Decentralization of the monetary structure as the path to reach the full potential of currency
In the last decades, the succession of financial crises of global reach has generated a series of concerns about the treatment given to the currency by the different forms of the monetary authority.
In the strict sense, money is defined by its liberating power (to equivalent obligations) and forced acceptance. From a legal perspective, the currency is issued by the monetary authority of each country, which concentrates the responsibility for building the balance between supply and demand.
Globally, the monetary authority is responsible for promoting the liquidity of the global exchange, setting inflation targets, building mechanisms to contain international financial crimes, and increasing transparency. At the national level, the maximum monetary authority is the Central Bank (BC) and its authority is exercised jointly with the institutions of the financial system of each country. [1]
In Brazil, the Central Bank applies the monetary policy in partnership with the institutions of the National Financial System (which assist in the execution) and with the National Monetary Council, which formulates public policies and regulations for the functioning of institutions and for the financial market as a whole.
The context of the emergence of the Central Bank in modernity dates back to the Treaty of Westphalia (1648) which defined Sweden as the Guardian of Europe.
Such a position, however, did not match the fact that Sweden was (at the time) a country with small industry and army. [2]
Chancellor Axel Oxenstierna suggested that the country should have a central bank to which several banks, present in each city, would respond.
This would solve two of the main challenges of the development of industry and commerce: the supply of physical currency and the supply of credit.
After a few centuries of institutional experimentation, the centralized monetary authority model was consolidated in European countries and the US before being spread to the rest of the world.
Until 1914 each country has a price of its currency tracked on a fixed weight of gold. In this period, Central Banks were not yet linked to the so-called 'real economy’, that is, unemployment, hunger, inequality, etc., were not part of their concerns.
All that changed in the first half of the 20th century, when two world wars forced central banks to prioritize social and economic problems. Today, the usual priority for central banks are price and financial stability, and economic development.
The paradoxical nature of currency
Concerns about the currency can be traced back to the 4th-century b. C, in the texts of Aristotle. Assuming that money arises from the need to establish fairness in transactions, the Greek philosopher stated that the fear of having their goods on the less valuable side of the scale makes individuals tend to attempt an infinite accumulation of values in the form of money. [3]
It happens because, even if the money itself has little practical use (you can't eat, wear or transport yourself using the physical material of coins), its conventional value can exceed the value of all other goods.
However, this position generates fragility, as the economic form which defines that the value of money is superior to the products distorts the total wealth available in a commercial relationship.
When the accumulation of currency assumes the post of the purpose of all commercial transactions, we say that the nature of currency is corrupted. Since it is no longer can intermediate fairly the transactions of products, it cannot relate to the original goal of its existence.
The function of the monetary authority, according to Aristotle, is to prevent this corruption by ensuring that the currency is an intermediate value.
Currently, the search for unrestricted accumulation has generated social forms characterized by the scarcity of access to goods that are produced in excess for the humankind
Hence, we can say that Aristotle's concerns were not overcome.
However, at the same time, the advance in technology made it easier to experiment with new financial forms and monetary management. Faced with this advance, we can question whether it is possible to ‘decorrupt’ the currency.
Decentralized Finance (DeFi) can be described as one of the most important experiments enabled by blockchain technology.
Powered by smart contracts, some of the possibilities of DeFi, so far, include credit operations, crowdfunding, governance, and derivatives. [4]
All these features would not be so interesting if they kept the fundamental aspect of the centralized monetary authority: being the object of a financial elite and inaccessible (on the supply side) to the majority of the population.
The most interesting question is about the contribution DeFi can offer in the sense of 'decorrupting' the currency, but in order to answer this question, we need to decide which criteria define an adequate answer.
If currency corruption arises when it ceases to be the intermediate value, the way to reverse it would be to contain the value of the currency in the intermediation itself.
While inequality itself is not a problem, but a fact of human diversity, a specific type of inequality (associated with the accumulation of wealth) creates inequalities in all spheres of life.
This inequality makes the advantages that a subject can accumulate in a single sphere (financial) a guarantee for advantages in all other spheres of life (health, culture, security, talent, etc). [5]
In other words, the transcendental character of money in relation to the spheres of life makes it possible for the internal inequality in one of them, which is not a problem in itself, to become an inequality in all of them.
The potential of currency
The alternative social form to the one we already have described would be one where the spheres of life are relatively autonomous in relation to the intermediate value they use in their transactions, so the advantage in one of them would not imply an advantage in all the others.
The accessibility of blockchain technology makes the experimentalism on DeFi accessible in the most diverse contexts, and today we have functional examples of this reality we're proposing.
Perhaps the most notable is CELO's initiative to distribute microcredit to immigrant groups excluded from access to credit in the traditional institutions of the financial system.[6]
The platform brings microcredit closer to blockchain technology and DeFi to unlink the disadvantage in the financial sphere (which characterizes the lives of unbanked immigrants) from a disadvantage also in the credit sphere, by creating a credit system that uses belonging as a tool to reduce the price and risk of credit.
The immediate result is the strengthening of the social fabric and the promotion of economic development, but even more important is the opportunity to provide monetary autonomy so that a community can define the value of what it produces and how this value will be allocated.
This reality is only possible outside the traditional financial system, which defines the value of everything by global monetary structures suitable for financial elites.
Simplifying: the autonomy for communities to define the value of what they produce is only possible with the decentralization of the monetary structure.
This does not imply abolishing or necessarily reducing the role of the centralized monetary authority, but opening space for new property and intermediate value regimes.
[1] Bordo, Michael. “A Brief History of Central Banks”. Economic Commentary.
[2] International Monetary Fund. "Monetary Policy and Central Banking".
[3] Antunes, Jadir. “Aristotle and the problem of money and justice in exchanges”.
[4] Schmidt, John, Napoletano, E. “Decentralized Finance is building a new financial system”. Forbes.
[5] This perception was originally elaborated by the philosopher Michael Walzer in the book “Spheres of Justice”.
[6] Downer, James. Field Notes Undercollateralized DeFi Pilot in Colombia.
This text was first published (in Portuguese) on Prensa.li platform, you can check it out here.