A new paradigm for national money

In the early 20th century, countries moved away from commodity money — gold and silver — and adopted fiat currencies. The transition was relatively easy: governments could print paper money or create bank records at low cost and exchange them for the gold coins held by the population.

But the shift to fiat ultimately slowed economic development. The constant expansion of the money supply acts as an inflation tax on the economy, encourages unproductive government spending, triggers destructive economic crises, and steadily reduces people’s purchasing power.

This is why more and more voices today are calling for a return to commodity money.

Yet returning to commodity money presents a major challenge. Governments cannot produce gold in sufficient quantities to exchange it fairly for the fiat currency people currently hold, based on its present purchasing power.

Another possible path would be to remove the legal-tender status of the national currency, allowing people to use whatever they want as money. But this would cause the existing currency to lose much or even all of its purchasing power, resulting in enormous financial losses for individuals and businesses — losses comparable to the total money supply of the country.

Until recently, there was no way to transition from fiat currencies back to commodity money without causing a crisis and widespread financial damage.

Fortunately, the emergence of cryptocurrency has made a crisis-free transition possible. Cryptocurrency tokens can be issued at very low cost, so it is now feasible to create enough new currency to exchange for people’s existing fiat holdings at fair value.

The key question is what kind of cryptocurrency — or more precisely, what kind of blockchain — is required to make this transition work effectively.