IO – The digital realm accelerates its encroachment into nearly every aspect of our lives. While Bitcoin, a decentralized digital (DP) or crypto currency (CC) was first introduced in 2009, it wasn’t until Facebook made a spectacular announcement in June of 2019 that their Company was preparing to launch the “Libra”, its own so-called “stable digital currency” in 2020, that the debate flared up as to whether the new DPs or CCs would become accepted new currencies that would out-compete fiat money – including all currencies as means of payments that society is familiar with – or whether they would remain just another kind of financial assets that investors and speculators trade in the markets.
Those are loaded words that I should try to clarify, even if just a bit. First, the notion of “fiat money”. Currencies which we use daily to make payments when we buy goods and services, such as Rupiah cash and others (US dollar or Euro) are accepted legal tender or means of payments that are commonly accepted – since they are issued by sovereign entities or authorities on behalf of a state. Such tender is officially called “fiat money”, since its nominal value is very different from its intrinsic value, as determined by a decree or edict from legal authorities, such as a Treasury (Ministry of Finance) or Central Bank of the respective Governments. “Fiat” is a Latin term for an edict or decree issued by authorities or sovereigns.
I will elaborate on bitcoins, digital or crypto currencies and the others in my discussion about the issues related to the topic below. What I am obliged to state as a caveat does however need to be underlined at the outset, i.e. that all these are still developing even in the general meaning or public understanding of what the terms and concepts signify. I am in fact not sure if this exposition will succeed in providing you with useful information about the topic discussed. Thus, these preliminary notes.
The main issues
The rationale for creating digital currencies as a stable medium of exchange is to deal with the extreme volatility of those previously issued, like the Bitcoin, Ethereum and others. The price of Bitcoin has been quite volatile, which would only serve the purposes of those who love to speculate, the risk-seekers, but not for others, the risk-averse groups which refers to the majority of the public. The price of Bitcoin is volatile due to the erratic intensity of its supply and demand. The supply is intentionally limited, since Bitcoin and similar digital currencies are created by those well-versed in the I.T. techniques of how it is created, via very complex algorithm known as a “blockchain”. They are called “miners”, and the process itself I called “mining”, possibly a metaphor chosen to echo mining gold and other precious metals. The process of the creation by all the miners (connected one with the others through a blockchain) halts after some time to limit the amount. Its price is thus intentionally kept expensive by limiting its volume, in the face of rising demand from new subscribers or miners. “Bitcoin” is the name of this type of digital currency created via complicated algorithm in a system called a “blockchain”; it is a generic name to describe digital currencies and how they are created, written in small case as “bitcoin”. When it is used to refer to a specific digital currency created in this system it is conventionally capitalized as “Bitcoin”, like other digital currencies, such as Ethereum and Dash. It is reported that there are around 1600 kinds of bitcoins being created and traded globally as of this writing.
Are these digital currencies competing against fiat money as we know it? Not necessarily. They are currencies used as a means of storing value, like financial assets. They are traded among those accepting them as stores of value or financial assets. However, if people in general decline to accept them as a means for payments, then the owner still need to exchange them for fiat money at some agreed price, in order to be able to execute a payment. Among those accepting bitcoin for general payments they are in fact competitors with fiat money, understood as currencies whose creation is not centralized in the hands of any Central Bank or Treasury. But, at least for now it is generally correct to say that they are not competing against fiat money.
However, the Libra, which the creator claims to be a stable coin (referring to the new digital currency) may be able to somehow compete with fiat money. Libra is not a decentralized digital currency like bitcoin, because it is created by a pool of mega financial and digital payment institutions. So, in a way it is somewhat centralized. While fiat money is issued by a central bank or ministry of finance, Libra will be issued by a joined institution set up by Facebook, supported by the likes of Visa, MasterCard, Uber, PayPal, EBay and others, in a new institution called Libra Association. It is thus based on a blockchain technique like bitcoin, while somewhat centralized in Libra Association (like fiat money). Its value will be stabler because it is based on a stable fiat money, namely, 50% in US dollars.
It is still not clear how Libra will be used and popularized as means for payments. But the statement made by Mr. Zuckerberg seems to throw down a challenge to monetary authorities and commercial banks, when he said that he aimed at making the transfer of money for those having no bank accounts as simple as sending an email. Facebook users all over the world at present number 1.7 billion. We will see how this will evolve.
A bit different from this development is the possible challenge to banking as a financial intermediary in the economy arising from the proliferation of different digital payments in most economies globally. There are different modern-day payment protocols using digital means, from digital debit and credit cards to Go-Pay, Grab-Pay and Paylah, to bigger ones like PayPal, Alipay, Amazon Pay, and more. Just imagine Alipay, owned and operated by Ant Financial, having more than 600 million average monthly users. A staggering number, isn’t it? If Libra could become a genuine competitor of fiat money as a means of payment, digital payment institutions could clearly function as competitors of commercial banks, in their function as financial intermediaries in the economy. This does not take into account other techniques like what is called “peer-to-peer lending”, which again works as a means of transaction between lenders and borrowers without requiring any banking service.
Central bank’s digital currency
Recently it was reported in the news that the People’s Bank of China (PBOC), the central bank of the PRC, was ready to launch its own digital currency, as soon as in November 2019, even though this rumor was immediately denied. Such a denial may be about timing, but not in terms of the plan to launch.
With similar caution regarding the hows and whys – lacking any clarity on these issues thus far – allow me to share a few remarks and notes on a digital currency issued by a central bank, in relation to the issues mentioned above. I would like to note that the digital currency that is being structured for a launch sometime in the future by the PBOC should be interpreted as China’s response to the most recent digital currency that Facebook and its associates are proposing to launch, namely, the Libra.
From certain reports in the media that I follow, the digital currency that PBOC is preparing to issue would actually substitute for, and could ultimately replace, the current Renminbi or Yuan in circulation. According to Deputy Director of Payment and Settlement Department of PBOC Mu Changchun, the digital RMB that is to be launched will be issued by the PBOC but distributed by 7 or 8 mega-banks and payment institutions, including the Industrial and Commercial Bank of China (ICBC), the largest bank in the world at present, the Agricultural Bank of China, Alibaba and Tencent, and Union Pay. In other words, the issuance is two-tier: it is to be issued by the BPOC to provide a cover of legality for managing and guaranteeing the currency, and circulated to the public by commercial banks and other institutions.
A digital RMB is of course different from a bitcoin, since its issuance is centralized. It is also a legal tender and a de facto fiat money, as it is issued by the PBOC, a central bank. My own take is that the PBOC is currently preparing its own response to the creation of a Libra-type digital currency.
In the meantime, the establishment of Libra itself faces hurdles from within. The Wall Street Journal reports that Visa and MasterCard are second-guessing their participation in the Libra project. PayPal might withdraw from Libra Association membership as well. In a similar vein, Apple CEO Tim Cook declared in a statement that “…issuing money is for the governments, not private firms”, in order to stress his company’s position that Apple was not contemplating the launch of any cryptocurrency.
Other developments that need to be considered are the view put forth by Governor Mark Carney of the Bank of England and views from the US Congressmen regarding the issues. Two US Congressmen, Representative French Hill, a Republican from Arkansas and Rep. Bill Foster, a Democrat from Illinois, are both proposing to Fed Chair Jerome Powell that the US issue national digital currency. what the motivations behind these proposals could be is still not clear. But for sure they remind us that the US Government is not ignoring the potential of this race to issue digital currencies.
Governor Carney proposed the creation of a digital currency backed by a basket of other financial instruments to enable global finance to move away from the present system, possibly out of concern of the global-scale risk of US dollar domination. Again, none of this is verified or concrete, as to how will this new digital currency would work or what its issuance would signify. All of this looks to be a long way off, until all economies accept a digital currency as a substitute for their current money as a payment medium for general transactions, as valid a legal tender as fiat money. We still need to be on guard, keep watching and carefully follow how this evolves.
It would be remiss for me not to note the political reasoning that could potentially influence the decision to adopt a digital currency of whatever type. For example, what Governor Carney proposed regarding a new digital currency that would be issued by a consortium of central banks, which might even point in the direction of a “Global Central Bank”. The rationale is clear: to somehow escape from the US dollar-dominance of the current system, a reality that could become precarious, considering the isolationist tendencies that the present US Administration seems to embrace.
The fact that PBOC may become the first central bank to issue a digital currency cannot be discounted, as this may be also driven by the current Chinese Party bosses, to further their ambition for global leadership at a time when the US seems to be pulling back. The BRI Project, as well as China’s spirited fight in the contagious Trade War against the US, are signs of this.
As I stated at the outset, I cannot promise to make anything clear about our topic; perhaps I am simply revealing my own confusion, in following the developing dynamics of the phenomenon.