Confidence in the dollar and the euro is waning worldwide. Yet confidence in digital money - bitcoins, stablecoins and other ‘coins’ - has not yet been established. In their research, experts from SBS Consulting outline how people will probably pay and save money in the future.

What are the disadvantages of fiat and digital currencies?

Fiat currencies - the dollar and the euro - are backed by the political stability of the issuing states. However, this stability is no longer predetermined. Even in the US, there is a rise in public debt, the return of higher inflation, and internal political problems in government. The controllability of issuance provided by centralised issuance is no longer an escape from the unsecured introduction of money into circulation - this has been shown, among other things, by the actions of national governments in dealing with the consequences of COVID-2019. In addition, national currencies may be at risk of sanctions, so that assets formally owned by one country or its citizens and companies will be frozen (and in fact confiscated) by the actions of another country. The growth of cash circulation increases costs and reduces the manageability of the money market for monetary authorities.

Countries are looking for an alternative to fiat currencies and inevitably turn to ‘digital currencies’. They are compared to ‘private money’ because the actual ‘issuance’ is done by users - ‘miners’ (in the case of cryptocurrencies). However, digital currencies have not yet become the dominant ‘money’ in the global market. The fact is that they have a number of disadvantages, which in many ways have become the flip side of their advantages:

• Most digital currencies are not tied to a physical asset and their exchange rates are easy to speculate on.
• The issuance of digital currencies is decentralised and the activities of issuing centres (miners) are not transparent. This leads to the fact that even stablecoins pegged to fiat currencies are subject to exchange rate fluctuations and the threat of default.
• The number of combinations and, consequently, notional ‘coins’ is finite, and ‘creation’ is proving to be a costly and complex endeavour as time goes on.
• Authorities do not trust digital currencies as they find it difficult to control decentralised exchange. Therefore, transaction times and transaction fees for digital currencies remain high compared to conventional cashless currencies.

One way to overcome at least some of the shortcomings of both traditional and digital currencies is to issue a currency that is digital from a technological point of view, but linked to a certain amount of energy. For the sake of simplicity, we will call it an energy currency.

Why is energy currency better than digital currency?

Energy currency has at least three advantages over digital currency:

1. It's backed by energy, which is an understandable measure. Civilisation is based on the creation and consumption of energy. Therefore, it's easy to think of all items in terms of the energy expended to create them or potentially stored during consumption. The term ‘energy value’ itself is not unique: it already assesses, for example, the usefulness of food products. As a means of payment, it is similar in design to a secured cryptocurrency (hereinafter referred to as a stablecoin). The issue volume of an energy cryptocurrency can correspond to a certain volume of an energy carrier with a corresponding amount of energy, for example, a barrel of oil or 1 kW of electricity, and the application mechanism - to any digital currency. In this case, the amount of energy currency in circulation will at least approximately follow the development of the national or global economy: the greater the volume of issue, the greater the amount of energy required.
2. Whether it can be used for payment depends on the agreement of the parties and the payment acceptance infrastructure. In the most basic case, an energy currency can be a surrogate payment instrument - a deliverable futures contract with free resale and no maturity limits. In a more complex arrangement, the energy currency would be an obligation of the issuer to redeem it in the form of delivery of relevant (and diverse) energy products or in the form of the equivalent cost of such products in another currency.
3. As a store of value, it has all the properties of a sought-after and, at the same time, liquid physical asset. The most important advantage of energy currency is that it will contribute to the storage of energy rather than energy consumption, as in the case of conventional cryptocurrencies. For example, mining one bitcoin in 2023 would cost 263 MWh of energy. In other words, instead of mining, 2,000 tonnes of oil could be extracted or 15.5 tonnes of aluminium could be smelted. An energy currency, at least by virtue of its pegging to an energy equivalent, would be deprived of this disadvantage, or at least the energy intensity of its ‘issuance’ would become a significant limitation preventing too rapid, ahead-of-time introduction into circulation.

Other advantages of energy currency include:

• the possibility of conversion to energy in one form or another;
• general preservation of the value of energy as such when source prices in national currencies fluctuate;
• fundamental reliability of the source compared to cryptocurrencies or stablecoins

How to create an energy currency?

There are three possible options when it comes to practical ways to create an energy currency.

Option No. 1. An energy currency pegged to the value of Russian oil

Stablecoins are the driving force behind the crypto market, with most of them issued by US companies. Out of more than 150 such instruments, however, just over 72 are traded, with the five largest accounting for 96% of the total market capitalisation.

A new process taking place in a somewhat related area is the active introduction of digital financial assets (DFA) linked to physical commodities. This process is called ‘tokenisation’. Tokenisation makes it possible to ‘tie’ a physical resource or financial instrument to blockchain tokens, where they are used to prove ownership or custody. In this case, for example, Luminium Coin, the first digital asset backed by aluminium, came into existence in 2020. Physical aluminium is stored in an insured warehouse, storage fees are charged at a daily rate of 0.01%, and tokens can be bought, sold or transferred to another person on the Luminium Coin platform. Thus, the creation of digital assets tied to commodities is no longer new.

The use of digital assets for energy payments will not be considered unique. For example, there is a platform called Power Ledger, which focuses on retail (p2p) trading of green energy and issues a cryptocurrency of the same name, POWR, for transactions. As of the beginning of 2024, POWR's market capitalisation was $368 mln and the volume of daily trades was $12 mln. Another example of such an application of technologies is Sun Contract, a platform focused on solar and other green energy trading based on its own cryptocurrency SNC, but this experiment is still limited to a capitalisation of $4 mln and microscopic daily turnover of $0.3 mln.

It should be noted that so far there are no successful examples of large-scale issuance and application of tokens related to energy resources or energy. To illustrate an unsuccessful experiment in tokenising oil flows, let us mention El-Petro, an attempt by the Venezuelan authorities to introduce an oil-backed cryptocurrency in response to US sanctions and high inflation of the national currency (bolivar). The Venezuelan government attempted to force oil buyers to purchase oil with El-Petro. It also provided the option to use the tokens to pay taxes or exchange for bolivars. However, El-Petro was not allowed by the government as legal tender within the country, the exchange for bolivars was based on an artificial exchange rate (devaluing the currency) and most importantly, easy free circulation of the token was not achieved. Cryptocurrency exchanges did not add El-Petro to their platforms, which hindered the free circulation of the currency, and as a result there are no oil-backed crypto-assets on the global markets at the moment (spring 2024).

Nevertheless, there are a number of prerequisites for oil to back the notional energy currency. The largest countries in the world have significant and large-scale oil storage facilities. Strategic oil reserves provide energy security for countries and also allow them to reduce oil costs by filling them during periods of low prices. These reserves could well be the basis for securing energy currencies when they are issued, acting also as dampers when they need to be issued or withdrawn from circulation.

Russia has no strategic oil reserves, and about 800 existing oil depots are mainly used for transshipment and distribution of petroleum products rather than for long-term storage. The first large underground storage facilities are planned to be built after 2024 in the north of the Krasnoyarsk region as part of Rosneft's Vostok Oil project. As for the rest, the necessary conditions for at least experimental implementation of energy currency are in place.

The creation of a stablecoin can technically be organised using the ETC-20 protocol in the Ethereum blockchain, which will save money on creating a blockchain of its own and increase the liquidity of tokens. The issuer could be one of the Russian mining companies (Gazprom, Rosneft), and the infrastructure to ensure payment (redemption) of tokens would require the use of transport and logistics networks. In this case, after purchasing a certain amount of oil from suppliers and placing it in storage facilities, it will be possible to issue a corresponding amount of tokens with the possibility of their further exchange for oil or free resale.

Option No. 2. Energy currency as a conventional reserve currency

The first option implies the introduction of a national ‘private’ energy currency. The opposite solution could be the organisation of an international unit of payment in a logic similar to that already implemented in the creation of the ECU, the conventional unit of payment that operated in the EU before the transition to the euro, or in the formation of the International Monetary Fund (special drawing rights). The initial prerequisite here would be the willingness and readiness of a certain group of states to use such a unit of payment and settlement, including the adoption of some conventional rules for its issue.

The logic of energy credit system formation can be presented in the following way. An interstate institution determines the estimated volume of special drawing rights and sets the share of this volume for individual countries, and then sells this share to the member countries for national currency. After that, the states use the national currency to purchase stocks of energy commodities and the issued energy credit to settle all foreign trade transactions. At the same time, it is possible to sell energy commodities from the accumulated stocks - again for energy credit, and to increase the stocks with the expansion of the volume of energy credit in circulation. Such an energy credit currency can even be called ECU, but it stands for Energy Currency Unit.

The key risk is the difficulty of determining how much of the special drawing rights will go to whom. The direct use of energy resource endowment as a measure of ‘issue rights’ within the framework of any international association, except perhaps OPEC, would be rejected. Thus, factors such as the size of the economy, the level of energy independence, the production and consumption of energy resources, and possibly also non-energy parameters such as population size or the area of the states' territories would need to be taken into account.

As the energy credit system develops, it will also be necessary to address the issues of adjusting the pricing policy for energy commodities so that the terms of trade through national currencies and through the energy credit are the same. In the future, a mechanism for circulation of the new currency within the member states, between legal entities and individuals will be needed. As the experience of euro implementation shows, this process may be quite lengthy.

Option No. 3. Energy currency as a reflection of the energy balance

This option is intermediate between the two options discussed above. The amount of energy currency issued is determined for a country not by a particular fuel type, but by the energy balance, i.e. the ability to make net energy exports in several forms.

At the same time, the energy balance itself can be formed not only directly for produced and consumed heat and/or electricity, but also for produced and consumed energy commodities. The process of creating a ‘balance’ energy currency implies its use as a payment ‘bill’, initially for one commodity (and even as in the first option - for one producer), and then for a basket of standardised energy resources (oil, gas) with a supply contract as collateral for the issued currency. The value of such a bill of exchange would reflect the FOB price (Free On Board, an international Incoterms trade term used to indicate the terms of delivery of a shipment and to identify the party bearing the cost of transport and/or to determine the point at which responsibility for the shipment is transferred from seller to buyer). Once the problems of converting different types of energy resources have been resolved and there is no room for arbitrage and speculation, the set of energy resources could be expanded and the number of issuing centres expanded to include new countries. Eventually, the energy currency may obtain the status of a world currency. Then the value of most goods will be expressed in it. It will also be used for international settlements. Ideally, the balances that determine the ability of countries to issue energy currencies should take into account the production of other commodities expressed in energy values. However, until the price system is adjusted, such accounting is premature.

The adjustment of commodity prices based on the value of energy consumed can be considered an important outcome of the development and application of an energy currency, with global implications in terms of energy savings and environmental management. The current pricing system is inefficient and does not always take into account the value of energy consumed. When converted back from US dollars (or national currencies) to the value of potentially recoverable MWh, price parity for petrol, diesel oil, coal and electricity is generally not met, even taking into account the costs of production. Non-energy commodity prices have a relatively high correlation with the very same oil only in the case of the most demanded exchange traded commodities. In other words, all prices of all commodities can be converted to each other through the US dollar, but it is impossible to do the same based on their energy ‘value’ even for similar or close commodity groups.

As a result of price adjustments using an energy currency created according to any of the options, energy balances can turn from reference and analytical tools into practical means of increasing the efficiency of the global economy. This could mean not only saving energy (as a value), but also increasing the production of cheap non-renewable energy - after all, clean energy is usually expensive. At the same time, the use of energy currency as a means of saving can help increase the energy storage capacity, which will even out price fluctuations in the markets and contribute to a more stable development of the world economy.

Conclusion

Modern technologies for developing digital assets open up new opportunities for creating alternatives to traditional means of payment. Combining these opportunities and the properties of the most sought-after resource in the modern world, energy commodities, may prove useful not only for solving short-term tasks related to overcoming sanctions restrictions, but also for achieving long-term sustainable development goals. Energy currencies will make it possible to overcome the problem of the increasing energy intensity of cryptocurrency mining, the unfair dominance of unsecured fiat currencies of developed countries in terms of their impact on national economies, and, to some extent, the problems of price parity violations.