Part 2: How a global currency could work - a practical perspective

In the first blog post of this series, I looked at how a global digital currency could be created from a basket of existing currencies. Now I’ll look at how this new global digital currency could be used from a retail perspective and what sort of conditions would be required for the currency to be attractive to users.

In a sense, a global digital currency could be seen by its users as a way to offload exchange rate risk to the currency issuer (in this example - HAL). This is assuming that HAL will not pass on the exchange rate fluctuations of the underlying currencies to the users by increasing or decreasing the amount of GOLD2 currency in their accounts. If HAL were to do this - why would users take the risk of holding GOLD2 as a currency? Apart from speculating?

The following example aims to shed light on how GOLD2 could be used for a purchase, but also the challenges the currency would face in terms of adoption and improvement upon the existing system.

Consider a purchase on Ebay of cologne from France. I live in Canada, so when I search for a given French cologne on Ebay, I see that the cologne is being shipped from France, and the price for the product and for shipping is in Euros but also shown in Canadian dollars (CAD).

It doesn’t really matter to me what the price is in Euros. For practical purposes, Ebay could simply show me the price in CAD, even though the buyer wants to be paid in Euros. If Ebay did this for all products on Ebay, and I only shopped on Ebay, then from my point of view the Canadian dollar is the global digital currency. But the caveat is that the price is ‘approximate’ - subject to foreign exchange fees, and will fluctuate based on foreign exchange rate movement. So these issues are really what a global digital currency attempts to solve, or at least mitigate. Ebay can provide the illusion (for me) that all goods are priced in Canadian dollars, but Ebay cannot ensure stable prices in CAD for all products in its marketplace, under this illusion.

Ultimately, a global digital currency may simply be one more price reference for a product, similar to the Ebay example where multiple prices are shown to the user. There will be the domestic price of the product (which will fluctuate only if the seller chooses to change the price - Euros for the cologne example), the “illusory” price that is the purchaser’s domestic currency (which will fluctuate regularly based on exchange rates movements - CAD in the example), and the GOLD2 price which could also fluctuate fairly regularly but not as much as the purchaser’s domestic currency. If the seller accepts GOLD2 and publishes a GOLD2 price, then the fluctuation will only happen if the seller changes the GOLD2 price as well (though the seller will be keeping an eye on the EUR/GOLD2 exchange rate).

What this dynamic could ultimately mean is that currencies like CAD that are not in the GOLD2 basket would weaken if adoption of GOLD2 is high. The purchaser’s non-basket domestic currency (i.e.CAD) will be sold as part of the transaction, to purchase GOLD2, which involves HAL purchasing the basket currencies. This will ultimately strengthen GOLD2 basket currencies, creating multi-polar currency demand for the basket currencies in an effort to create a single digital global currency.

Would this be more efficient though than simply selling CAD and buying EUR, in order to buy cologne in the example above? Rather than a basket of currencies? Might it make more sense to drive out inefficiencies in the existing foreign exchange market to reduce transaction costs, rather than invent a new currency? And perhaps it would make more sense to attempt to stabilize the market price for goods across multiple foreign currencies (at least for a certain length of time) through some form of creative hedging. Could this sort of business model make more sense from a retail perspective than use of a synthetic global digital currency?

It’s also worth considering that because HAL will be holding the currencies underlying the GOLD2 currency, the system design could make it possible for users to move out of GOLD2 and into any of the basket currencies. From this perspective, HAL is effectively offering users a foreign exchange trading account.

Imagine, for example, that a user sends $2,000 USD to HAL for their account, but requests not to convert to GOLD2 initially. The account would look like this (using exchange rates from Part 1):

The user could wait until the dollar strengthens before converting to GOLD2. And if the user is holding GOLD2 - she could consider moving to USD if she anticipates USD will soon be strengthening. And ultimately, users will need to move back into their home currency to spend in their domestic economies for certain products and services. Even if GOLD2 use is ubiquitous in a given country, users will still need to pay taxes in their home currency. This includes, for example, sales tax at the point of purchase, adding further complexity to a central digital currency concept and its practical impact and benefits.

So where are the benefits of GOLD2 going to be found? Less volatility relative to single currencies? With trading and speculating thrown into the mix, and a continuing demand for domestic currencies, HAL could effectively become preoccupied with managing foreign exchange rate risk for themselves. Is this the business they foresaw themselves getting into?