Coauthored with Can Akalin
The arc of history for the last thirty years has seen the transition of physical currency into digital currency, yet an open question remains about the next steps of this transition. The public-private franchise of central and commercial banks is increasingly questioned in the age of digital transformation and disruptive technologies such as distributed ledger technologies and online banking. The end consumers and citizens are asking a fundamental question of the provenance of the money in their account.
Contrary to public misconception, currencies have already been digital for the last twenty years. The digitization of bank balance sheets and the creation of public money in commercial banks have been automated and streamlined as part of the modernization of digital banking. For most end consumers, the dollars or the pounds they see in their accounts correspond to numbers in a database that is kept in sync with a central bank and an existing regulatory framework that protects their deposits and the public interest at large.
Despite the namesake of so-called “cryptocurrency” and alleged private digital currencies, these new technologies do not provide a reliable means of exchange, store of value, or unit of account for parties to transact in a fashion akin to national currencies. These new technologies simply provide a new speculative asset or gambling product denominated in national existing currencies and whose existence is singularly predicated upon investors capacity to appreciate returns in actual currencies via arbitrage opportunities and offload the assets on an increasing pool of greater fools.
Despite the pretense of innovation, there is limited evidence to support the thesis that the disruption of private, public partnerships between central banks and commercial banks is in need of disruption, so-called central bank digital currencies alleged to replace this relationship with the central bank-issued digital currency. Which seemingly offer no benefit over the existence of digital currency. Commercial money in circulation is already digital. At this time it is unclear if central bank digital currencies would provide any advantage over existing national digital currency solutions or whether they are indeed a solution in search of a problem. In the eyes of end consumers, there is no significant difference between the digital remembi and consumer balances held in Alipay or the Bank of China or the digital pound sterling held in Monzo and the Bank of England.
The entire phenomenon of central bank digital currencies is a reactionary response to cryptocurrency. This reaction is a natural response that is best understood in terms of the incentive structures of the government organizations and the remit of their authority to protect the public interest. In the Western theatre, governments are centrally concerned with regulating the issuance of crypto assets in terms of existing securities structures and the gains of private citizens in terms of the current regulatory perimeter of capital gains and orthodox taxation structures. In emerging markets, the primary incentive structure is based on the enforcement of the capital controls perimeter of controlling the outflux of capital at the national boundary level and political dynamics of these states with the international order.
While the western style of tax enforcement in the international community seems sensible within the democratic international order, there may be governance issues with the centralization of monetary and fiscal control over citizens within less democratic regimes. The capacity to control and monitor the day to day transactions of citizens introduces the potentiality for autocratic controls on the every day life of the populace far in excess of what has been possible with previous financial infrastructure. It remains an open question about whether the international order and the democratic systems based on the rule of law can synthesize with the existence of a total surveillance state.
In terms of interstate means of transactions, both schools of thought diverge at the international level. Western-style, mainly developed economies are indifferent towards the money flows as long as they are regulated, accountable and taxable. International investment and other types of monetary flows are based on currency reserves, which is the current international order is the US dollar. Western political allies and trade partners are in favour of regulating digital currencies and crypto assets to continue their influence in the current regime. However, emerging markets with regulated capital flows are getting cosy with digital currencies to decrease the friction of trading with their local currency. Reducing trade friction with national currency will incentivize smaller local trading partners to trade in their domestic currencies. Thus the issuing country of the current world reserve currency and its allies’ abilities impart pressure on these economies to trade and consequently the geopolitical tensions would decrease.
The intellectual foundation on which cryptocurrency and CBDCs exist—despite intrinsic technical differences—is fundamentally a political substrate cause rather than practical. More specifically, the foundation of cryptocurrency is a narrative-driven phenomenon on the capacity to build a “decentralized financial system”. However, both projects exist to further ends that advance the causes of their ideological proponents rather than reduce the friction of transactions or serve the general public. And as such, the two projects have become ideologically entangled because of the resonance with the same collective notion of improving the financial system through indefinite means detached from existing frameworks and regulation. It remains unclear what the advantage of CBDCs are if they can become untangled from the political imaginaries of cryptocurrency and attached to the political realities of public interest.