From Bitcoin to Saga: The four waves of digital currencies
Digital currencies have made the last decade quite exciting for students of monetary economys. So far, we have seen three waves of digital currencies and there may be a fourth.
The 2008 wave saw Bitcoin become the first digital currency. It was a long-lasting wave, as the Bitcoin idea led many private digital currencies like ethereum and dash, litecoins, tether, and so on. Because they were all based on algorithms, they were collectively called cryptocurrencies. (For more information, see my previous piece on Bitcoin.
These two waves came very quickly and were completed simultaneously. Facebook introduced Libra in 2019, which was a significant improvement on the decentralized cryptocurrencies. Facebook backed Libra along with other digital economy companies, the first step towards improving Libra. This was done to allow Facebook’s subscribers to be able to settle transactions and send remittances in their own currency. Libra will now be tied to a variety of currencies in order to reduce volatility, as was the case with previous cryptos.
The third wave was the central bank digital currency. Most central banks did not pay attention to Bitcoin after its debut. Many cryptos grew and frauds occurred, so some governments banned the currency from their borders. There were back-and-forth frictions between crypto players, governments, but ultimately, the latter prevailed, threatening law and penalities. The cryptos became assets and stopped being currencies.
Saga claims it is a Global Currency
As the sentiment has changed over time, central banks have become more comfortable accepting digital currencies. The leading central banks in major economies have begun to advocate for digital currencies (CBDC) from their central banks.
There are many reasons CBDC can occur, from the decline in cash (Sweden), to monetary supremacy(France and China). The advent of Libra, with the backing of Facebook, has particularly shaken them. It had the potential to challenge their hegemony. They are now using the old private cryptocurrency technology to create their digital currency.
We now enter the next phase, which could include a fourth wave that will feature a new digital currency called Saga (SGA). Saga was discovered by Ido Sadeh, a technologist. SGA’s advisory board includes Myron Scholes (Nobel Economics laureate 1997) for his work on Black Scholes formula for pricing financial derivatives. Jacob Frankel is a former governor of the Central Bank of Israel.
Scholes was also part of LTCM (Long Term Capital Management), which collapsed in 1998 to great embarrassment to the Nobel committee as well as the finance community. LTCM had a former central banker, David Mullins Jr., on its board.
Saga claims it is a global currency, just like other currencies. Saga is open to working with governments. Libra and Bitcoin were both created challenging governments. According to Saga, the whitepaper states that it is a currency which “evolves from existing currency systems, rather than rejecting them”. Facebook was also on the same page, but it was after there was backlash against its platform.
Saga is built upon four pillars. It is first a modelled currency that is the result of a large interdisciplinary effort from economists, historians, and technology specialists.
It is second tamed by drawing value from a reserve fiat currency (like Libra).
Third, transparency is the key to trust. The online KYC and AML process applies to its participants.
Four, Governance where it has taken inputs form both the functioning of ‘nation state’ and ‘central banks’. Saga’s Constitution, which outlines the fundamental principles, rules, and norms for its functioning, is at the top of this hierarchy. We have then participants that are equivalent to citizens of “nation states”.
To ensure checks and balances, there are several committees and councils that follow. The Executive Council (EC), an elected group of professionals, manages the whole system. The Monetary Council is responsible for the soundness of Saga. It closely resembles various central bank Monetary Policy Committees. Other committees have the following roles: Constitutional (to settle disputes), Transparency, (provide and disclose pertinent information), Appointment – to set qualifications standards and appoint members to EC and MC).
Saga (SGA), a token currency, will have its value based on a group of fiat currencies until it reaches its own value. SGA announced that the basket would be similar to IMF’s Special Drawing Rights in order to prevent speculation. SGA tokens’ supply will be adjusted based on demand. This is in response to criticisms of Bitcoin, whose supply has been fixed.
Another problem with Bitcoin was its rapid change in value. SGA will address this issue by keeping the price within a bid-ask spread, just as central banks do to keep overnight interest rates within the corridor.
To keep the price within the corridor, the SGA will establish a reserve account. This reserve account will purchase/sell tokens and will also maintain a reserve ratio in order to meet these objectives.
Saga is one of the many cryptocurrencies that are trying to make an impact in the monetary industry. Saga, unlike Bitcoin, was not created to challenge government control over monetary systems. Instead, it is a middle ground that takes positives from both digital and fiat currencies. Sceptics will laugh at the idea of another cryptocurrency that will eventually go extinct. They will feel more hopeful because the Bitcoin idea inspired innovators to think of alternative monetary systems to the government.
Ascent of Money was written by Niall Ferguson. It is a widely-read book. I’ll paraphrase: “e-dollar”, e-euro and e-renminbi. Bitcoin, ethereum. Libra, Saga. Call it what you want, digital money matters.” The winner of this race will shape the future of humanity in the same way that earlier forms of money did.