Would Total Adoption of Crypto Make Banking & Government Finance Better? Accounting Says No

[I wrote this several months ago for a crypto audience such as Coindesk; it is written with that audience’s assumptions/point of view in mind.]

An important area of concern among many cryptocurrency proponents revolves around the idea that the current banking and government finance systems are inherently unstable or inflationary. Ultimately all finance is about debits and credits, assets and liabilities. How would total adoption of crypto by a country change these?

A common criticism of the current banking system concerns the way in which it expands the money supply through lending (the basic payments system would change with crypto but is not the focus here; the accounting can be peer-to-peer in any system and has been for a long time in continental Europe). When lending now, banks simply mark up a borrower’s account: Loans are not a transfer of some (digital) token but instead are an increase in bank credit. This expands the money supply (M1, which includes demand/check deposits); the system is a credit-based system. Many think this is inflationary (especially as aggregate amounts are indeed very large; bank credit constitutes the lion’s share of the money supply) and/or that it gives banks too much power. Note that these worries long predate cryptocurrencies, dating back to the Great Depression and the Chicago Plan, which was proposed again in 2012 by IMF economists.

On government spending and fiat, worries are often about deficit spending and the national debt. Again, this criticism is common in the crypto community but also predates it.

Adoption of peer-to-peer crypto systems that transfer ownership of a token rather than create credit-based money would appear to radically change both bank and government monetary systems. Not only do they achieve the loanable funds system (token-like in its accounting) that the Chicago Plan envisioned, they do so automatically because distributed ledger technology makes ownership of accounting units immediately transferable and inherently tokenized rather than just a token-like accounting method. If one entity with 100 tokens transfers 10 of them to another, then it is clear that the first now has 90 and the second has 10. Banks would lend only existing tokens, and government spending would be limited to tokens actually held by the government.

However, in both banking and government finance, adoption of crypto would not actually change the underlying accounting of the system. Why not?


Let’s run through three scenarios – 1) a loan taken as cash by a customer 2) a loan kept and spent through their bank account (by far the most common scenario) and 3) a loan in a cryptocurrency-only system. (Interest is not important for the basic accounting in these examples).

If a bank in the current system lends 10 units (dollars, pounds, etc.) and the customer takes it in cash (a non-electronic token) what happens? The bank gets a promissory note from the customer for 10 units (asset) and loses 10 (electronic) reserves (banks draw down their reserve accounts with the Central Bank in exchange for vault cash, leaving their balance sheet the same). The borrower takes 10 units in cash (asset) and a debt for 10 (liability). Assets and liabilities still balance. The important change to the real economy is that there are now 10 units that will likely be spent (people borrow to spend) and secondarily, a person who now has a debt of 10.

What is the accounting for a loan using only bank accounts? As before, the bank loans 10 units. It again gets a promissory note for 10 (asset) and a promise to settle payments with other banks for 10 (or the government—whoever the customer wants to pay; a liability of 10 for the bank). Like the previous example, the assets and liabilities are a wash for the bank. The customer once again has a debt of 10 (liability) and an asset of 10 (the promise by the bank to settle a payment of 10 on their behalf).

What about a cryptocurrency loan? If a lender who has 100 units lends 10, this leaves the lender with 90 units (asset) and a promissory note for 10 (asset), and the borrower with 10 units (asset) and a debt of 10 (liability). Assets and liabilities still balance. The main change to the real economy is once again that there are now 10 units that will likely be spent and secondarily, a person with debt of 10.

In all cases the effect on the economy, the lender, the borrower, and amount of financial assets in the system is the same. Having a system based on transferable tokens does not change the underlying accounting of the loan or effects on the economy.


What about government? If a government adopted a cryptocurrency (bitcoin or any other supranational cryptocurrency), it would have to have tokens in order to spend. This would seem to force a balanced budget, limit “fiat money creation,” and assuage the fears of many in the crypto community (and “deficit hawks” in general).

Note first that a change from the dollar or pound etc. to crypto would not affect the accounting of non-currency-issuing political units, because they are already currency users (of their national currency). Municipalities and states would continue to fund themselves—as they do now—with income, sales, and property taxes.

The change would seem to affect currency issuers (the national governments of countries like the US, Japan, the UK, Brazil). The immediate effect would seem to be that either national taxes would increase, in order to pre-fund crypto spending by the national government, or government would have to shrink.

However, just as with the bank loans above, a country could borrow cryptocurrency. The country would have that same amount of additional crypto to deficit spend, and this would create sovereign bonds held by investors and savers, the same as now. 

The same incentives that drive sovereign bond buying now would still exist (sovereign bond auctions—even with zero-interest bonds—are oversubscribed; investors are eager for ultra-safe sovereign bonds). And the same incentives for borrowers and lenders in the money- and capital-markets would still exist, just denominating the contracts in the new currency. In banking, secured crypto loans work the same as securities-based, mortgage or auto-loans do, and the emerging unsecured crypto lending market such as Aave are based on the same “relevant laws and contracts” as now (although now usually lend “fiat” with crypto as collateral; we are not in a “crypto only” world).

Regardless of what monetary unit is used, sovereign bond, corporate bond, money-market and commercial paper markets would still exist, and therefore so would the same monetary and credit expansion as now. Although there may be other benefits from adopting cryptocurrencies, stopping the lending-based increase in the balance sheet of the private sector (and thus effective “money supply”), or changing the national system of organizing public goods through government spending and sovereign bonds, is not among them.

Notes and References

For vestigial reasons, the public cannot directly deal in reserves; modern currency-issuers still make savers who want to save with a government unit have their bank convert reserves into treasuries on their behalf. This is not truly “borrowing” as both reserves and treasury securities are created through the same sovereign authority (as long as currency-issuers don’t assume foreign-currency-denominated debt), and accounting-wise the system works out the same as it would with direct spending and allowing saving in reserves; this is little understood (work through the last table here for the accounting). The treasuries/gilts etc. systems are simply vestigial accounting methods for saving directly with the US/UK etc. government). Allowing direct access to and saving in reserves, such as with a CBDC, would make clear that sovereign bonds are not needed for national government spending. Note that direct spending not only doesn’t change the underlying accounting. It would actually be less inflationary as there would be no interest payments pumping dollars into the economy (and worse, usually to wealthy savers, needlessly worsening inequality). Although even with the vestigial bond system rates can be at zero (and without bonds, can be made higher using Interest on Reserves [IOR]).

Adopting an external currency (whether crypto or not) results in the public’s loss of abilities stemming from sovereignty: the full control of their own interest rates, monetary system, and ability to organize public goods limited only by real resources rather than external constraints. It is hard to see a benefit to the public from that.

Linked References:

Painting: Portrait of Luca Pacioli, “The Father of Accounting and Bookkeeping,” by Jacopo de’ Barbari, 1495.

Bank of England “Money creation in the modern economy” https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

IMF “The Chicago Plan Revisited” https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Coindesk “No Collateral Required: How Aave Brought Unsecured Borrowing to DeFi” https://www.coindesk.com/tech/2020/08/24/no-collateral-required-how-aave-brought-unsecured-borrowing-to-defi/

“Exercising Currency Sovereignty Under Self-Imposed Constraints” http://heteconomist.com/exercising-currency-sovereignty-under-self-imposed-constraints/

“CBDC: The Power and the Profit” https://clintballinger.com/2021/08/22/cbdc-the-power-and-the-profit/

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