@woodstockmerkle’s post made me think about this topic more, and I’m now convinced that Tier 7 is a new form of capital control for digital currencies that hasn’t been discussed among cryptocurrency communities, as far as I’m aware. I know shareholders are busy with finalizing FLOT and liquidity operations, but this topic needs to be addressed in the coming months.
The definition: > Capital controls are residency-based measures such as transaction taxes…
So, the Nu network should realize it has already inadvertently pioneered yet another form of digital monetary policy (the ability to institute capital controls) through variable or volume-dependent transaction fees. This is a topic that needs to be addressed eventually, because it has the possibility of alienating hardcore cryptocurrency enthusiasts. The Nu network should either pass a motion declaring that it will never use Tier 7, or else begin to formulate the conditions under which Tier 7 could be applied. To choose the first option would be to increase the odds of permanent peg collapse however, and so I favor the second option for the reasons that follow.
The International Monetary Fund (IMF) has published an extensive series of articles and papers on capital inflows and outflows. In the case of Nu, our largest risk comes from capital outflows (ie. NBT being sold for fiat). One excellent IMF paper that is relevant to our network is here: http://www.imf.org/external/np/pp/eng/2012/111412.pdf beginning on page 25.
Capital outflows that are large, sustained, or sudden can pose significant policy challenges. Some capital outflows are a natural consequence of openness, as foreign investors recoup their investments and domestic investors diversify their portfolios and expand business operations abroad. Outflows can, however, become disruptive in some circumstances, which are usually associated with economic crises. Such disruptive outflows can be driven by domestic factors but they can also be driven by international factors such as global risk appetite, liquidity, interest rates, and global growth, and by contagion effects through trade and financial linkages and investor confidence. **Disruptive outflows can lead to reserve depletion, currency collapse, financial system stress, and output losses. Even short of crisis, large or sustained outflows can pose challenges through their effects on exchange rates, availability of financing, and interest rates.**
In crisis situations, or **when a crisis may be imminent, there could be a temporary role for the introduction of Capital Flow Management Measures (CFMs) on outflows**. For example, when countries face domestic or external shocks that are large relative to the ability of macroeconomic adjustment or financial sector policies alone to handle, or when the size or duration of the shocks are highly uncertain, CFMs may help to prevent a free fall of the exchange rate and depletion of international reserves. When a crisis is considered imminent, CFMs may be desirable if they can help to prevent a full-blown crisis.
In this case, our primary CFM would be Tier 7 transaction fees.
**CFMs in response to disruptive outflows, while they need to be comprehensive, should be temporary.** The right time to lift outflow CFMs will depend on specific country circumstances. In general, outflow CFMs should be lifted when macroeconomic stability, particularly with respect to the exchange rate, debt sustainability, and financial stability are restored, confidence is regained in domestic assets, access is resumed to international capital markets, and foreign reserves climb above critical levels
This supports my assertion in the OP that transaction fee hikes should only be in place until equilibrium is restored.
Overall, I think there is a place for Tier 7 liquidity as a last line of defense against currency collapse. The IMF report seems to support limited use of CFM’s like Tier 7 when necessary. Shareholders should begin to discuss under what circumstances other CFM’s may be applied, according to IMF (or other economic expert) guidelines.