【Seigniorage】Explanation of Basic Vocabulary
A system where profits are generated simply by issuing currency
Good morning.
I’m Mitsui, a web3 researcher.
Every Saturday and Sunday afternoon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also making them suitable for revisiting and studying.
Today’s feature is “Seigniorage.”
Please watch until the very end!
1. What is Seigniorage?
The term “Seigniorage” originates from the medieval French word “Seigniorage” (lord). Its etymology stems from the practice of lords minting coins and profiting from the difference between the face value and the cost of production.
The most straightforward example is coins. If only 5,000 yen worth of metal is used to make a 10,000 yen gold coin, the remaining 5,000 yen becomes the issuer’s profit. With paper currency, this is even more pronounced; the printing cost for a 10,000 yen bill is merely a few dozen yen.
However, modern seigniorage is a bit more complex.
Modern central banks do not directly profit by printing banknotes. The primary method by which central banks issue currency is by purchasing assets such as government bonds. They buy these bonds with newly issued currency, and the interest earned on those bonds constitutes seigniorage.
In other words, modern seigniorage refers to the economic benefit derived from the very position of being able to issue currency.
2. Why do nations want to hold the power to issue currency?
The power to issue currency is one of the most important authorities a nation possesses. There are three main reasons for this.
Fiscal flexibility.When expenditures cannot be covered by tax revenue alone, the government can raise funds by issuing government bonds, which are then purchased by the central bank. This serves as a last resort to meet sudden fiscal demands during wartime or disasters.
Control of economic policy.By adjusting interest rates and increasing or decreasing the money supply, we can stimulate the economy or curb overheating. Without the power to issue currency, we would lose this adjustment mechanism.
Symbol of sovereignty.The issuance of a national currency is also a symbol of economic independence. The difficulties faced by eurozone countries in pursuing individual monetary policies were highlighted during the European debt crisis.
The power to issue currency is not merely the ability to create money. It is the very power to control the entire economy.
3. Inflation and Seigniorage
Seigniorage has another aspect: inflation as an invisible tax.
When new currency is issued, the total amount of currency circulating in the market increases. As supply rises, the value per unit of currency decreases. This means the assets of those who already hold currency are relatively diminished.
This is sometimes referred to as an “inflation tax.”
For example, suppose the money supply in a given economy increases by 10%. If prices rise by 10%, the real purchasing power of savings declines by about 10%. Although the government is not collecting direct taxes, it has achieved the same effect as “taxing” the purchasing power of money holders.
The key point is that this “taxation” is not readily apparent.
For income tax, the amount is listed on your statement. For consumption tax, it’s displayed at the time of purchase. But there’s no bill for the inflation tax. Simply holding currency quietly erodes its value.
The profits from new issuance are concentrated in the issuer (the state), while the costs are distributed across all holders of the currency. This is the fundamental structure of seigniorage.
4. Does Bitcoin Have Seigniorage?
Bitcoin also has a mechanism for new issuance. So, does seigniorage exist?
In Bitcoin, new BTC is issued as a reward each time a miner generates a block. This is called the block reward, which is currently 3.125 BTC per block (after the 2024 halving).
This reward can be seen as similar to seigniorage. Newly issued BTC goes to miners, and existing holders’ BTC becomes diluted due to the increase in total supply.
However, there is one crucial difference from the seigniorage of national currencies.
The publication schedule is predetermined.The total supply of Bitcoin is fixed at 21 million BTC, with the reward halving approximately every four years. It cannot be increased at anyone’s discretion.
Publishing incurs costs.Miners perform massive computations and consume electricity to generate blocks. The reward is compensation for that cost, not “profit from nothing.”
Transparent issuance rules.When and how much will be issued can be verified by anyone through the code written in the protocol.
Bitcoin can also be said to have sought to eliminate the opacity of seigniorage by removing the “issuer’s discretion.”
5. Token Economics and Issuance Revenue
In Web3 token projects, the issue of seigniorage becomes more directly apparent.
Many tokens have an “Initial Token Allocation.” Before launch, the design specifies how much of the total supply is allocated to the team, investors, foundation, community, and others.
Here lies the issue of issuance gains.
Initial allocation to the team and investors.Teams and early investors hold large quantities of tokens with virtually zero production costs. If those tokens gain value in the market, that is precisely seigniorage. Structurally, it is identical to how a nation issues currency and profits from it.
Inflation design.Some projects continuously issue new tokens for staking rewards and ecosystem grants. This new issuance dilutes the holdings of existing token holders.
Who benefits from this structure?When evaluating a project, it is crucial to examine “who benefits from the token issuance.” The vesting schedule, unlock periods, and inflation rate trends reflect the token’s issuance benefit structure.
Reading token economics also means reading the distribution structure of seigniorage.
6. CBDC and Seigniorage
In recent years, the CBDCs (Central Bank Digital Currencies) being developed by various nations strongly reflect national intentions concerning seigniorage.
As cryptocurrencies and stablecoins become more widespread, people will conduct economic activities outside of state-issued currencies. This signifies a loss of seigniorage for the state.
CBDC is an initiative to keep the power to issue currency in the hands of the state, even in a digitalized economy.
Furthermore, CBDCs may be endowed with programmability—the ability to control their purpose and expiration date through code. “Money usable only for specific purposes” or “money that expires if not used within a set period” can be seen as a further extension of the issuer’s authority.
The digitization of currency is not merely a matter of neutral technology. It is an intensely political issue concerning who issues the currency and who sets its rules.
Summary
Currency issuance is not neutral. It is an act wielding significant power, both economically and politically.
Nations have historically gained seigniorage through their right to issue currency. Bitcoin has hardcoded this rule into its code, eliminating discretionary power. In token projects, seigniorage is embedded within the initial allocation and inflation design.
Understanding web3 also means re-examining who issues the currency and where the profits flow.
Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.
About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,’‘ we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.
Author
mitsui
A web3 researcher. Operating the newsletter “web3 Research” delivered in five languages around the world.
Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:
Telegram：@mitsui0x
*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.