On-chain monetary policy : from smart money to smart society ?

Transcript

okay hi everyone thank you for being here so my presentation was way too long so i wrote my speech to make sure i stay within the allocated 20 minutes um so my name is i'm the director of sales for chain security a blockchain security company specialized in smart contract audits you might know some more clients such as maker dial compound and curve but that's not what i'm going to talk about today before joining chain security i wrote a book called the futures especial about innovation in monetary policy and that's what i'd like to talk about i'd like us to think about two questions together first what should be the role of a

currency in society and then what is the role of cryptocurrencies in society i'm not going to shock anyone if i say that our current economic system doesn't allocate resources optimally that it could and should be improved and i think that crypto pioneers have a role to play in this improvement and this is the message i want to pass today cryptocurrencies are laboratories for economic policy for monetary policy innovation and that is pretty amazing for the first time in history you can take whatever economic utopia you have in mind and launch a crypto project and create a small scale real life economic experiment extremely

well documented and without limiting anyone's freedom you can take microeconomics decisions based on real data in real time to make you understand how crazy this is i have to tell you a very famous joke one of my economics teacher always used to make so you have an engineer an architect and an economist who are stranded on an island and they have nothing to eat but one day they find a tin can with food in it the problem is they don't have a can opener so the engineer starts thinking well you know if i take a rock and i hit the can at a certain angle then you know we're going to be able to get the food and then the architect goes

well you know if you're going to do that i'm going to build a box around it so that we don't spill any of the food and then finally the economist goes on yeah but if we did have a can opener we should angle it 45 degrees when we open the box so that was the punchline there's nothing more to expect and it's funny because many economists work with so many assumptions that their models are not in touch with reality anymore but with crypto experiments there is data in real time and this is actionable and even better than that monetary policy decisions can also be applied in real time and fine-tuned with immense precision there is a very famous allegory in economics called

ketchup inflation which i'm sure that you know so it's a major problem faced by central banks basically when the economy is sluggish no growth no inflation maybe even deflation and so the central bank wants to dynamize the economy by injecting liquidity on the market i.e putting ketchup on the plate so they start hitting the ketchup bottle a little bit they slowly start with inflationary measures they lower interest rates a little bit nothing happens no economic growth no ketchup comes out of the bottle so then just like the rest of us you know when captured ketchup doesn't come out they start hitting the bottle harder with negative interest rates with quantitative easing and then bam catastrophe the full bottle empties on your plate

the economy suffers terrible inflation and this is because the central bank doesn't have precise direct tools in its monetary policy toolbox and this again is the type of innovation that could come from the cryptocurrency realm because monetary policy is a very conservative kingdom stability is what we're after and if we're going to add something new to the central bank's monetary toolkit or even in its mandate it either has to be one very very politically motivated for example dropping the gold standard because we have a war to finance two it could be very slow and progressive for example going slowly into negative interest rates

um territory or it has to be demonstrated that it worked elsewhere and from and for number three this can come from us if cryptocurrencies with novel monetary policies survive and thrive for many many years we might see someday in the far and distant future central banks replicate part of our monetary toolkits so let's get to it what looks replicable already before we go into any way to create or destroy money the most obvious innovation is about data analytics currently how does a central bank determine whether they should implement inflationary or disinflationary measure they use the consumer price

index or cpi so this is the cpi for switzerland how does that work you have the swiss statistics office which looks at the average spending of households and comes up with the average basket in belgium it's funny because we call that le pen la menagere which is the housewives shopping basket because we're very modern like that so here you can see that the biggest expense of swiss households is accommodation and energy with over 27 percent of the spending and so when the statistics office knows which percentage of spending goes to which category they monitor the prices of the items in this categories and then they calculate the evolution of the prices i.e the inflation rate

and based on that the central bank will take monetary policy decisions to keep the economy at the desired inflation rate okay so the problem with that is the time lapse is too long between the price increasing the statistics office monitoring it the central bank learning about it deciding to do something about it and basically at that point the ketchup is already out of the bottle before the central bank stops hitting it but in crypto we've already learned that this type of mechanism could happen automatically and with very little delay if you look at maker dial for example the price feeds for ether and other collateral currencies trigger monetary policy operations

and many projects have innovated with this type of systems for year increasing security and reliability through trial and error and with the cooperation of amazing companies like chain security and this is not something that a central bank could have done best case scenario they could have done some modeling or maybe even a proof of concept but they could never run a 10 billion dollars bug bounty for years to test something that might seem completely outlandish to begin with and the results of those experiments are open source code and readily available data i mean how amazing is that and it can work with a basket of goods

that mimics actual spending like it is now but it could also be with a prescriptive basket that represents the ideal spending of households it could also be with a basket of commodities or currencies which could allow us to go back to some sort of commodity standard and so on so last year more than 80 percent of central banks when we were working on some cbdc related project imagine in some decades when those cbdc's will actually be developed there is no doubt in my mind that a system of this type will be implemented and the tech will be inspired by the crypto toolkit and then central banks will have systems that can automatically and instantly detect

inflation or deflation and trigger monetary policy operations to maintain price stability that is just amazingly efficient no need to wait for the statistics of last quarter to try and get the ketchup when it's gone when the ketchup is going to flood the plate and this transition will happen with way less risk thanks to our work in the crypto and defy space okay so now that we have a way to automatically determine whether the economy is heating up and needs to be calmed down with this inflationary measure or even deflationary measure or whether the economy is frozen and needs to be dynamized with inflationary measures now let's take a look at what those measures could be um so the one obvious thing where

central banks can benefit from our experience in the crypto world is the way we manage decentralized loans as i'm sure you know currently fiat money is mostly created through loans and the transmission of monetary policy relies on bankers who like most humans generally think in cycles a swiss economist who helped me with my book use the great allegory you can take a horse to the river but you cannot force it to drink which means that even when central banks offer extra accommodating monetary policies and low interest rates there is no guarantee that the bankers will drink up those liquidities and make loans to people and businesses and generally what we see is that if

they have negative expectations for the state of the economy they tend not to lend money although it's precisely at that time that we need bankers to make loans loans to avoid recessions and so many economists argue that bankers tend to intensify economic cycles of bubbles and bursts and this is something that can be fought with decentralized loans managed through smart contracts which are less like a horse that doesn't want to drink and more like a car that the central bank can just fill with fuel and drive in the required direction there is no emotionality or cyclicality in smart contracts the car might still break down but at least it doesn't have a mind of its own

and amazingly these loans could have dynamic interest rates based on the inflation monitoring system mentioned earlier which could have a counter cyclical effect so which would fight inflation and deflation and you know foster stable growth but that's not all you can do with interest rates if you if we take a quick look at belgium so in belgium if you're under 35 and you're buying your first home you can get a cheaper bank loan so it's a way to incentivize home ownership because you know in belgium we believe that if people have paid back their home before retirement then we can pay them lower retirement benefits and so the same way belgium uses interest rates to incentivize a

behavior they judge positive a decentralized organization could decide to use monetary policy to reward users who perform actions judged positive by the community for example users who have been actively involved in governance of the dao could get access to cheaper loans and this would incentivize voting through monetary policy so do you know where we use inflation inflationary measures to incentivize certain behaviors bitcoin's monetary policy uses monetary creations or an inflationary mechanism to reward and incentivize the behavior viewed positively by the community

securing the network the ethereum does the same and that's pretty big to think about this could be used to reward minors but in a different system it could be used to reward who participates in governance those who help senior citizens who contribute to the sustainable development goals etc or unfortunately it could also be used to reward those who rise propaganda for the regime or who build a palace for the emperor as early as the 10th century people in power started over printing paper fiat money and using it to facilitate their own affairs so i'm going to make a quick tangent here and then i'm not going to come back to it in cases like this the integrity of

governance mechanisms are of the utmost importance just like any democracy decentralized governance still has to avoid the dangers of mass thinking mediocracy immobilism non-participation or participations only of the extreme etc etc and vitalik buterin wrote a great article on that topic he wrote that the architects of decentralized organizations shouldn't include their own values and beliefs in code but instead should offer the opportunity to the users to influence governance outcomes through his actions within the system and this is a message that is equally valuable to the architects of our economic systems okay so let's close this parenthesis

which you know we could discuss all day but going back to monetary policy innovation and maybe going to something a little more exotic helicopter money so helicopter money was initially a thought experiment by an experiment by renowned economist milton friedman in 1969 and basically the idea is that when the economy is going bad and needs a little push instead of lowering interest rates in hope that money is created through bank loans the central bank could just print money and fly a helicopter over the city and drop the cash without counterparty just growing the balance sheet of the central bank and this is pretty imaginable for

most of today's economist partly because the central bank's balance sheets must be equal on both sides but with crypto that's what we do most of the time anyway bitcoin's hypothetical central bank doesn't need a balance sheet actually if i had to define bitcoin's mining reward in the realm of monetary theory i would say that it's targeted helicopter money targeted because bitcoin doesn't just send the reward to all addresses on the network only to some miners who have proven they contributed to network security but that's not the only way we use helicopter money in crypto we gave it another name and called it airdrop

and we've been using it using it in a way that is very interesting many projects have airdropped their tokens to addresses which held more than a certain amount of ether which is basically the equivalent of flying the monetary helicopter above the fancy neighborhoods and dropping the money there but we could discriminate wallets in many different ways especially if we manage to link one address to one person and i'm not saying that we have to know who that person is but knowing that one person cannot have more than one wallet and it's probably going to be the case for cbdc's anyway and based on data we can still reward behaviors that we judge desirable

but we could also promote the id the ideals of our community for example if we are in a left-leaning socialist community you could have social aid in the form of helicopter money targeted to the poor this would slightly lower the value of all monetary units which means it's effectively attacks to all money holders but it doesn't require the same overhead as taxes so going back to helicopter money one thing that bothers mainstream economists is that it's never going to be destroyed when you have normal fiat currency it's destroyed when a loan is paid back but with helicopter money you grow the monetary supply forever and you cannot remove the monetary units later on

if the economy is overheating and that is where we have another amazing innovation in crypto with ethereum's eip 1559 we would take transaction fees and burn that money which increases the value of all remaining units and fights inflation and the idea of destroying monetary units is amazing for complementary currencies because as opposed to official currencies they cannot sustain demand by force of law so with tools to limit or decrease supply they have much more chance at thriving and so it allows them to also have inflationary mechanisms which they can use to incentivize certain behaviors

but that's not it any deflationary mechanism can also be used in a targeted way to discourage a behavior judged negative by the community the same way helicopter money doesn't have to benefit everyone a deflationary mechanism doesn't have to affect everyone for example in a community that wants to foster good governance you could have demolished fees or negative interest rates that only affects the wallets who haven't voted in the past month if we are again in a left-leaning socialist community which values social equality the fee could be only for the rich although it's kind of just like taxes and the rich would store their wealth elsewhere that's that's another topic and so another factor which would determine

whether you will be the direct beneficiary of an inflationary mechanism or the direct victim of a deflationary mechanism could be whether your wallet holds another token for example a certain amount of carbon credits or some sort of a community credit which you get whenever you do something for the community and i'm not saying these particular examples are desirable because each community must choose what they believe in and build wide economic wise economic models what i'm saying is that it could be very powerful to use monetary creation and destruction as tools not only to regulate economic cycles but also to shape the economy of a community according to its own values and again

the major issue remains um how do you foster good governance to determine the values of your community community in a way that can be trusted that cannot be abused by those in power and that cannot be gained and i'm sure that crypto pioneers will make amazing progress in this field over the next decades so going back to the two questions i wanted us to think about today what should be the role of a currency in society well many mainstream economists agree that cur that our current indirect mechanisms of transmission of monetary policy are broken in some form or another just look at all the money that was printed since the coveted crisis and how a lot of that money went

straight to inflate the stock market and you have serious economists who are trying to go the official way to reform monetary policy in 2016 german economist richard werner presented to the european parliament a helicopter money type of proposal called qe for the people it didn't go through but it caught some attention there are also serious proposals in iceland in 2015 in switzerland in 2018 and these economists need data to back up their claims and this brings me to my second question what is the role of cryptocurrencies in society to me we are so much more than a get-rich-quick scheme we are laboratories for monetary policy

innovation we can run experiments with real money but with relatively low stakes i mean worst case our crypto or defy project goes down and our token holders lose an investment they knew was risky from the get-go that's not so bad it's not like a central bank would run the economy of its country to the ground and what's really amazing is that the data of those experiments is publicly available forever it's going to outlive all of us imagine how many phds in economics and political science are going to be written on the data that we are creating on the experiments that we are running in the real world with our real money and in the future these experiments could lead to rethinking

the role of currency in our society they could even help design the shape of new currencies so to close this presentation i'd like to tell you about sylvia jesel a utopian economist who kind of invented negative interest rates in 1916. he invented that because he thought deflationary currencies favored the rich who are getting richer without even investing their money and at the time the gold standard was mainstream economics so it was absolutely crazy to have money that loses value over time and now a century later it is slowly becoming mainstream economics so if this can happen maybe the crazy project you're currently building will be mainstream monetary economics in

the 22nd century thank you [Music] all right thank you guys you