Is flatcoin backed by Coinbase founder a good idea?

flatcoin has practitioners, but it may not be suitable as a medium of exchange.

Written by JP Koning

Compiled by: Luffy, Foresight News

To get straight to the point, I don’t think flatcoins are a good idea.

The idea of flatcoins has been around for a while, but it didn’t gain widespread traction until it appeared in a Coinbase article earlier this year. Now, the number one hater of cryptocurrencies, “Dr. Doom” Nouriel Roubini, has changed his tune and is about to launch crypto flatcoins. These novel tools seem to represent the “way forward” for the medium of exchange.

What is flatcoin?

If you have $1 worth of stablecoins or $1 worth of Wells Fargo deposits, both are locked at $1 indefinitely. In contrast, the value of a flatcoin slowly increases over time to compensate holders for the dilution of value due to inflation. So if you own a flatcoin worth $1 today, tomorrow it will be worth $1.0001, the day after tomorrow $1.0002, and so on. After 12 months, its value will be $1.05. A 5% appreciation protects you from 5% inflation while keeping your purchasing power unchanged.

Roubini and Coinbase market flatcoins as a blockchain-specific species, but the concept can also be packaged as a traditional financial product without blockchain. Imagine a Wells Fargo account with a fixed balance of $100 that grows 3-4% per year. Or imagine a flatnote in which the issuer ties its purchasing power to inflation by promising to buy it back at a higher price.

Roubini sees flatcoin as a potential “global payment method.” As far as currency/payment technology goes, I disagree. **I think flatcoins are an evolutionary dead end. **

One of the key features that makes money so popular is that it integrates directly into the primary business language we use in our daily economic lives.

What does business language mean? We talk and bargain in dollars, we think and plan in dollars, we dream in dollars, we remember in dollars. Every aspect of our daily business lives revolves around this very basic unit of measurement. (In Europe, the euro is the basis of business language, while in Japan it is the yen.)

The dollars in our pockets (and the dollars in our bank accounts, and the stablecoins in our MetaMask wallets) are designed to be fully compatible with the dollar measurement unit we refer to in our language. That is, our medium of exchange is pegged to $1. For example, if I have to pay $1,500 in rent next week, I know I have 1,500 units in my bank account to meet that obligation. I don’t know much about my other assets, like my S&P 500 ETF, my gold, my government bonds, or my Dogecoin.

This normalization is a convenient feature. It eliminates many of the hassles in daily business life. This means that when we buy something or make shopping plans, there is no need for constant translation between the medium of dollars in our pockets and the dollars in our words, thoughts, and plans. As Larry White once said, reconciling the units we use in spoken language with the units we trade “reduces the information required for economic calculations by buyers and sellers.”

The market for them has become highly developed as everyone tends to use these very useful standardized units for payments (i.e. deposits, stablecoins, and banknotes). This in turn would make them more useful for payments, actually cementing their dominance.

In contrast, flatcoin is not compatible with the U.S. dollar as we use it colloquially. One unit of flatcoin may be worth 1.1145 times the dollar we speak today, 1.1147 tomorrow, and 1.1205 next month. This erases one of the currency’s most human features, its conformity to business terms, alienating anyone who might use it for everyday spending. As a result, flatcoins will be less liquid than a standardized 1:1 USD, and this lack of liquidity will make them less useful for payments.

The second problem with flatcoin is from taxes. Because flatcoins increase in value over time, any purchase made using flatcoins will result in a small taxable capital gain. This creates an administrative burden that makes it even less likely that people will use flatcoins as a daily medium of exchange.

This inconsistency in language doesn’t mean people won’t hold them, they may function as a long-term savings vehicle in the same way people buy and hold fixed-income ETFs. But unlike Nouriel Roubini, I don’t think they are the “way forward” for trading media. No one will buy coffee with flatcoin.