Currency Baskets and the Blockchain Revolution

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Taken from Globcoin Blog



Why do Central Banks use currency baskets?
In a globalised world, a national currency does not always represents the wealth of their citizens, it’s just convenient for accounting or payment purposes. This is probably the reason for the growing trend among Central Banks to build up their own currency baskets or to peg their national currency to a basket.

Central Banks usually use this approach to link their national currency to a set of currencies that, combined in certain proportions, fit within the fixed exchange systems. This technique is a variation to the classic “full convertibility”, but it has the advantage of a slight exchange rate flexibility without losing stability. This system eliminates the negative effects of abrupt changes when you have only one single reference currency.

For example, the value of the Yuan is made up primarily of the Yen, the Dollar, the Euro and the South Korean Won, according the Chinese Central Bank (although the specific weight of each currency has not been revealed to the public). Usually, central banks establish the weightings of each currency according to their importance for foreign trade.

Why couldn’t WE use currency baskets before?
The “currency basket” concept was previously reserved for large clients; No retail bank or broker currently offers such a basket to individuals, and public institutions such as Central Banks manage the issue by themselves. The main reason is the Foreign Exchange Market structure. They are dealing with a minimum size of several million units per currency. Very few people would have access to the network necessary to construct such an offer themselves, and the associated cost of doing this would be very difficult to cover.

The Blockchain revolution
Let’s first take a look back at what a ledger is: a large book or file for registering economic transactions. The Blockchain allows the creation of smart contracts using a Distributed Ledger system, which is a database of transactions updated independently by individual participants in a large network. This unique distribution is not communicated to participants by a central authority (like a central bank for example), but instead the record is being independently constructed by each of the contributors.

The decentralisation brought by the Blockchain Technology now makes it now possible to offer the currency basket concept to the public, enabling solutions that were formerly reserved to a few privileged market participants. We can now build and distribute this product to everyone.

Isn’t it a revolution that anyone, easily and at very reasonable costs, can behave like a central bank, managing currency risk?