Seigniorage

Bitcoin has a market capitalization — meaning coin price in dollars multiplied by total number of coins — of around $2 trillion. This is a large enough number that something new, like T-coin, might have a meaningful impact on the US debt.

How much might T-coin help the US? Note that Dogecoin, a digital currency based on the Bitcoin protocol but created initially as a joke, has a market cap of around $64 billion. If Bitcoin is worth 33 times more than Dogecoin, despite being a fundamentally similar creation, why couldn’t T-coin be worth 50 times more than Bitcoin? At that valuation, just the premined portion of T-coin would allow the US Government to pay-off most of its $36+ trillion debt. The coins which came to the Government as the system continued to run in the years which followed would contribute significantly to future spending.

How is this possible? How could the US Government create, out of nothing, a digital currency which would allow it to pay off a $33 trillion debt? The magic happens when we capture the seigniorage benefit of creating the first government-supported, anonymous, decentralized currency.

Seigniorage Explained

Seigniorage refers to the profit a government earns from issuing currency, calculated as the difference between the face value of money and the cost of producing it. Historically, this term was tied to the minting of coins, but today it encompasses both physical currency and digital forms of money issued by central banks. Seigniorage plays a critical role in financing government operations and reducing reliance on taxation or borrowing.

How Seigniorage Works

When a government issues money, the cost of production (printing bills, minting coins, or creating digital balances) is typically much lower than the value of the currency itself. For example, a $100 bill costs only a few cents to produce. The difference between the cost of production and the face value is the seigniorage.

Central banks issue currency primarily through open market operations. When the Federal Reserve, for example, purchases government bonds or other assets, it creates money, effectively lending it to the economy. The assets acquired generate interest income, which also contributes to seigniorage.

Seigniorage in the U.S.

In the United States, seigniorage operates through the interplay of the U.S. Treasury and the Federal Reserve:

  1. Coins:
    The U.S. Mint produces coins and sells them to the Federal Reserve at face value. The production cost (including materials and labor) is subtracted from the face value to calculate the seigniorage. For example, if a quarter costs 10 cents to produce, the seigniorage is 15 cents.

  2. Paper Currency:
    The Bureau of Engraving and Printing produces paper currency at a cost of approximately 5 to 14 cents per note, depending on the denomination. Like coins, the Federal Reserve pays the production cost, and the face value of the currency becomes a liability on its balance sheet. While paper currency doesn’t directly generate seigniorage, it facilitates monetary transactions and circulates interest-bearing government debt, indirectly contributing to seigniorage-like revenue.

  3. Federal Reserve’s Role:
    The Federal Reserve earns seigniorage primarily through its asset holdings. When it creates money to buy U.S. Treasury bonds or other assets, the interest earned on these assets becomes revenue. After covering its operating expenses, the Federal Reserve remits the majority of its earnings to the U.S. Treasury. This remittance constitutes a significant portion of U.S. seigniorage.

Significance and Challenges

Seigniorage helps the U.S. Treasury offset fiscal deficits, but excessive reliance on money creation risks inflation and economic instability. Maintaining the balance between leveraging seigniorage and preserving monetary stability is essential for long-term economic health.