The Future of the United States Monetary System

Posted in: Business Law

Facebook Inc. and its partners are planning to issue a “basket of crypto-currencies.” The name “currency” is a bit misleading. A currency is (i) a physical or identifiable fixed measure, (ii) which helps compare the value of different goods or anything else, and (iii) which most people would accept for many things and services, which they give, because (iv) they can then buy other things and services with this money.

Thus, the value of money will determine the price of a loaf of bread. The more dollars are available in the economy, the less value a dollar may carry, unless the number and nature of available products and services grow as well, and match the growth of the dollar. Otherwise, the result may be lower prices or lower availability of bread. The controller of the amount and value of money can issue more dollars and reduce its value, or match it with more available assets.

Currently, the law of the United States vests in the government, through the Federal Reserve Board and other agencies, the exclusive power to (i) issue money; (ii) to change the dollar value by issuing more money or withdrawing money from circulation. This is why the law prohibits anyone else from issuing, copying, or destroying dollars.

Issuers of “Facebook crypto-currencies” could affect the value of this type of money by determining the amount and initial price of these currencies, and perhaps the information about the crypto-currencies that are issued. Furthermore, crypto-currencies trading, like securities trading, produce unstable values, because their value may depend on demand for the currencies and their supply by the issuers, and on public judgment and sentiments, as well as the opportunities of trading in other securities, like any tradable securities. In fact, if the crypto-currencies are deemed securities under the securities acts, the “basket” of crypto-currencies is likely to fall under the definition of a mutual fund, and perhaps be regulated as such. It is unclear whether this regulation would focus on the number of securities the basket will issue, but this number will likely affect the value of the securities issued by the basket.

An enthusiastic newspaper writer praised the Facebook plan, noting that, we do not trust the government regarding money and implying that we should not trust the government. Therefore, the Facebook partnership’s proposal invites an examination.

First, perhaps, the question is not whether the government is trustworthy. Its control of the value of money is regulated by Congress and by federal law. The more important question is whether the Facebook group is trustworthy to manage America’s monetary system. Should America trust instead of the dollar—and the law regulating the government that issues the dollar—the proposed crypto-currencies basket, out of the law’s and government’s reach?

Second, will the current law apply to the basket? Third, should we trust the managers of the basket to provide this country with a stable currency? Fourth, will the basket value offer a stable pricing system for a loaf of bread? We note that instead of clearly defined securities, the basket will hold “crypto-currencies,” which may be classified and characterized as securities, presumably issued or managed and chosen by trustworthy and reliable obligors and managers, such as Facebook and its companions, rather than the unreliable dollar issued by the untrustworthy American government.

I suggest that prices should differ by what we sell; not what we sell with! We need price predictability for products and services that we offer and need. Let us trade in securities measured by money not money measured by securities. In the past, pearls and gold were used as money. Then the banks’ receipts for gold in custody were used as money. In fact, the receipts became money even if the gold backup was eliminated. What is next?

If a loaf of bread costs $1 today and the amount of money available in the economy is lowered by half, the cost of the loaf of bread is likely to be to rise to $2, unless one additional loaf is offered free, to reduce the price to $1. Not only will the basket affect the money supply. If it is used as money, the basket of crypto-currencies is similar to a mutual fund, or the pools of mortgages or pools of other obligations. Should this money or a basket of somewhat different types of money be traded as securities? Should we look at the trading chart to find out the cost of a loaf of bread each hour?

As noted, the value of crypto-currencies will be determined by their market price, (demand and supply). The buyers will be those who need the basket to buy and sell necessities or luxuries. The suppliers of the value of what we need will be Facebook and affiliatesWe should not trust the government, but we should trust Facebook and affiliates? While the law regulates the Federal Reserve board, officers and employees, there is no need to regulate Facebook operators and affiliates. Trust them! Alternatively, the basket might be regulated under the Investment Company Act of 1940. As manager of the basket, they would be subject to the Act’s regulation.

Two main features would distinguish crypto-currencies from the United States dollars: (i) The issuer of the currencies will not be the government but Facebook and perhaps its affiliates. (ii) The crypto-currencies’ values will change with the trading of each (or perhaps altogether). The model seems to be a mutual fund in securities issued by corporations. Except that they will be accepted as payment, that is, money.

Will the basket remain fixed? If it is traded and its components will be traded, then the reasonable prediction would be: Not necessarily. The value of this currency must move with supply and demand. Let the supply and demand and the regulation of money be outside government reach. The value may depend on the traders or the managers of the trading of the basket—just as the investment company advisers are doing. Most importantly, the value will affect the economy or segments of the economy, in accordance with the policies and other considerations of those who trade and those who can issue more of the crypto-currencies than others.

This is not a wild prediction. Securities and Exchange Commission member Hester Peirce favors self-regulation of the crypto-currency market over U.S.-level regulation. There is a need for clear regulatory guidelines but “we need to let people do what they want to do and try not to have too much government partnership with the private sector.” The entire Commission may not agree but outside important parties might follow.


The Facebook “innovation” is ancient. Current law prohibits this “innovation” if it impacts our currency. We need a far clearer understanding of where it is leading, who will control our currency, and how stable and rational it will be. Let us be clear about gambling with our livelihood and that of the future generation.