The good people at BBVA Research recently published a paper on central bank digital currencies (Central Bank Digital Currencies, Gouveia et al, March 2017) in which, amongst other conclusions, the authors say that “we also consider it likely that a scenario in which CBDC is anonymous, universal and non-yield bearing will be implemented”. But why is this “likely”? Why would any central bank bother setting up the form of distributed ledger that the authors envisage in order to implement something of such obvious utility to criminals, terrorists, money-launderers, tax-evaders and corrupt politicians? I’m not sure about this as a trajectory for money in the always-on robo-economy.
While this report talks in general about central bank digital currency (or “digital fiat” as I prefer to label it), it refers repeatedly to distributed ledger technology (i.e., shared ledgers) as the mechanism for managing this currency. It also refers to “blockchain technology” in the Executive Summary, although I would have thought this least-likely form of shared ledger architecture to implement such a system. Bitcoin uses a blockchain is that it is resistant to attacks from untrusted actors who are part of the consensus-forming network while rewarding participation in that network with currency. But a central bank will want to regulate the supply of digital fiat itself. If it doesn’t, then what’s the point of digital fiat? And if the central bank is going to, for example, use commercial banks as the nodes in the consensus-forming network then surely these must be trusted actors? If a rogue bank starts introducing bogus transactions, the central bank has a lot more to worry about than maintaining retail balances.
To put it more succinctly: why would we use 21st-century technology to emulate 17-th century money? Are we going to use new technology merely as a band-aid to cover up the flaws in the existing system or are we going to do something different? J.P. Koning came up with a lovely way of thinking about this, with the added bonus of evocative imagery and a core analogy that holds true: money is indeed imaginary.
Like Inception, our monetary system is a layer upon a layer upon a layer… Monetary history a story of how these layers have evolved over time.
Great movie, with the wonderful line “yes, but how did you get here”. Physiology recapitulates phylogeny, as they (used) to say. In other words, the structure of the monetary system shows its evolution, just like our knees do. It did not arise by intelligent design. In fact, quite the contrary: it demonstrates some pretty unintelligent design on a daily basis (like have people instruct instant payment transfers by typing in account numbers and sort codes).
So: do we revolutionise money (whether using a blockchain or not) by adding layers or replacing them? It’s really hard to replace a layer without disturbing the layers above so you end up having to replace the whole stack and that is hard to co-ordinate, so conservatism wins, and we end up hacking money to make it work in the modern world. Yet, as I will point out in my forthcoming book “Before Babylon, Beyond Bitcoin”, the future of money actually began back in the 1970s when it went virtual. So the money of the future, money that is nothing more than bits, is already here. Yet the institutions we use to create and control it (central banks and the IMF, monetary policy and capital ratios) date back generations, indeed centuries. No wonder it doesn’t work properly.
Things, however, are about to change. Suppose that we apply intelligent design to create forms of money that are grounded in a world of mobile phones and shared ledgers and such like to operate in a fundamentally more efficient way.? Then what would that money look like? And who should take part in the consensus-forming process (but that’s for another day!).
In intelligent design, we ought to start out by deciding what is best for society as whole rather than what is best for (say) banks. We want to have regulations that are good for society but we do not want regulations that are expensive, beyond cost-benefit analysis and a burden on stakeholders. Nor do we want regulations, as we have now, that have spiralling costs with no end in sight. We might ask, for example, in the case of America whether it makes sense to have one virtual currency regulator or 50:
It is a fair question to ask whether there should be state regulation of virtual currency.
From Virtual currency needs one regulator, not 50 | American Banker
In this case it is, I would imagine, a byproduct of state regulation of banks and it perpetuates because regulators at the state level mistakenly imagine money to be something to do with banking. And, I suppose, they are currently underemployed, what with everything being so stable and efficient in the financial services world. Our first step to a better system, then, is not based on fintech but on regtech:
Regulation — ‘aligning financial regulation with the Global Goals … to make sustainable asset classes more investible at lower cost.’
If we look at the patten of the co-evolution of money and technology what we see (yes I know this is a gross simplification) is that sustainable asset classes as a mechanism for deferred payment that becomes a store of value and then a means of exchange. The means of exchange then becomes a currency that denominates other transactions. OK, so what would these assets be? Richard Roberts goes on to identify candidate currencies based on “flows”, which is a useful way of thinking.
We’ve identified four key flows — you could also think of them as currencies — that we believe will define tomorrow’s economy: money, data, carbon and genes.
This accords with another perspective that I have written about before, the Long Finance perspective. In Gill Ringland’s examination of plausible financial services scenarios for 2050, she talks about the key assets being a person’s identity, credit rating and parking space (alluding to a new demographic asset class of residence). I think that there will be many more currencies, because I see currencies linked to communities, but I agree with the general thrust, so let’s imagine that there is a framework in place for creating the currencies (a privacy-enhancing framework with all sorts of goodies such a homomorphic encryption and zero-knowledge proofs baked in to it) and that it has been intelligently design to meet the goals of society.
Now this is where fintech comes into things, helping people to manage these currencies in a more sophisticated and efficient way within that regtech framework (e.g., shared ledgers). Fintech helps me to track whether I’m buying too much coffee, make loans to people in the developing world and to crowdfunding a new board game. I love it. And it works within a regtech framework that allows it to do all of things cost-effectively. This seems to me to be a much more realistic vision of the future than the “Star Trek” alternative, even though I do enjoy that version:
One of my favorite moments from Star Trek is in ST IV: The Voyage Home, when Kirk and the gang are stranded in 1980s San Francisco. They try to board a Muni bus and are promptly turned away.
Spock: What does it mean, “exact change”?
Kirk: They’re still using money. We need to find some.
Not only is money a foreign concept to the crew, it’s so foreign they didn’t even remember it was used in the Twentieth Century.
From Why Star Trek’s Future Without Money Is Bogus — Brain Knows Better
It’s tempting to imagine a post-scarcity future where money (as a system for allocating scarce resources) has vanished and the vast communist galactic super state takes care of everyone’s needs. But like the writer here, I don’t buy it. Some things will always remain scarce and desirable, like my attention span, and money will remain necessary. But it won’t be the same money that we have today.
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