and oxidation – high malleability – relative easiness of purity assessment – Pleasant color • Gold purity certification • Representative money • Fractional receipt money • Fiat money and legal tender Ferdinando M. Ametrano 2016 5/28
6. The Global Information Economy • Data is transferred with zero marginal cost • Why pay a fee to move bytes representing wealth? • Why only 9-5, Monday-Friday? • Who (and when) will gift humanity with a global instantaneous free p2p payment network? BANK Ferdinando M. Ametrano 2016 6/28
7. What are bitcoins? https://bitcoin.org/en/ • Decentralized digital currency • Not backed by any government or organization • Instantaneous peer-to-peer transactions • No need for trusted third party • Cryptographic security • Low-cost banking for everybody everywhere https://bitcoin.org/en/faq http://www.coindesk.com/information/ Ferdinando M. Ametrano 2016 7/28
8. Bitcoin • Decentralized: no authority • Permissionless: no regulator • Censorship resistant: no frozen funds • Open-access: no discrimination, no amount limits, 24/7, 365 days • Free: negligible transaction costs • Borderless: no geographic limits • Transnational: no specific jurisdiction applies • Secure: non falsifiable, non repudiable transactions • Resilient: nothing has been able to stop it or break it Ferdinando M. Ametrano 2016 8/28
9. Friedrich August von Hayek Denationalisation of Money • history of coinage is an almost uninterrupted story of debasements; history is largely a history of inflation engineered by governments for their gain • why government monopoly of the provision of money is regarded as indispensable? It deprived public of the opportunity to discover and use a better reliable money Blessed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest A Free-Market Monetary System, Gold and Monetary Conference, New Orleans, Nov. 1977, https://mises.org/daily/3204 Hayek, F. A., Denationalisation of Money, The Institute of Economic Affairs, http://www.mises.org/books/denationalisation.pdf Ferdinando M. Ametrano 2016 9/28
10. Permissionless Innovation Fast and Effective • No centralized security mechanism, no barrier to enter, no editorial control – Email has not been designed by a consortium of postal agencies – Internet has not been developed by a consortium of telcos • Will a decentralized transactional economy be shaped by a consortium of banks? Ferdinando M. Ametrano 2016 10/28
11. Explain Money To An Alien fiat money • No intrinsic value (legal tender, social contract) • Currency based on paper/ink security • Discretionary governance • Wicksellian interest-rate approach bitcoin • No intrinsic value (digital gold) • Currency based on math/cryptographic security • Algorithmic governance • Deterministic supply Ferdinando M. Ametrano 2016 11/28
12. Bitcoin Inelastic Supply: Deterministic Decreasing Rate chart 2029: 96.88% of all BTC issued 2141: last 0.00000001 BTC will be issued 2029: 96.88% of all BTC issued 2141: last 0.00000001 BTC will be issued Ferdinando M. Ametrano 2016 12/28
13. Bitcoin as (Digital) Gold in the History of (Crypto) Money gold • Its adoption was not centrally planned • For centuries it has been the most successful form of money • It has bootstrapped all monetary systems we know of • It has been surpassed by other kind of money without becoming obsolete bitcoin • Its adoption has not been centrally planned • It is the most successful form of cryptocurrency • It will bootstrap new monetary systems • It might be surpassed by more advanced type of cryptocurrencies without becoming obsolete Ferdinando M. Ametrano 2016 13/28
14. Statement of the bitcoin problem • successful at getting rid of a centralized monetary authority, it has given up the flexibility of an elastic supply of money • no salaries, no mortgages, no stable purchasing power Ferdinando M. Ametrano 2016 14/28
15. Money Comparison Medium of Exchange Store of Constant Value Unit of Account Live cattle Diamonds Gold Fiat coins and notes Bitcoin • swappable • fungible • portable • divisible • recognizable • resistant to counterfeiting • reliably saved, stored, and retrieved • retain usefulness over time • Maintain its storage properties • non-perishable or with low preservation cost • relative worth unit of measure • stable value for stable price comparison • supply must be controlled in some way Ferdinando M. Ametrano 2016 15/28
16. Unit of Account: Money as numeraire • Money is the unit of account against which the value of every other good is measured • The price system measures the value of goods relative to the value of money Good money should provide stable prices to best perform its role as unit of account Ferdinando M. Ametrano 2016 16/28
17. The Holy Grail of Stable Prices • Gold standard, bimetallism, symmetallism • Fixed value of bullion (Aneurin Williams 1892) • Compensated dollar (1911-20 Irving Fisher) • Commodity Reserve Currency (1932 J. Goudriaan, 1937-44 B. Graham, 1942 F. Graham, 1951 M. Friedman) • ANCAP basket (1982 Robert Hall) • Futures contracts (1984 Miles, 1989-95 Sumner) • Quasi-futures contract (1994 Kevin Dowd) • Price index option (2000 Kevin Dowd) Ferdinando M. Ametrano 2016 17/28
18. Hayek Money • The cryptocurrency monetary standard of elastic non-discretionary supply • Price stability paradigm with respect to a reference basket • Concurrent cryptocurrencies will compete in monetary policy definition and reference basket choices Ferdinando M. Ametrano 2016 18/28
19. Fixed USD Exchange Rate • USD/BTC: 15-Apr-11 1.0, 29-Mar-14 500.0 • x500 increase for BTC demand relative to USD • 29-March-14: 12.5M bitcoins in circulation • Inflate their number 500 times to 6250M • On 29-Mar-14 it would have been equivalent – to own BTC1 worth $500 – or (rebased) RBTC500 each worth $1 Ferdinando M. Ametrano 2016 19/28
20. USD-Parity Rebased Bitcoin Daily rebasing Ferdinando M. Ametrano 2016 20/28
21. Brent-Wheat Commodity Price Index Ferdinando M. Ametrano 2016 21/28
22. Brent-Wheat Commodity Price Index Rebased Bitcoin Ferdinando M. Ametrano 2016 22/28
23. Brent-Wheat Commodity Price Index Ferdinando M. Ametrano 2016 23/28
24. Rebasing Bitcoin? No, not really! • Use bitcoin for the sake of discussion, basically to leverage its historic price series • Bitcoin is good as it is: more of a cryptocommodity than a cryptocurrency, bitcoin is digital cryptogold Ferdinando M. Ametrano 2016 24/28
25. Observation of Commodity Prices Without A Central Authority • Miners are the agents of the transaction history consensus algorithm • Miners can also be the agents of the reference price consensus algorithm • Shelling points: unbiased market prices are focal prices for the average consensus process • Miners as (black market) brokers Ferdinando M. Ametrano 2016 25/28
26. Commodity Price Index Maintenance • Commodities’ importance changes, traded volume, relative price stability and sensitivity, and competitive markets might suggest Commodity Price Index alterations • The Commodity Price Index is composed of technically unconstrained numbers • Nothing could stop the majority of miners from changing the Commodity Price Index definition • Proof-of-stake is crucial: the prerogative to change the Price Index is not oligopolistic power abuse, but the proper right of the majority to rule about its own money Ferdinando M. Ametrano 2016 26/28
27. Hayek Money This First Simplistic Implementation • Results: – Price stability – Salaries, mortgages, forward payments are now possible • Problems: – Number of coins in a wallet changes without direct in/out flows – Purchasing power of a given wallet is not stable – Miners are in charge of reference basket maintenance – Coins still have speculative investment appeal and so enjoy limited transaction usage Ferdinando M. Ametrano 2016 27/28
28. Hayek Money Further Research • Split transactional and speculative money demand with two non-fungible assets: coins and shares – see Sams (2014) A Note on Cryptocurrency Stabilisation: Seigniorage Shares https://github.com/rmsams/stablecoins/blob/master/paper.pdf • Leverage bitcoin as reserve asset – see Ametrano (2016) Price Stability Using Bitcoin as Reserve Asset http://ssrn.com/abstract=2508296 Ferdinando M. Ametrano 2016 28/28