# Why don't we transact with securities rather than fiat money?

I don't know a whole lot about economics besides for an intro course I took once so bear with me please...

I'm a software developer working with cryptocurrencies, and I got to thinking that it would be technically possible to tokenize securities (ideally giving legal ownership of that security to the token holder) and use them for transactions within an economy instead of currencies like the USD. One token would represent a certain percentage share in a holding company or a mutual fund or maybe even a government bond.

After looking into this, there seems to be some large legal barriers preventing this sort of thing from happening, and it would be more of a feat in that regard than on the technical side of things (I think), but, more theoretically, it got me thinking about what the effects of replacing fiat with securities might be.

One thing I've heard is that a mildly positive inflation rate is desirable in a stable economy because it increases the opportunity cost of holding money thus stimulating more spending. A deflationary means of exchange might reduce spending and cause bad things? I'm also aware that using fiat allows the Federal Reserve some control over the economy via monetary policy, which is definitely needed in this boom and bust situation we're in now.

On the other hand, securities actually have what all those gold-standard nutjobs want a currency to have, actual intrinsic value! It allows for anybody taking part in an economy to necessarily own part of it. It could be a kind of free-market socialism where the means of production is actually owned by the people (redistribution of wealth still needed of course). Furthermore, In today's world, the very rich tend to have proportionally more of their wealth tied up in investments compared to the working class, further widening the divide. If securities were currency, investing wouldn't be a choice but a requirement.

My main question is, why isn't this the way it works today? Certainly it would be possible for just a regular US dollar to be legally backed by equity or debt with no crypto hacking involved, so why haven't we done so?

• All trade mediums are based on trust, and the trust is based on the track record that the medium cannot be inflated and manipulate the value easily. – mootmoot May 25 '18 at 9:44
• Just want to say that there is nothing inherently illegal with creating a security token as you are describing. They just must be registered with the Securities and Exchange Comission and fufill large disclosure requirements. The SEC has cracked down on tokens in the past that they consider to be securities even if they are not marketed as suc. – TheSaint321 May 25 '18 at 18:02
• en.m.wikipedia.org/wiki/Solidus_Bond this country (US) is way too patent-happy – Jonah May 25 '18 at 19:27
• How many peaches can I buy for a share of Apple? How about a share of Microsoft? How about a share of immibis hypothetical technologies ltd.? (is that just a shell company or is it doing actual stuff? are we about to discover a new cure for cancer or are we heavily invested in film cameras?) – immibis Aug 8 at 3:11

## 2 Answers

@EnergyNumbers aptly points out that Bearer bonds do exist and act in some way as a currency like you are describing. This does not answer the question of why aren't bearer bonds used instead of fiat currency?

First we should understand what a bearer bond is. A bearer bond (or any bond really) entitles its holder to fixed payments over years (coupon payments) and the ability to have a pre-agreed upon amount paid at a later date (principal payment). It is essentially an agreement that a company or individual will pay the holder of the bond back the money that the bond was purchased for plus some agreed on interest. Unlike some types of bonds a bearer bond is special in that whoever holds the piece of paper owns the bond, whereas other bonds are generally in someone's name and must be transferred on paper not just physically. Theoretically it makes sense that you could go into a store and pay them in bearer bonds instead of cash assuming the store was willing to accept them.

There are two big reasons for why you couldn't just stop using the fiat currency and switch over to bearer bond based exchanges.

1) Bearer bonds are not necessarily a good holder of wealth. Bonds are a promise by a company to pay back a debt over time with interest. If the company goes bankrupt as most tend to do over time the bond becomes worthless. If you had your life savings in the form of bonds and the company that backs the bonds disappears you suddenly have no money. As an employee or shop owner I may be reluctant to take payments in a currency that may have no value tomorrow. This volatility in price and the potential to lose all value overnight is why only wealthy people generally invest in securities since they can tolerate this risk.

2) Bearer bonds are worth currency. What gives bearer bonds value is that they can be exchanged for fiat currency. A $100,000 bearer bond entitles me to $100,000 plus interest payments. If you don't have some fiat currency what does that mean? There needs to be some agreed on value for this type of debt and some sort of unit. Even if all transactions take place in the form of transferred securities (most large corporate transactions already do) there needs to be some agreed upon unit of measurement to compare a bond from one company to the next.

These same points apply to securities in the form of stocks and ownership in companies. They are simply too volatile and impossible to compare value without some underlying fiat currency. The reason the dollar works so well is that you know the US government is going to be around for a long time. You can trust that the government is going to accept payments in dollars and be paying in dollars meaning that the dollar has some intrinsic value unlike a highly volatile stock or bond.

With all of this said many transactions do take place using an exchange of securities and bonds. Most corporate transactions as well as large transactions among wealthy people take place by transferring ownership of these types of investments. For small transfers (such as buying milk at the store) these types of transactions simply don't make sense for the reasons stated above.

• Yes, he answered my question, and good points. 1) Makes sense, securities would definitely be more risky (except maybe if they were government bonds or just a very well diversified set of stocks?) 2) True, a loan needs to be denominated in some (very stable) unit of value. – Jonah May 25 '18 at 18:42
• In regard to your second point, what if the bonds were government-issued perpetual barer bonds whose interest is payed in more of the same type of bond? Although this might be essentially a fiat currency because the discount rate would be equal to the coupon rate. investopedia.com/terms/p/perpetualbond.asp – Jonah May 25 '18 at 19:59
• The perpetual bond could be denominated as a percentage of all currently outstanding bonds of the same type. Equivalently, it could be divided into some (continuously-growing) number of "shares". – Jonah May 25 '18 at 20:07
• If there is nothing to base the value of the bond on then it sounds like you're just talking about some complicated version of a fiat currency which increases in value over time. The key question is what does the bond represent? If the answer is just the faith that the government's notes hold value then you've described a fiat currency. – TheSaint321 May 25 '18 at 20:44
• Hmm then I think this could possibly be another way of thinking about a fiat currency. I'm thinking the bond should behave the same way as USD and not actually increase in value. Assuming all bonds are issued with the same interest rate, paying the bond by increasing the total bond supply would decrease the size of the principle relative to the total supply (which is why I'm thinking interest rate == discount rate), therefore the value of the bond should remain constant . If the government issues newly "minted" bonds, this would wash-out existing bonds, similar to increasing USD supply. – Jonah May 25 '18 at 21:40

You've just reinvented bearer bonds. From that page:

Bearer bonds are bonds that are owned by whoever is holding them, rather than having registered owners like most other securities. Like most other bonds, they have a stated maturity date and interest rate, but coupons representing interest payments are generally physically attached to the security and must be submitted to the company for payment.

It's been done. Like cryptocurrencies, the one class of transactions they turned out to be well-suited for was the class of illegal transactions; money laundering, payment for criminal services, prohibited capital movements, etc.

And having a fiat currency which is simply backed by a country's economy, has succeeded against all other kinds of currency as the most viable.

• I thought I thoroughly google searched but "bearer bonds" is exactly what I'm looking for – Jonah May 25 '18 at 18:19
• In light of this, blockchain bearer bonds might be a bad idea... – Jonah May 25 '18 at 19:05