BIS official examines money's coordination role and decentralization challenges
Hyun Song Shin, Economic Adviser at the Bank for International Settlements, explored the historical function of money as a coordination device and its implications for the current decentralization agenda. He highlighted the tradeoffs between capacity and true decentralization in digital monetary systems, which can lead to fragmentation.
Coordination's Historical Roots and Digital Branches
The speech began by referencing the Bank of Amsterdam (1609-1820) as a historical example of a central bank's role in the monetary system, issuing a global currency and supporting long-distance trade.
Bills of exchange, serving as both monetary and credit instruments, demonstrated the elasticity of money in early wholesale payments.
Shin explained that these bills were orders to pay, not promises, and their settlement on Bank of Amsterdam accounts led to an early form of "singleness of money.
He then transitioned to the "decentralisation agenda in money," noting its rejection of a centralized notion of trust in favor of consensus among dispersed validators.
This shift from a centralized coordination device to a decentralized one forms a core tension in the modern monetary landscape.
Balancing Trust and Throughput
Shin detailed how decentralized consensus mechanisms, such as Proof of Work and Proof of Stake, aim to achieve agreement among self-interested validators without a central authority.
However, he highlighted a fundamental tradeoff: the capacity of a blockchain is inversely related to its true extent of decentralization.
Congestion is often necessary for validator incentives, leading to a difficult balancing act in finding the right capacity.
This dynamic means that network effects of money, which underpin its coordination role, are diminished when trust is decentralized, resulting in greater fragmentation of the monetary system, as illustrated by the proliferation of Layer 1 and Layer 2 networks.
Fragmentation's Inevitable Cost
The speech effectively illustrates that the pursuit of radical decentralization in monetary systems often comes at the expense of efficiency and cohesion.
While promising autonomy, the inherent incentive structures of decentralized ledgers lead to congestion and a proliferation of less secure, fragmented blockchains.
This ultimately undermines money's fundamental role as a universal coordination device, suggesting that true monetary stability may still require a degree of centralized trust.