Here’s an Idea for a Digital Currency That Actually Solves a Problem, Unlike Bitcoin

Nobel economist Robert Shiller thinks bitcoin is a bubble, but he has an idea that might help electronic money solve the problem of price volatility. Think of Shiller’s idea as using big data to make money a more perfect expression of value.

Bitcoin aims to function as a medium of exchange or a store of wealth, but it’s not yet clear that it’s better than the alternatives; indeed it seems to be worse, because many people are instead treating it as something to speculate on. Instead, Shiller proposes designing electronic money around ways to properly index prices. He takes his inspiration in this area from Chile, where something called the unidad de fomento (UF) exists. The UF is an inflation-indexed unit of account used to set the prices of loans or long-term contracts in real terms. Almost all financial activity in the country is priced in terms of UFs and converted into pesos only when it’s time to pay up.

What does that mean in practice? More certainty and safety in the future. Right now, any long-term obligation—in any currency—is affected by currency speculators, inflation, deflation and other stuff unrelated to the value of whatever you’re buying. The UF strips out the ephemera to look at exactly what things cost. Chile adopted the UF to attract international lenders who might have otherwise worried that rampant inflation would devalue the return on their investments, but Shiller likes the example of rent: If it is set in UFs, you and your landlord don’t need to argue about how much it should go up due to inflation, just how to value those new light fixtures she installed.

Shiller’s next step is making UFs electronic, and calling them “baskets.” Each basket aggregates the price of a typical consumer’s daily purchases. More specific baskets for seniors, children or different income levels would improve accuracy even more. Consider the minimum wage: In the US, it’s not inflation-adjusted, leading to fights over how much to raise it each time inflation makes the old one obsolete. But if the wage were based on the basket of goods a low-income earner needs, there would be no need to change it. (Of course, deciding what to put in the basket would be a hell of a fight).

Electronic payments companies like Square or PayPal could integrate this concept into their products, allowing you to transact payments in “baskets” across borders rather than euros or dollars. It’s also an opportunity for companies like Premise, which is developing a global, real-time price index. In a paper on the topic, Shillerdescribes a future (pdf) where baskets are “used for all transactions, so that the role of conventional money might be reduced to clearing-house functions only.”

What we’re talking about is reducing currency to its most fundamental abstraction, basing it on units of economic need. It’s futuristic stuff, and Shiller hopes that ideas like the “day-wage” and the “basket” spur a re-thinking of how we measure value.

Reprinted with permission from Quartz. The original story can be found here.