If a fluctuating cryptocurrency becomes the new world coin, would it stop fluctuating?

Question

An often mentioned criterium for money is that it should be a unit of account. It could be argued that cryptocurrencies don't satisfy this requirement.

The argument is that businesses like bakers would adjust their prices all the time, which is not acceptable. I.e. it fails to be a unit of account.

Suppose that suddenly a cryptocurrency would be the only coin that's accepted in this world.

Would this mean that it stops fluctuating, as there's nothing else to exchange the coin into, and thus becomes a unit of account?

Answer 1

Your question is very similar to "if we were back on the gold standard, what mechanisms exist to regulate inflation/deflation".

The question is a difficult one because it brings into scope the role of banks and credit and how they would fit into the world. Crypto-systems (in the sense of cryptocurrencies) don't address credit today.

You'd likely see the world separated into two categories of 'user':

• Those who manage their own wallets
• Those who do not

For the second category banks would continue to exist. Cold wallet storage, data centers and the like. Those banks would still be licensed to issue notes on the basis of the 'digital gold' they hold, so we'd be back to square one with banks being literally issuers of notes with cryptocoin as the new gold.

The value of the trustless gold, and its trust based proxy, would be regulated by the same mechanisms that existed under the old gold framework: trade imbalances result in cross border settlements of gold influx/egress that adjust bank exposure to circulating 'paper'. This results in credit interest rate adjustments, which accelerate or brake the economy depending.

So yes in short international trade would act as a mechanism for adjusting things and tending towards some regulation of the currency value. Similarly central banks would adopt policies to manage the availability of coins. I don't know what policies, but we should never underestimate the power of states (eg now under C19) to simple dictate that coins be donated/given/taxed etc to a central authority.

Answer 2

As I noted, this question is just asking: if only a single form of money existed in the world, would people use it as money? Of course they would.

The real issue is “unit of account.” Let’s just talk about online sales, since changing prices is trivial. A firm can set a price in its unit of account, and then translate it to other currencies. What does the “unit of account” refer to? It is what it does it’s accounting in. The firm needs to answer the question: am I making a profit at this sales price? The only way to answer that is to compare the sales price to the cost of purchasing/manufacturing that good. The unit of account has to be the currency in which most of expenses are denominated in.

We can then ask: what are the main expenses faced by the business sector? Wages. Unless firms can pay workers with the cryptocurrency, they really cannot use it as a unit of account. The institutional structure of economies makes it very difficult to pay workers in a foreign currency (including cryptocurrency) in the developed world.