By Hema Senanayake –
U.S. billionaire Tim Draper has envisioned that in this dire economic crisis Sri Lanka should use Crypto-currency popularly known as Bitcoins. Then he paid a visit to President Ranil Wickremesinghe and still the media did not report how President viewed his proposition. Then, he met with the Governor of the Central Bank Dr. Nandalal Weerasinghe who rejected the proposition outright. For that I admire Dr. Nanadalal for taking the correct position. Dr. Nandalal asserted that the country cannot use cryptocurrencies 100% which point I will discuss in this essay later.
However, to be fair for the billionaire, I am not sure whether he suggested to use cryptocurrency in wider economy or whether he invited the Central Bank to use cryptocurrencies to a certain amount in foreign exchange reserves maintained by the Central Bank. If the latter is the case then the Central Bank could evaluate the proposal as the proposal is to use cryptocurrency as an instrument of financial assets like gold. Gold is not used as money in the economic system, similarly cryptocurrency will not be money in day-to-day economic activities. In the United States, cryptos are defined as financial assets or property on which capital gain tax is imposed in buying and selling. It is very much like buying and selling of shares at Wallstreet stock market. But country’s money is different. It has a very unique role to pay which role cannot be played by Cryptos of even by gold.
Usually, money is considered as the medium of exchange. But it has a much bigger and precise role than being an instrument of medium of exchange. Money is primarily about ensuring the efficiency of the economic system even though it is used as a medium of payment and settlement.
In order to understand this, first, we must look into how the contemporary capitalism gains its relative efficiency in the allocation of productive resources among numerous production processes. Any money-based economic system fails if that system is inefficient in allocating physical productive resources including labor, among innumerous production processes. Therefore, efficient allocation of productive resources among numerous production processes, is a primary requirement to organize an efficient economy – capitalist or socialist. Efficiency factor is the most important thing and not the mode of settlement.
For an example let us think about a commodity. In the production of a commodity, we use a certain quantity of a given quality of raw materials. We need certain kind of utilities such as electricity and water to produce it. Also, certain amount of labor will be expended in producing the commodity. This means we have used a certain amount of social resources in producing the commodity. How do we know whether the use of social resources in producing this particular commodity is actually right?
The actual sale of commodities for money tests the validity of the expectation that any particular resource expended is indeed socially necessary resource. It is only after the sale that social and necessary character of the resource expended in producing a commodity is guaranteed. The commodity producer produces the commodity on a speculation that the market will validate the social and necessary character of that resource.
This means that the buyer or the consumer must validate the production by the act of purchasing. The market or the demand element in the market, does this. This is the essential role of market. In other words, allocation of social resources efficiently for production among numerous production processes is the primary role of market. Now, how the markets function?
Market exchange of goods and services is not possible without a common measure of value. This should be an extremely flexible measure of value that freely penetrates into each and every productive resource so as to have a relative value for the output. Is the gold a flexible measure of value which can play this vital role in the economy. No, it cannot. Similarly, is Crypto capable of penetrating into each and every productive resource so as to express the relative value to facilitate the efficient allocation of output and resources used in production processes? No, it cannot. Societies need strong and stable measure of value.
Any unit of the measure of value that has no value in its own form, and which can be produced without any significant effort electronically or in any other form, will lose its character as a unit of measure of value if the production of such unit is not restricted or regulated. Therefore, if there is such thing of which production is regulated then it must be done by a decree of a government and hence it must be duly called money. We cannot outsource the power of decree to any cryptocurrency operator. Accordingly, the position taken by Dr. Nandalal, not to use Cryptos in wider economy is accurate.
In fact, modern money, whether it is paper currency or electronic currency (excluding crypto), is a fiat currency. Fiat currency is simply defined as any money declared by a government decree to be legal tender. It is this legal tender that penetrates into each and every product revealing its value in order to facilitate the exchange of goods and services through which social validation of the use of social resources is taken place. Cryptos will never do this. This is what money does even though there could be weaknesses in current monetary theory and practice. But I do not directly reject the ability to use a certain amount of Cryptos, very similar to gold when the Central Bank maintains its foreign exchange reserves.