As of 18 April, one dollar is worth 0.89 Euro, 111.96 Japanese Yen, and 0.77 British Pound. But these rates are extremely volatile because the currency prices are likely to change in the next five minutes. We have to conduct international businesses keeping this risk in mind.
The value of money in a particular country is measured by comparing it to another strong currency. It is common practice to compare a currency to the US dollar. Comparing to an uncommon currency like Rwandan Franc (which is worth $0.0011) is not practical. Clearly, there is no standardized monetary measurement unit while the length, weight, temperature, etc can be easily measured with standardized units. So, why is this measurement problem for money? Can we get rid of it?
There is no universal financial standard
A financial standard should be like kilogram, meter, or liter- a well-accepted unit that can be applied everywhere. At this moment, the Special Drawing Right (SDR) created by the IMF (International Monetary Fund) is the closest thing to a financial standard which is based on the five most stable currencies of the world- US Dollar, Euro, Pound Sterling, Japanese Yen, and Chinese Yuan. However, we never see a news portal comparing Bulgarian Lev or Burundian Franc to the SDR. It is because the SDR is exclusive to the IMF.
Moreover, the SDR is prone to change as the currency rate of its member countries changes. So it cannot be considered as a standardized monetary unit or currency that people can use. In fact, SDR is supposed to help the member countries in the event of a financial crisis by leveraging the asset.
We are still looking for a solution
As there is no universal monetary standard at this moment, businesses tend to rely on the US Dollar, which is considered as one of the strongest and most stable currencies. Investors naturally want to minimize risk amid inflation, speculation, and volatility of fiat. Considering USD as a standard currency has also a number of drawbacks. No fiat currency is truly stable because of the likelihood of depreciation over time due to inflation.
In addition, USD value can fluctuate in accordance with government decisions. For instance, USD fell dramatically against major currencies in March 2018 when Trump proposed a new tariff plan that raised trade war fears.
Unites States also have a soaring national debt, which exceeds $22 trillion. With this colossal debt, other countries will begin to believe that the US government cannot repay the loans. This loss of trust can send the US dollar to a corner anytime that might shake the global economy due to the heavy reliance on USD. Many economists have already issued warning that the next financial crisis would be worst than the last, with likely fall of the dollar and the rise of others.
The cryptocurrency was originally designed to work as a medium of exchange that uses cryptography to secure financial transactions which will have decentralized control. It was meant to replace fiat as the principal mode of exchange. Getting rid of the central banking system was another objective which Bitcoin applied as it emerged in 2009. These concepts of borderlessness and freedom from central control are now embodied by thousands of cryptocurrencies.
Although the concepts were supposed to create a stable and standard currency, the crypto market is extremely volatile, making them risky for holding value. Another kind of currency known as stablecoin came forward to solve this issue throughthe backing to fiat money or other kinds of assets like gold.
Controversial crypto known as Tether is the most popular stablecoin today that has a daily trade volume of about $9 billion. Although each token was supposed to be backed by one USD, Tether could not keep the promise as it dipped to $.80 at some point. The fall was attributed to the rumor that Tether is not legitimately 100% backed by USD. Therefore unless we have a feasible solution to the need for a stable and universal financial standard, it is wise to diversify investments in order to minimize the risk of loss. But it is clear that fiat currencies cannot be relied on as a store of value. On the other hand, a crypto-based stablecoin can be tailored to save an investment when markets stumble.
Nils Grossberg is an entrepreneur from Tartu, Estonia. Nils Grossberg graduated from the University of Tartu with a bachelor’s degree in History. He is the co-founder and former CEO of Dagcoin OÜ, the software company behind the development of Dagcoin cryptocurrency and its ecosystem.