Abstract:
· The most traditional crypto-assets are struggling to transform themselves into true cryptocurrencies;
· The Par currency in Argentina appears to be one of the first cryptocurrencies to fulfill the three essential functions of money;
· Its operation, issuance rules, and the way in which the major constraints of the most traditional alternative currencies are resolved are quite unique and innovative;
· Such a monetary experiment breaks with the image of blockchain technology as being associated solely with speculation.
Purpose of the article: This note aims to present the challenges and functioning of a unique monetary innovation, the Par currency in Argentina. At the crossroads of local alternative currencies and blockchain technology, this monetary instrument fulfills the functions of currency sufficiently well to be classified as a cryptocurrency, unlike the majority of crypto-assets. Blockchain technology demonstrates its usefulness in solving problems specific to low-income sectors.
While crypto-assets are legion, cryptocurrencies are struggling to emerge. The difference between the two lies in the difference between a typical asset and a currency.[1] As the issue of stablecoinsshows , crypto-assets do not generally fulfill the function of a store of value or a standard of measurement, which compromises their role as a medium of exchange. However, the sine qua non condition for a monetary instrument to constitute a currency is precisely that it circulates and is used as a medium of exchange.
While this has not yet happened with Bitcoin, for example, and stablecoins are struggling , we must look to the world of alternative currencies to find the innovation that allows us to talk about true cryptocurrency.
However, we must distinguish between the scope of the initial Bitcoin project, which was to establish itself as a currency capable of replacing national currencies, and that of other alternative currencies, which are precisely positioned as alternatives to national currencies without seeking to replace them. The first case revives the debate on Gresham’s law, according to which bad money drives out good money, because individuals prefer to hoard the latter and get rid of the former through their spending. The second case, on the contrary, generally develops when the national currency has major limitations.
This article focuses on Par currency , a current experiment in alternative currency that takes the form of a token registered in the Bitshare blockchain.
A specific national context
Most alternative currencies develop when the national currency struggles to fully perform its functions. This was the case, for example, with the Argentine peso in the late 1990s. Argentina was then under a currency board regime and had a current account deficit. The turn of the millennium heralded the beginning of an unprecedented liquidity crisis: « Bank deposits in pesos and dollars declined throughout 2001. But from November 1, the flight turned into a rush, culminating in a hemorrhage of $1.3 billion on November 30 alone. On that same day, the central bank’s reserves melted away by $1.7 billion and the monetary base contracted by the same amount.« [2] The country finally abandoned the currency board, which marked the end of the peso-dollar parity and the sharp depreciation of the former.
The lack of peso liquidity in the real economy undermined its function as a medium of exchange and led to the development of barter clubs, which soon began issuing their own currencies. In 2002, more than 2.5 million members were trading their goods through these clubs (Ould-Ahmed, 2010). We will not dwell further on these experiences, which all ceased to exist, for various reasons, during the economic recovery period of 2000-2010.
Except during the currency board period , Argentina has experienced structural inflation. However, this has accelerated since 2016 following the sudden deregulation of the foreign exchange, capital, and foreign trade markets. The resulting exchange rate effects—a sharp depreciation of the peso—coupled with the inertia effect, two of the main causes of inflation in Latin America according to ECLAC (Valdecantos et al. 2015), have caused the inflation rate to exceed 40% annually in 2018 and 50% today. This time, it is mainly the store of value function that is affected. On the other hand, the economic recession—aggravated by such high levels of inflation—causes a drop in real income in pesos for the working classes, which is equivalent to a lack of liquidity in pesos. The conditions are then once again ripe for the development of new alternative currencies.
The first transaction in Par currency took place in 2016 between two of the association’s founding members. It took place at IMPA, a self-managed metalworking factory since 1998 located in the Almagro neighborhood in the heart of Buenos Aires. Like most alternative currencies, the birth of Par is based on a political project, if we take a broad definition of the term. The aim is to bring together different self-managed companies with complementary production activities in order to create a sufficiently diversified circuit so that everyone can benefit.
An innovative approach
If we were to attempt to classify the Par currency using the typology developed by Jérôme Blanc in Les monnaies alternatives (2018), it would borrow characteristics from both mutual credit and the best-known crypto assets, notably its support, a public blockchain, that of Bitshare.
While « traditional » crypto assets are often criticized for not having an elastic supply and, as a result, for not being linked to debt like all fiat currencies, the Par currency is exempt from this objection. Issuedby credit (following a vote by the Par association’s assembly), the Pares in circulation are the counterpart to a debt owed by the community to itself. Each user can access different zero-interest loans depending on their category: simple member, self-employed entrepreneur, or representative of a cooperative company (Scoop).
In our system of money creation—in national currency—through bank credit, no distinction is made between granting credit to a non-financial company or an ordinary borrower and money creation, i.e., putting money into circulation.
Par’s system distinguishes between these two moments. The creation of the monetary tool differs from the issuance and circulation of new money. When the assembly votes to grant credit to a member of the community, it actually gives them the opportunity to go into debt. This opportunity takes the form of a tokenized smart contract , but users employ the term » endorsement, » which can be translated as « approval. » In reality, it is a permanent overdraft facility for a certain amount. Let’s take the example of a new member who has no Par and is granted an endorsement of 1,000 pairs. Their electronic wallet, accessible from the Moneda Par application, displays an initial balance of zero. This user can then reach a balance of -1,000, regardless of whether they can earn and spend other pairs before reaching this negative balance. As a result, such a balance is equivalent to putting 1,000 Pares into circulation in the system, which constitutes a demand for the production of other members. When the latter acquire them through the sale of their goods, they constitute a demand for the supply of those who put them into circulation. In other words, the expenditures of some are the income of others, which in turn translates into expenditures, and so on.
It is therefore clear that users’ account deficits are the counterpart to the money supply. Consequently, if they were required to repay their loans immediately by bringing their balances back to zero in order to accumulate surpluses, it becomes obvious that unless a constant imbalance between creditors and debtors were maintained, there would no longer be any pares in circulation.
Raphael Porcherot, a doctoral student in economics at the ENS, specializing in Argentine alternative currencies, explains in an interview for this article:
» So you’re at -1,000. You sell [goods] for 300, you go to -700. You can then spend 300 PAR again before reaching your authorized overdraft limit. […] As it stands, there is no credit repayment, so no « monetary destruction » as such.
The money supply is therefore directly dependent on the number of people in the network, the type of endorsement they have, the welcome « gift » amount, and possibly the terms for adjusting monetary assets to take inflation into account. In short, there is no obligation to repay your credit. [It can be seen as] a kind of « right » associated with you as a current or potential producer of goods and services. However, measures are provided for in the regulations for people who have been in deficit for too long, to tell them to get back on track. But from themacroeconomicpoint of view of PAR, it is better for there to be a lot of people in deficit: this allows for cash flow, since money is created when you use your endorsement. »
Most exchanges currently take place in the province of Buenos Aires, which includes the country’s capital. Unlike other alternative currencies that have existed in this geographical area, the PAR circuit includes SMEs, most of which are self-managed.
Leaks
Questions relating to the creation and circulation of money lead to questions about leaks in the circuit.
Widely analyzed in Chapter IV of Jérôme Blanc’s Les Monnaies alternatives (Alternative Currencies), these concerns anything that could result in the outflow of value from the circuit. Thus, hoarding, melting down[4], or conversion into national currency are the most common forms. The repayment of loans, if such a thing were to be implemented, would also constitute a form of leakage.
The option of conversion into national currency is practically ruled out since the issuance of pares is not conditional on any contribution in pesos. Consequently, no user will want to « recover the pesos they have put in. » However, this conversion may occur when there is a desire to enter the market despite not having access to credit and a desire to leave the community because it is not profitable. This is all the more rare as the par circuit is diversified. It should be noted that a member can leave the circuit without repaying their credit. There is therefore no need to buy pesos. The pares corresponding to their debt remain in circulation.
On the other hand, hoarding and melting are linked. While the latter aims to prevent the former, it also acts as a deterrent to potential new entrants. The Par system seems to have resolved this constraint. Rather than making the currency meltable, the founders simply decreed parity with the peso (1 peso = 1 par). If the loss of purchasing power due to inflation is equivalent for both currencies, then the incentive to switch from one to the other to protect oneself is nullified.
Parity without reserves
This is one of the most innovative and controversial aspects of this system. Parity is not ensured by the creation of a peso fund that covers all or part of the pares in circulation. Nor is it pursued through control of the money supply. It is simply decided in assembly. This may seem untenable in the long term, but let us simply remember that par-peso transactions do not really take place due to the way in which it is issued. The case already mentioned of a member leaving unilaterally and quickly may lead to a desire to sell off their pares. Two scenarios are then possible. Either all members want to leave and seek to sell off their pares, which corresponds to a situation where the community is « decadent. » In this case, it would be unlikely that a newcomer would come forward to buy pares. If they did, they could potentially buy a large quantity with few pesos, but the supply on the market would be so reduced that they would not make much profit. Consequently, in this scenario, those offering pares would not find buyers willing to join the community that the former are leaving.
The other scenario would be that the Par market offers undeniable advantages over the peso market. There would certainly be countless free riders eager to acquire Pares in order to consume the products offered by the community without contributing to their production themselves. If Par-peso transactions took place in this scenario, it would lead to an inevitable appreciation of the Par. It is even possible that for certain marginal transactions, parity would not be respected. However, if these exchanges reached a critical threshold, the information that they were taking place would be reported to the assembly, which would have no choice but to apply the sanctions provided for this purpose, which can range from a simple warning to exclusion.
As a result, the exchange rate is not determined by pure market forces, but rather by democratic agreement and control made possible by blockchain technology. Of course, this mode of governance would be seriously questioned if the number of members were to exceed a critical threshold. While the alternative currencies that circulated after the 2001 crisis in Argentina enabled nearly 2.5 million people to survive, the community has only a few hundred members.
Certain pitfalls of the past are already avoided by blockchain technology, such as counterfeiting or indiscriminate issuance. The token representing the monetary signs in members’ electronic wallets is recorded in the Bitshare blockchain. As a result, all transactions are public and the ledger is decentralized. To hack the Par system, one would have to hack the Bitshare blockchain, which, even if it became technically possible one day, would raise the cost of hacking to a level far higher than the potential gains. In this sense, it is impossible to issue counterfeit Par currency, which is a clear advantage over other alternative currencies that have existed until now. It should be remembered that one of the causes of the collapse of the créditos in the 2000s was precisely the very high level of money supply, largely fueled by counterfeiting.
Other problems remain possible, such as the community growing too quickly or expanding too rapidly in relation to the integration of the production-consumption cycle. These issues are resolved in assemblies through a constant back-and-forth process of learning by doing. While these decision-making bodies may sometimes appear chaotic, they remain the main strength of the currency, which, like all monetary systems, operates within an institutional context where collective decisions take precedence over the illusion of pure rationality. In this sense, the Bitcoin community’s » code is law » implies that the monetary architecture is enshrined once and for all in the protocol and that it is unshakeable. However, this protocol was first created by human beings who had to make certain decisions rather than others, for political purposes at that[5]. On the other hand, the sanitizing logic of » code is law » is called into question when a pool of miners comes dangerously close to 50% of the computing power. To preserve the whole, it is once again humans who must make the decision to leave this pool and join another. In the case of Par, » code is law » is replaced by « the assembly is sovereign. » While the form changes, the substance remains the same.
The challenge of incentives
While the technological support seems flawless, it interacts with a complex set of market incentives that are mixed with those of another kind, closer to institutional policy logic.
Indeed, the production of a commodity sold in Par involves an expenditure in pesos. Consequently, the gain in terms of purchasing power on the Par market must be greater than the purchasing power in pesos that can be obtained from the sale of the same commodity on the peso market. It is therefore understandable that the opportunity cost of going through the Par market is equivalent to « what I refuse to earn and buy in pesos. » This opportunity cost must be considered lower than the opportunity gain associated with the choice to sell, earn, and consume in Pares. For example, if I spend 10 pesos to produce a kilo of flour that I can sell for either 100 pesos or 100 pares, what I can buy with 100 pares must be greater than what I can buy with 100 pesos.
It is clear that this possibility does not exist when the Par market is very underdeveloped because there is not much to buy there. The cost of entry is therefore very high for early adopters and may discourage membership, especially in the case of a Scoop. Indeed, if the president of the cooperative supports the project and convinces the assembly to sell part of the production in pares, but the Scoop cannot acquire anything of interest with these, then the president risks losing his position.
The answer to this problem lies in coordination. In this sense, the assemblies also serve to bring together a sufficiently large group of producers with sufficiently complementary production so that everyone can immediately benefit.
Conclusion
In conclusion, while we are not seeing national currencies being replaced by the most traditional crypto-assets, as the most convinced activists would like to see, the emergence of true cryptocurrencies in some cases, such as , is the result of the convergence of popular initiatives in times of crisis and blockchain technology, as evidenced by the example of Par. However, we are only at the beginning of a potentially revolutionary innovation. But development per se, due solely to its intrinsic qualities, seems unlikely. One of the lessons we can learn from this Argentine experience is that the use of such technology does not only take place to meet collective and individual needs, but occurs as a result of the conscious translation of these needs into a coherent and organized project.
Bibliographical references:
Blanc, J. (2018). Alternative currencies. Paris, La Découverte.
Ould-Ahmed, P., (2010) » Argentine ‘barter clubs ‘:
a monetary microcosm dependent on the macrocosm of the peso, » Revue de la régulation [Online], 7 | 1st semester /, accessed April 3, 2020. URL: http://journals.openedition.org/regulation/7799; DOI: 10.4000/regulation.7799
Valdecantos S., et al (2015) « Chapter V The determinants of inflation in Latin America : an empirical study of the period 1990-2013″ in Bárcena, A., Prado, A.,Abeles M., (editors), Productive structure and macroeconomic policy: heterodox approaches from Latin America, ECLAC Books, Santiago, Economic Commission for Latin America and the Caribbean (ECLAC).
[1]Store of value, unit of account and intermediary of exchange
[2] Michel Aglietta, V. Les crises de la globalisation financière, La Découverte « Macroéconomie financière, » 2008, p. 136
[3] Money creation implies that the mass of what is considered money (M3) increases. For a monetary instrument to be considered money, it must fulfill the functions of store of value, unit of account, and medium of exchange. To fulfill the latter function and become money, the monetary instrument must necessarily circulate. Consequently, money creation can be considered equivalent to putting money into circulation.
[4] This system, devised by Silvio Gessell, implies that each monetary unit loses value over time in order to reduce hoarding and encourage circulation through spending.
[5] The Bitcoin protocol is implemented with the aim of replacing the banking system and governments—institutions deemed to have failed after the subprime crisis —in the issuance and management of currency.
