...by Daniel Szego
quote
"Simplicity is the ultimate sophistication."
Leonardo da Vinci

Monday, December 18, 2017

On the fiscal and monetary policy of a cryptocurrency


Most cryptocurrency have at the moment something as a simple algoritmically specified token supply, which is pretty far from classical tools of a nations' currency. So let we examine if something similar to the classical monetary and fiscal policy can be realized with cooperation of a cryptocurrency. 

Classical monetary policy.
- Increasing monetary supply: increasing monetary supply simply means increasing the amount of tokens that are available in the circulations. That can happen in an algorithmic way, as it is usual in most of the cryptoruccencies, however it can occur as a result of a centralized or semi-sentralized explicit action.  
- Decreasing monetary supply: well this is not so easy. One option might be to somehow burn coins, however the major question is with this situation where should be the coins burned. If they are burned directly in the wallets of the customers, then probably the trust of the currency will not be huge. Another idea might be to have a standard inflation rate with a standard token issuance rate, so this issuance rate can be increased or decreased to zero as well.   

Direct counterparty involvements.
If the major focus is to influence or keep stable the changing rate on market, one possibility is to influence it directly with the help of a counterparty. The party will have an amount of funds to change the changing rate of the currency and can act consciously for a certain market situation at selling or buying. Certainly, this situation involves an explicit counterparty risk.   

Policy via token multiplication. 
If we consider not just the cryptocurrencies but the tokens financing projects or companies on top, we get a system that can be better fine-tuned. A token issuance can act something like a currency multiplication act, especially if we consider the tokens as part of the monetary basis. If we can motivate or demotivate the issuance of the new tokens, we get a system that influences indirectly both the monetary supply and the whole market readiness to create new projects or companies.   

Fiscal policy. 
Real fiscal policy is pretty difficult in a cryptocurrency context. It is probably because of two reasons: On the one hand crpytocurrencies provide just currencies and not necessarily a full or partial economy. Even if some economy exist behind, it is far from being a closed one. It is questionable if pure fiscal policies ever can be interpreted in the context of cryptocurrencies.