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. Like “What?” or “Why?” or “What could that possibly even mean?” When I read that 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 start-up 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 that 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 if it’s worth a dollar. One way to do that is to promise to buy back your coins at any time for a dollar. But to make that promise 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.
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: 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, through 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 stable major currencies like the U.S. 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 in 2002 to Argentina, among others. Even Britain was unable to maintain its peg to other European currencies in 1992, leading to Black Wednesday.
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 must hold in reserve. They also preside over economies in which people are likely to feel compelled to hold and use the local currency — because they have to pay taxes in it, for example. Nobody will need to pay taxes in Decentral’s coin.
Kazemian told me he understands these concerns, and that is why Decentral will 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.
He said a key reason the company brought Moore onboard was to help understand how big it would need to get in order to successfully behave like a central bank and issue a stable fiat currency. “When it is 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, in which the currency isn’t fully backed by reserves.
You may have further questions. Like “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 either a real currency or a fake one. As recently as 2016, he admitted 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.