The case for a real estate asset backed currency

Money serves a vital purpose. It oils the cogs of the economy, we no longer have to exchange chickens in return of shovels. As a medium of exchange money makes the world go around.

But a currency also is meant to serve a couple of other vital purposes, which is being a unit of account, and a store of value.

For a currency to be a unit of account is directly linked to its adoption rate. Store of value on the other hand is something which has fluctuated over a period of time.

The earliest currencies were simply pieces of precious metals. Gold and silver discs were used as money. As it became untenable to carry around physical gold, currencies became paper which were redeemable for a certain amount of gold on demand.

This system has a fundamental flaw.

One, it is limited. There is only a finite amount of gold on earth. If you take all the gold mined worldwide till date, melt it down would fit in a cube of 20 mtrs per side.

As the world economy grows, more transactions will happen which would mean more currency is needed. But gold being limited would become an impediment to the growth of the economy.

One can argue that prices would steadily get lower in such an economy, which can only be a good thing.

Wrong.

A deflationary economy enters a death spiral. People end up stalling on purchases as they expect prices to be lower in the future than they are now. This slows down the economy till it eventually enters a tailspin and a cash. Remember the early 1930s.

Secondly, a currency which increases in value too fast often ends up being hoarded. The purpose of the currency is to make more transactions happen. Instead it becomes the asset in itself. Transaction costs increase due to the increased value of the currency.

Both Bitcoin and Gold suffer from similar problems due to their limited nature.

Gold apart from being used in jewellery and some electronics serves no real major utility. It is a stable but unproductive asset. If you take a bar of gold and keep it buried somewhere, and if you pull it out after a few years, you would still only just have the same bar of gold. Great at holding value but poor at generating additional value.

Most countries of the world have dropped any link to the gold standard.

But fiat currency on the other hand is even worse. An arbitrary money supply controlled by the state is a tempting lever to pull for those in power. Countries like Zimbabwe and Weimar republic Germany attempted to pay their dues by simply printing additional money. Turns out it does not work, prices soared sucking the additional supply till buying bread required a cartload of cash.

Peter Thiel? founding mission for Paypal was to allow those in 3rd world countries to transfer their wealth to stabler currencies.

Turns out the money printing bug has been caught by the rich world as well.

In the aftermath of the GFC, Central Banks worldwide resorted to money printing. Quantitative easing, they called it. So why have prices not soared?

They have, the share and property market boom of the last few years is primarily due to the additional money supply than any significant sudden growths in productivity. We are now sitting on a powder keg of inflated prices and no one knows how this is going to end. Worse, there are no more levers to pull for those supposed to be in control.

So a currency needs to have a few additional characteristics apart from the 3 mentioned above. And that is having a predictable supply growth rate to accommodate a growing world economy. It should be asset backed, and the asset should be such that it is universally recognised as a store of value and this asset should not be limited in supply. Yet its supply should not be so unlimited that it destroys its value.

It should be an asset that is decentralized in its control. So that no state based actor can arbitrarily flood the market. Any one should be able to mint new coins, not just the select few.

And the generation of new currency should be through a process of value creation, not value destruction.

Bitcoin allows in theory anyone to mine new coins, but in the process you are effectively wasting a huge amounts of electricity and computing power. What if the same amount of energy went to a productive purpose?

So we want a currency that is

1. Medium of exchange
2. Unit of Account
3. Store of value
4. Backed by an Asset that is universally recognised as a Store of value (3 and 4 are interlinked but marginally different)
5. Has a supply that grows to accommodate a growing economy
6. The process of creating it has to be decentralised, allowing any one to create new coins
7. The process of creating it should create value not destroy it

We propose real estate as the asset that would back such a currency. Real estate is a universally recognized asset and unlike gold, you can create more houses. Plus the process of building a new house can in theory taken up by anyone. And when you build a house, you create value unlike the process of Bitcoin mining.

We will delve in to greater detail of the exact mechanics of how this would work in a future article.