Still working out the kinks.
Photo: Andrew Harrer/Bloomberg via Getty Images
In the most perfect news of 2019, Lydia Moynihan and Charlie Gasparino of Fox Business Network report that conservative economic commentator Stephen Moore, who did not have enough support from Republican senators to get a seat on the actual Federal Reserve Board, is working on starting a decentralized central bank for cryptocurrency.
Here’s how Moynihan and Gasparino describe the proposed venture:
‘Decentral,’ as it is known, will attempt to perform Fed like duties in terms of regulating the supply of crypto in the same way as the Fed controls the supply of money for the U.S. economy, they contend. It will exchange its own new token for other cryptos; the supply of the new cryptocurrency will be tied to the value of the dollar or some other “stable” valuation method and will be strictly controlled by an algorithm, company officials tell FOX Business.
You may have some questions; for example, you might ask, “What?” or “Why?” or “What could that possibly even mean?” When I read the paragraph, I also had these questions. It sounds like announcing you’re going to start a private “central bank” that trades in gold in order to control the supply and price of gold. How would that possibly work? It wouldn’t, is the short answer.
So I spoke with Moore’s business partner Sam Kazemian (a 2015 UCLA graduate whose previous venture, Everipedia, is a blockchain-based competitor to Wikipedia) to ask what it would mean for a crypto startup to “perform Fed-like duties” and “regulate the supply of crypto.” Having spoken with him and gotten more detail on the proposed business plan, I think the “central bank” branding is distracting and it’s most accurate to say Kazemian and Moore hope to issue a fiat stablecoin. Let me explain what that means. (Spoiler: It’s still not a good idea.)
First of all, a stablecoin is a crypto coin that has all the advantages (or “advantages,” as the case may be) of working on the blockchain, but without swings in valuation, because its value is pegged to the dollar or something similar to the dollar, such as a basket of major global currencies.
The challenge with a stablecoin is keeping the price stable. Saying your coin is worth a dollar does not make it so; you need to do something so members of the public will treat it as worth a dollar. One way to do that is to promise to buy back your coins at any time for a dollar. But for that promise to be credible, you need to have dollars available to repurchase your coins. This is why Facebook’s proposed stablecoin, Libra, would be backed by real-world currencies held in bank accounts.
But for a number of reasons, Moore and the founders of Decentral would like to avoid backing their stablecoin 1:1 with traditional currencies. The premise behind their venture is: What if you could have a coin that was stable, but that wasn’t backed by a whole bunch of stable assets? What if, like a central bank, you found a way to issue currency and achieve a stable price not through backing by valuable reserves but by fiat: that is, though reliance on a reputation for stability, plus certain open-market operations designed to influence the value of the currency you have issued?
Of course, there are some problems with this idea.
The first is that even large, sovereign governments often run into deep trouble when they try to achieve something similar. Countries whose currencies have a history of inflation and instability sometimes seek to “peg” those currencies to major, stable currencies like the US dollar. The problem is that maintaining your dollar peg requires going out into the market and using dollars to buy up your own currency when its price threatens to fall — and sometimes, you run out of dollars. This is roughly what happened to Argentina in 2002, among others. Even Britain was unable to maintain its peg to other European currencies in 1992, leading to Black Wednesday.
And sovereign governments fail at this despite having advantages that Decentral will not. For example, they can levy taxes. They regulate banks that take deposits and issue loans in the fiat currency and adjust the supply of that currency by telling them how much they most hold in reserves. They also preside over economies where people are likely to feel compelled to hold and use the local currency, for example because they must pay taxes in it. Nobody will need to pay taxes in Decentral’s coin.
Kazemian told me he understood these concerns and that was why Decentral would begin its operations with a more traditional stablecoin model, achieving a stable price by holding other stablecoins in full and equal value to the coins Decentral itself will issue.
“When is it big enough, when it’s the kind of self fulfilling prophesy of the Fed,” Kazemian said, they would pivot to a model similar to the Fed’s where their currency is not fully backed by reserves. And he said a key reason they brought Moore on board was to help them understand how big they would need to get in order to successfully behave like a central bank and issue a stable fiat currency.
You may have some questions; for example, you might ask, “What?” or “Why?” or “How could that possibly even work?” or “What good would Steve Moore, of all people, be in the process of trying to launch this business?” Those remain good questions. Moore, after all, is not and never has been a central banker. He has no experience in stabilizing a real currency or a fake one. As recently as 2016, he admitted that he is “not an expert on monetary policy.”
“I hope it makes me rich,” Moore told Fox Business about this dumb new business idea. Certainly, there have been examples in the past of company founders getting rich through the process of developing a product or service that has no hope of making money for its investors or its users. But this is not the one I would bet on, even in that limited manner.