ethereum coin on fiat money

Inspired by Cryptocurrencies, Countries Experimenting with Two-Currency Financial System

While most of the world is still unsure what to make of cryptocurrencies themselves, the technological innovations underlying digital coins like Bitcoin and Ethereum are slowly but surely making their way into mainstream use. The most obvious example of this is the blockchain, which is now being applied in industries as disparate as global finance and gaming.

Recently, however, a less common cryptocurrency innovation has been introduced onto the world’s stage: two-currency financial systems. This is a model employed by a handful of cryptocurrencies, including NEO and Havven, in which a platform has two official coins that serve distinct functions on the network.

Several countries are now experimenting with similar systems by creating state-backed digital currencies that operate in parallel with the countries’ existing fiat currencies. The most noteworthy countries employing this strategy are Venezuela and Iran, both of which are creating digital coins in a last-ditch effort to avoid U.S. sanctions on their fiat currencies.

While these countries are hardly paragons of fiscal responsibility—as demonstrated by their persistent economic turmoil—the fact that two-currency systems are even being attempted is revolutionary. According to my research, not a single country before now has had two official state currencies at the same time. Some countries use multiple currencies—supplementing a single state-backed currency with money from a foreign nation or international body like the EU—but what Iran and Venezuela are attempting is something different: two official currencies issued and used by the same government body.

Novel as these efforts are, the consensus among experts is that Iran and Venezuela’s digital currencies are bound to fail; both countries are on the brink of economic collapse, and digital currencies are unlikely to save them.

But Iran and Venezuela’s attempts to establish a two-currency system could be the precursors to similar projects from countries in less desperate situations. In fact, there are legitimate advantages of two-currency systems, and I predict this is not the last that we will see of them.

Two-Currency Systems: When One Just Isn’t Enough

The primary benefit of two-currency systems is that they allow cryptocurrencies (or governments) to make use of both an inflationary currency and an anti-inflationary currency. ‘Inflation’ is broadly defined as an increase in the cost of goods caused by the devaluing of a currency. Moderate inflation (around 2 percent) is generally considered to be economically desirable. When inflation gets out of control, however, it can be incredibly destructive.

This phenomenon is exemplified by Venezuela and Iran, both of whom have experienced extreme inflation in recent months. Venezuela’s situation is particularly dire; the Venezuelan bolivar is reportedly set to experience one million percent inflation by the end of this year—indicating a crushing devaluation of the currency relative to the cost of goods.

It is for this reason why many cryptocurrencies have been designed with anti-inflationary measures. One such measure is 14th-ranked cryptocurrency NEO’s two-coin system. One coin, the eponymous NEO token, represents voting rights on the NEO platform and has a fixed token cap of 100 million coins. In addition to the fixed cap, NEO tokens are indivisible, meaning that a single NEO token will always be worth a single vote on the network. By contrast, the NEO ecosystem’s second token, called GAS, is used to pay transaction fees on the network. GAS also has a maximum coin cap of 100 million coins, but unlike NEO, GAS is divisible by up to eight decimal points, meaning there is exponentially more room for inflation in GAS than in NEO.

This kind of a system creates a lot of economic flexibility in the NEO ecosystem and is a model that could be appealing to governments as well. In fact, this kind of a system could possibly be even more effective on the governmental level, because monetary policy, while controversial, is generally regarded as an accepted tool of modern governments. A government could theoretically follow the same model as NEO: have one pure fiat currency that is subject to inflation and can be manipulated through monetary policy, and a second anti-inflationary currency that has its value pegged to something of stable real-world value, gold for example.

Supposedly this was the idea behind Venezuela’s Petro coin, which was to be backed by the country’s extensive oil, gasoline, gold, and diamond reserves. Pegging the value of the Petro to these concrete resources should, in theory, have created a currency less susceptible to inflation, which ideally would have led to increased economic stability in the country.

As mentioned above, it hasn’t panned out that way for Venezuela—perhaps because the Petro was a scam from the onset—but the idea still stands and could potentially be viable in another circumstance.

The Value of Choice

Beyond the theoretical benefits of a two-currency system on a macroeconomic scale, it is worth considering the potential ramifications on the micro scale as well. To my mind, the most significant benefit of a two-currency system for individuals would be the freedom to build a portfolio using both currencies.

There would likely be significant tradeoffs between a standard fiat currency like the dollar and an anti-inflationary digital currency. Fiat currency, for example, is generally more liquid and would likely be in greater supply (because there is no cap). It would, therefore, be easier to secure a loan in a country’s fiat currency compared to their anti-inflationary currency.

The anti-inflationary currency, on the other hand, would likely be less vulnerable to economic downturns. One could save money in the anti-inflationary currency and perhaps feel more secure that their savings will retain its value, even in the event of a market crash.

At the same time, if anti-inflationary coins follow in the path of cryptocurrencies, they could still be sufficiently liquid that they are usable for day-to-day transactions. This is in contrast to traditional anti-inflationary investments like gold or government bonds, which require investors to sell the asset for cash before being able to convert its value into anything else.

In the era of digital coins and cryptocurrencies, however, this is no longer the case. Perhaps governments will create state-backed digital wallets in the same vein as those used for Bitcoin and other cryptocurrencies. Investors could then capitalize on the anti-inflationary qualities of stable assets while still maintaining the usability of a digital currency.

Conclusion

A two-currency financial system is a novel premise that has been made possible by cryptocurrencies and their underlying technologies. Even if Venezuela and Iran’s digital currencies fail—as they almost certainly will—the idea has entered the public consciousness, and it’s a very intriguing idea. As the technology continues to be refined and economists begin to speculate on the possibilities, the idea of two-currency systems will undoubtedly resurface itself once again—and we will have cryptocurrencies to thank for it.

Bio: Matthew Godshall is the editor in chief at Unhashed.com. An avid writer, Matthew is passionate about cryptocurrency, politics and all things technology.

Disclaimer:  The author of this article owns a small holding in various cryptocurrencies, including Bitcoin. The information in this article is based upon current available data and the author’s views as of September 10, 2018, all of which are accordingly subject to change. The above article should not be considered investment advice. Any such advice or opinions should be sought by an independent, third-party expert over such matters.

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