Digital currencies, which includes the myriad of private cryptocurrencies (cryptos) as well as central bank digital currencies (CBDCs), are all over the both mainstream and alternative media. They are being loved, loathed, misrepresented and misunderstood. Governments around the world are dabbling with either legitimizing or outlawing the new curiosity. China, El Salvador, and many other nations are working separately and in all directions. Here in the United States, The National Conference of State Legislatures reports that, “Thirty-seven states and Puerto Rico have pending legislation … in the 2022 legislative session.” Colorado is among the latest to stir the pot, with the governor announcing that private cryptos will be accepted for state taxes and other fees starting this summer. Colorado’s government will turn around and sell them for, well, real money (AKA US dollars), of course.
If you buy a car and trade in the old one, the car does not become currency. It was a trade, asset for asset, with the value of both being measured in money, as would also be the case if you traded for the car using crypto. The car dealership has a motivation and infrastructure that makes accepting your car as payment sensible for them. But what is the sense in Colorado’s decision? Replace crypto with the old car, or with a nonfungible token (NFT), your beanie baby collection, your timeshare, and then ask why Colorado will not be measuring and reselling those things in exchange for tax liabilities. Cryptos are not real money, and as The Blockchain Socialist recently stated on MacroNCheese, “Part of the reason why I felt like I needed to make my blog and podcast is because of this fact that even if you try to look up the most basic technological understanding of how Bitcoin or a blockchain works… 90% of the time it leans right wing libertarian.”
Accepting cryptocurrency is more like accepting stocks. While there is significant diversity among them, they are mostly Ponzi-based. In other words, real money from new investors is used to pay old investors. Eventually someone is left holding the bag. Guess who that will be, the retail investors (like you) who traded 535 billion dollars’ worth of cryptos last year, or the institutional investors (e.g., Wall Street) that traded 1.14 trillion? Which one of them paid for the Superbowl commercials? Which one received the bailouts when the housing bubble burst in 2008?
These schemes lack stability, they lack money’s legal security, they lack sovereignty. These are experiments with new technologies that could prove invaluable down the road in applications such as democratized finance, smart contracts, and much more. As of this writing around 100 different cryptocurrencies are traded on Coinbase. Like the blimps that preceded modern aircraft, one Hindenburg will ground them all.
These cryptocurrencies are just another type of asset, and highly unstable ones at that. So, what is real money?
When the federal government deficit spends, its so-called debt is actually the creation of high-power money; there is no inherent need to delete it, and it can be rolled over indefinitely. When a financial institution issues loans (e.g., credit cards, loans and mortgages) they have created new low-power money, which is designed with its deletion (repayment, with interest) as the goal. The two different sources are important, but the money is indistinguishable while in circulation. This describes the difference between public and private United States’ debts.
So, with that in mind, if you pay your federal taxes with a credit card or other loan then you’ve reduced the public debt and increased the private debt, but the number of dollars actually in circulation is unchanged. If you pay state taxes with a credit card or loan then the public debt is the same, the private debt increases, and there are more dollars in circulation. If you pay federal taxes with cash or money in your bank account, the public debt goes down and so does the supply of dollars in circulation. If you were to pay your state taxes with that same cash then the debts and amount of dollars in circulation are unchanged. Because individual states, such as Colorado, are currency users, not issuers – just as you are.
If Colorado wants to use a digital currency in an innovative way, they should adopt their own. Take bids for the creation of a tailor-made nonprofit, that will create and manage a dollar-fixed stable coin that Colorado can use to achieve full employment. A coin with a central ledger for issuance and cancellation, alongside what Rohan Grey describes as “token-based, hardware-based, bearer-instrument currency,” (e.g., stored-value cards) for the in-between transfers. The nonprofit would pay, using the new coin, the state’s minimum wage (which should be higher) to any Coloradan that wanted a job. The coin’s rapid acceptance and continued desirability in Colorado’s economy could be encouraged by a small discount when it is used to pay state taxes and fees (instead of using federal dollars as you would now). The state would pay for this discount with the boost in overall economic activity and conventional tax revenue that full employment would provide, or with Pigouvian taxes. A complimentary cryptocurrency powered not by speculation or scarcity, but by the State of Colorado’s power to tax.
Individual state’s powers of physical currency creation have long been revoked by our federal government (metal coins in the constitution and paper notes in later legislation and Supreme court cases). However, the specific laws are beyond archaic. What is basically just a small-denomination, resaleable, and digital version of existing tax anticipation note is presently legal. Digital items, denominated in amounts over one dollar, issued in exchange for services rendered, and with expiration dates, would skirt a couple centuries of old laws and precedents (for more information see page #404). This puts full employment within the reach of each state (since our federal government has abdicated this professed responsibility); and within the reach of many larger municipalities on the sovereignty spectrum (that are less legally restricted than states). While perhaps not always on the scale of localized full employment, these mechanisms could put smaller economic mobilizations (or, at the very least, security), in the hands of our university networks, hospital systems, or other sources of what MMT scholars, such as Professor Scott Ferguson, call monetary agency.
Professor Ferguson explained on MacroNCheese that:
“The Uni, as we conceive it, would give credit creation capacity to cash-strapped public universities, which have been increasingly starved of funds by feckless state legislatures for decades.
“Extending what Hockett and Omarova call the ‘finance franchise’ to public universities, the Uni would end austerity and privatization in public universities. It would also, on our design, increase the democratic agency of faculty, staff, students, and surrounding community members.
“Perhaps the most mind-blowing aspect of the Uni, furthermore, is what it demonstrates about the plasticity of endogenous credit creation.
“The Uni shows that no one is merely a passive user of a currency, that credit always precedes return and that, as a result, money as such is never driven by recycling revenue.
“This has tremendous implications for democratic monetary design, challenging us to imagine credit systems that transcend not only revenue constraints but also the profit motive.
“Instead of finance franchisees lending money that must be paid back, for example, we can establish granting institutions that disburse credit not according to a logic of quantitative payback but, rather, through a qualitative logic of communal and environmental obligation.
“Crucially, we think, the Uni can serve as a generalizable model for similar projects elsewhere, revealing MMT’s still-untapped potentials for political and economic transformation in unexpected ways.”
Why is Colorado doing what they’re doing, instead of what they could be doing? One hand washes the other. In addition to further fueling the frenzy around these right-wing libertarian experiments, the scale and seasonality of Colorado’s taxes provides a new feeding ground for both day traders and crypto-arbitrage bots. Colorado governor Jeff Polis is one of America’s wealthiest politicians. While he says he is not personally invested in crypto, he certainly has every reason to be cozy and subservient towards Wall Street. Whatever the inventors or investors of these cryptocurrencies had in mind, selfish or selfless, no matter what good and bad things were accomplished on the way, now, their creations have largely been captured and tamed by the same-old monsters.
It is time for us to reimagine these technologies not as a way to create scarcity, not for another lottery of haves and have nots, not a new digital means for aristocracy to steal, but, rather, as a tool to improve all of society. Learn Modern Monetary Theory and let us get to work fixing this mess.