Monetary policy gambles, cryptocurrency, and the Triffin dilemma

5 October, 2018

One of the things we talk an awful lot is bitcoin gambling. After all, we are primarily an informational site focusing on gambling. But we are also terribly fascinated by cryptocurrencies in general. And that brings us to the topic of this post: a different kind of gambling that could become completely obsolete if cryptocurrencies like bitcoin continue to grow.

The gambling we are referring to takes place every single day on the world stage. It occurs when various world governments and central banks implement monetary policy in order to artificially control economies. It happens all the time. Just recently the U.S. Federal Reserve raised interest rates as a means of slowing down inflation brought on by a recovering U.S. economy.

These types of things are always a gamble because no one ever really knows for sure how world markets will react when one nation shifts it policies. Furthermore, not all markets and world economies are equal. Some players, like the U.S., print currencies the rest of the world wants. These are known as global reserve currencies. Controlling such currencies with sound monetary policy creates something known as the Triffin dilemma.

The rest of this post will describe what the Triffin dilemma is and how cryptocurrency could solve it. It is not overly technical, but a basic working knowledge of how cryptocurrencies operate would make the topic easier to understand.

Cryptocurrencies are decentralized

Before getting into the Triffin dilemma, understand that cryptocurrencies are decentralized. When you choose to play at e.g.'s casinos and place a bitcoin deposit, that bitcoin transaction occurs solely between you and the casino.

There are no third parties involved. There are no banks, transaction processors, or exchanges. That's because bitcoin is not a hard currency recognized as legal tender by any world government.

Bitcoin is also not controlled by any central bank. There are no well-dressed bankers sitting around large, oak tables trying to figure out how to manipulate bitcoin in order to control its value. The bitcoin universe consists only of buyers, sellers, and the blockchain technology that powers it all.

For the record, that is one of the things that makes cryptocurrency so attractive for online gambling. Its decentralization allows for anonymity, security, and near instant transactions. But let's not get sidetracked by that. Let us move on to cryptocurrency and the Triffin dilemma.

Triffin dilemma basics

It is best to use the United States as an example to illustrate the Triffin dilemma. After all, the U.S. dollar is the world's default reserve currency. What is a reserve currency? It is a currency that is held in large quantities by world governments for the purposes of conducting international transactions. In other words, a reserve currency is one that world governments agree to use when doing business with one another.

Because the U.S. dollar is the most sought-after reserve currency, the reality of global business creates a conflict for the U.S. government. Both government leaders and the Federal Reserve have to allow their monetary policy decisions to be governed by what's best for the U.S. They have to concentrate on domestic policy first and foremost.

On the other hand, they cannot allow their decisions to disrupt the global economy either. If the global economy tanks, the value of the U.S. dollar drops as a reserve currency. That has a negative impact on not only the U.S., but all her trading partners as well.

The Triffin conflict arises when domestic policy conflicts with global policy. This happens more frequently than you might imagine. What is good for the U.S. economy may not necessarily be good for the rest of the world, and vice versa. So what do leaders do? There is no easy answer, which is why the scenario is called a dilemma.

Crypto solves the dilemma

World leaders have been dealing with the Triffin dilemma since the 1950s. But according to at least one economist from the St. Louis Federal Reserve Bank, cryptocurrencies may be the answer.1 Economist David Andolfatto recently said during a Twitter Q and A that, "if a private cryptocurrency were to replace a given world reserve currency, this would eliminate the dilemma for that currency."

Let's just say the U.S. government decided to replace the dollar with bitcoin. Things would change instantly. First and foremost, the Federal Reserve would no longer have the ability to manipulate monetary policy. Next, the government would have no ability to print more money; they would no longer be able to manipulate the world's money supply. And finally, the actual value of bitcoin would not be influenced by U.S. fiscal policy.

Bitcoin's value is determined solely by market forces. It is only worth as much as buyers and sellers agree to. As such, it puts everyone on a level playing field. Adopting bitcoin as its default currency would mean the U.S. is no longer faced with the Triffin dilemma, for the simple reason that bitcoin's value would remain equal across the world, no matter who held it.

It will probably never happen

Andolfatto doubts that cryptocurrency will ever replace the U.S. dollar. That's probably a good thing because the Triffin dilemma does serve a valuable purpose. Likewise, eliminating the dilemma by shifting away from fiat currency in favor of crypto might create more problems in the long run.

For all its negatives - and fiat currency certainly has plenty of them - the centralized nature of fiat currency forces countries to deal with both domestic and global monetary policy. It forces world governments to look beyond their own borders to ensure that their decisions do not financially trash the rest of the world.

In a perfect world, a decentralized cryptocurrency would be the ideal replacement for every other fiat currency in use. But this world is not perfect. There will always be those players looking to game the system with the intent of amassing as much wealth as possible at the expense of all others.

A worldwide cryptocurrency would immediately create a new dilemma that, because of the decentralized nature of crypto, could prove impossible to solve. What is that dilemma? Despite crypto's fungibility creating a level playing field in terms of per-coin value, those who were already rich in that particular crypto would instantly have a tremendous economic advantage over those who owned no crypto at all.

The wealthy would be able to drive up the value of the currency simply by hoarding it. The more they bought and kept to themselves, the higher the price would go. That would end up pricing the poor out of the market altogether.

Good for gambling, not Reserve Currency

Mr. Andolfatto's insights into cryptocurrency and the Triffin dilemma are interesting. A recognized cryptocurrency could solve the Triffin dilemma for any country willing to adopt it. But solving that dilemma would almost certainly create at least one new dilemma, if not more. In the end, cryptocurrency is probably not good as a reserve currency. It is great for online gambling, though.

What makes bitcoin and other cryptocurrencies so attractive to the online gambling space? Check out these advantages:

  • Transaction Speed - Casino owners and online gamblers alike appreciate the fact that cryptocurrency transactions are nearly instantaneous. Attempt to make an electronic bank transfer and you might be waiting a day or longer before you can start playing your favorite games. Use bitcoin and you are playing within minutes.
  • Anonymity - Cryptocurrencies are, by nature, anonymous. Gamblers can keep their credit card and banking information out of the equation by depositing Bitcoin, Bitcoin Cash, Litecoin, Monero, etc. The only records entered into the crypto ledger are unique addresses for sender and receiver.
  • Security - Cryptocurrency is, by nature, made secure through encryption. Crypto transactions are also irreversible once confirmed. This makes platforms like Bitcoin, Bitcoin Cash, Litecoin very secure. They are certainly more secure than credit cards and bank transfers.
  • Accessibility - There are some places in the world where fiat currency is not easily accessible due to geography, economics, or even politics. No such restrictions apply to crypto. Anybody can access it. All it takes is a device to get online and an internet connection.

The world as we know it operates on a large number of fiat currencies printed by world governments and controlled by central banks. It may not be the best system in the world, but it has served us well since man first started using hard currencies centuries ago.

Cryptocurrency is a wonderful alternative to its fiat counterparts. It is a great option for online gambling and any other transaction that can be completed electronically. But no cryptocurrency is likely to ever become the de facto currency of the entire world. Fiat currencies will continue to be the standard for as long as countries maintain independent economies.

So yes, it would be nice if the Triffin dilemma didn't exist. But it does. As such, world governments gamble every day with their monetary policies. They must walk that fine line of protecting domestic economies without negatively impacting the global economy.

How would you like to have that responsibility? It is a lot easier to place your bets. At least with games like you have a shot at winning a jackpot! Who needs the Triffin dilemma when you have that to look forward to?


1) Cryptocurrencies Can Solve the Triffin Dilemma, Argues St. Louis Fed Economist, Dash Force News.