Cryptoaltyn for Silk Road

In June, speaking at the Astana Economic Forum, President of Kazakhstan Nursultan Nazarbaev proposed to consider the introduction of an international payment unit of account, possibly based on a cryptocurrency. He noted that such a unit of account should be “not based on abstract confidence, but be backed with specific assets, so that this currency is democratic, that is accepted by consumers from all over the world”.

An international unit of account can be created following a standard approach, based on a basket of currencies. For example, there are “Special Drawing Rights” used by the International Monetary Fund and a number of other international financial institutions. Creation of a regional payment unit based on distributed ledger technologies is a fundamentally new proposal. It is much easier to supplement the accounting function with the payment one using the blockchain.

In a recent report of the EDB Centre for Integration Studies entitled “Exchange Rate Fluctuations within the EAEU in 2014–2015: Analysis and Recommendations”, we wrote about the need to prevent currency crises similar to the ones that hit the economies in the region in 2014-2015. In this context, one of the potential measures is to create special monitoring instruments, such as a common regional monetary unit of account and relevant measures of local currencies’ deviation from it (we are talking about a unit of account, not a common currency).

This will create a kind of a monitoring instrument that would help not only to see the patterns of exchange rates of local currencies compared to an average indicator for the Eurasian Union, but also to obtain information on the relative competitiveness of exports. Thus, the EAEU member states will be able to develop measures aimed at eliminating mismatched movements in mutual exchange rates and take joint actions that will also have a positive effect on their mutual trade and, ultimately, on their growth.

This approach is used within the framework of the Chiang Mai Initiative. In particular, its member states do not follow the goal of creating a common currency basket or pegging their local currencies to it within a certain band. At the same time, due to the high dependence on mutual trade and investment, they are concerned about the adverse impacts of mismatched movements of exchange rates of their local currencies on the competitiveness of the regional economy. They have introduced the Asian Monetary Unit (AMU) and certain measures of deviation from it. The AMU is not an officially recognised instrument within the framework of the Chiang Mai Initiative, but this unit and the measures of its deviation, calculated by the Research Institute of Economy, Trade and Industry (Japan), are used as background information for coordinating monetary policies in the region.

But we can go further and introduce a regional payment unit to be used as a means of settlement. The question is whether it is possible to create such a system based on cryptocurrencies? Most likely, yes. The cryptocurrency has many shortcomings when it comes to monetary policies. These drawbacks stem partly from the similarity of virtual money and gold, including their decentralised emission, inability to control money supply and demand, and, finally, removal of the instrument of independent monetary policies itself because of the zero cost of arbitrage for virtual money.

However, in this case, it is about creating not a common currency (this issue is not on the EAEU agenda at all), but a unit of account based on the principle of the European ECU. As the mutual trade grows and businesses blend within the EAEU, the costs associated with conversion of local currencies will become increasingly important, and such a mechanism for coordinating exchange rate policies will be useful for the business community.

In addition, it is not at all necessary to lim it one’s thinking to the EAEU only – after all, this is only 2.5% of the global economy. By the way, Nursultan Nazarbaev also had a broader geographic coverage in mind. Could Eurasia also include China, India, and the ASEAN? The “turn to the East” is slowly, but surely happening: in 2016, Russia and other Eurasian countries redirected 1.5% of their trade from the European Union to China and other Asian countries. The barriers to a further increase in trade and investments include both higher transaction costs and macro-risks that negatively affect trade (currency wars, competitive depreciations etc.). They should be minimized in a systemic way.

Under a certain approach, the Eurasian blockchain-based unit of account could become a key element of the financial architecture of Greater Eurasia. It would be safe to assume that in the broader Eurasian context, this idea may prove to be more promising and useful than in the EAEU context.

In view of the international nature of this instrument, it is logical to assume that international development banks could act as centres for its study, creation, testing, implementation, and further maintenance; and given the trend in the formation of such units at the regional level (AMU, ECU), these could primarily be regional development banks, engaged in cross-border lending in local currencies.

‘Altyn’ [a historical Russian currency denomination, equivalent to three kopeks] would be a good name for such an instrument in the Eurasian context – that explains the title. This word reflects two key characteristics of the instrument: its being similar to gold as a means of payment and its counting nature (according to some coin collectors, Russian ‘altyn’ originates from a Turkic monetary unit associated with the gold dinar).