Amol Agrawal
The last decade has been quite an eventful one for students of monetary economics, thanks to digital currencies. We have seen three waves in digital currencies so far and maybe, there is a fourth one in the making as well.
The first wave was in 2008, with Bitcoin taking off as the first digital currency. This was a long wave as Bitcoin idea led to many private digital currencies such as ethereum, dash, litecoin, tether and the like. They were collectively named as cryptocurrencies as they were based on algorithms. (For details, please see my earlier piece on bitcoin).
The next two waves happened very quickly and simultaneously. In 2019, Facebook launched Libra, which was an improvement over the decentralised cryptocurrencies. The first improvement was that Libra was backed by Facebook, along with other digital economy firms. The idea here was to give Facebook’s subscriber network an option to settle transactions and provide remittances using FB’s own currency. Second improvement was that Libra will be pegged to a basket of currencies to check the high volatility in values as seen in previous cryptos. (More on Libra here).
Third wave was central bank digital currency. Post-debut of Bitcoin, most central banks ignored the currency. As multiple cryptos mushroomed and there were frauds, some governments became concerned and banned the currency in their countries. There was back and forth frictions between crypto players and governments, but eventually the latter prevailed, threatening with law and penalties. The cryptos stopped being currencies and were seen more as assets.
Over time, sentiment changed and central banks have become more comfortable with the idea of digital currencies. So much so that central banks of leading economies are trying to push a case for central bank digital currency (CBDC).
The reasons for CBDC vary from decline of cash (Sweden) to monetary supremacy (France and China). They are in particular shaken by the advent of Libra with backing of Facebook, which had the potential of challenging their hegemony. They have adopted the once discarded private cryptocurrency technology to build their own digital currency! (More on this topic here.)
Now, we enter the next phase which could be a fourth wave with a new digital currency named Saga (SGA). Saga was found in 2018 before Libra by a technologist named Ido Sadeh Man. SGA has a formidable advisory board with members, including Myron Scholes, a Nobel Economics laureate of 1997 for his work on Black-Scholes formula for pricing financial derivatives, and Jacob Frankel, former governor of Central Bank of Israel.
However, Scholes was earlier part of LTCM (Long Term Capital Management) as well whose collapse in 1998 was a huge embarrassment for the Nobel committee and the finance community. LTCM also had a former central banker – David Mullins Jr – on its board!
Saga pitches itself as a global currency like others as well. Both Bitcoin and Libra were designed challenging governments, but Saga wants to work with them. Saga’s white paper says it should be seen as a “currency which evolves out of the existing currency system, rather than rejecting it”. Facebook also toed this line, but this was after there was a backlash against its platform.
Saga is built on four pillars. First, it is a modelled currency which is fruit of a great interdisciplinary effort by economists, historians and technology specialists.
Second, it is tamed as it draws value from a reserve of fiat currencies (like Libra).
Third, transparency is key to trust and applies an online regulated KYC and AML process on its participants.
Four, governance where it has taken inputs from functioning of both ‘nation states and central banks’. At the top of that hierarchy is Saga’s Constitution which establishes the core principles, rules and norms of its functioning. Then, we have participants who are equivalent to “nation states’ citizens”.
This is followed by several councils and committees to serve as checks and balances. There is an Executive Council (EC) which is an elected team of professionals which manage the entire system. The Monetary Council ensures soundness of Saga and closely resembles Monetary Policy Committees of various central banks. The other committees manage following roles: Constitutional (to resolve disputes), Transparency (provide and disclose relevant information), Appointment (to set qualification standards and appoint members of EC and MC).
Saga (SGA) is a token currency whose value will be based on a basket of fiat currencies till it achieves its own value. In order to avoid speculation, SGA has announced that the basket will resemble that of IMF’s Special Drawing Rights. The supply of SGA tokens will adjust based on its demand, which again is a response to the criticism of Bitcoin whose supply is fixed.
Another criticism of Bitcoin was its rapidly changing value. SGA plans to address this by keeping the price within the bid-ask spread just like central banks try and keep overnight interest rates within the corridor.
The SGA will have a reserve account which will buy/sell the tokens to keep the price within the corridor and will maintain a reserve ratio to achieve these objectives.
To sum up, Saga joins the list of cryptocurrencies trying to create an impression in the monetary world. Unlike Bitcoin, which was established to challenge the government control of monetary systems, Saga is more of a middle ground taking positives from both the worlds of fiat and digital currencies. The sceptics will scoff at another cryptocurrency which will eventually bite dust. The hopefuls will be more optimistic that the Bitcoin idea helped innovators think of alternatives to government monetary systems.
Niall Ferguson started his widely read book Ascent of Money as: “Bread, cash, dosh, dough, loot, lucre, moolah, readies, the wherewithal; call it what you like, money matters”. To paraphrase, “e-dollar, e-euro, e-renminbi, Bitcoin, ethereum, Libra, Saga, call it what you like, digital money matters” and winner of this race will shape humanity as earlier forms of money have done in the past.
Amol Agrawal is faculty at Ahmedabad University. Views are personal.
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