The Fight Over the Future of Money — Part Deux
Two months ago, we assessed that the backlash against Libra by global regulators is part of the broader fight over the future of money as central banks strive to govern crypto activity in their countries and maintain control over their monetary policies — China’s announcement that its central bank has developed its own digital currency is the most recent example of this. Well, the bell seems to have been rung to signal the next round of this contest, with momentum swinging toward proponents of digital assets.
Bank of England Governor Mark Carney proposed that central banks jointly create a virtual currency to serve as the basis of a new “multipolar international monetary and financial system.” This would be a bold proposal under any circumstances, but it is particularly intriguing in light of the ongoing debate about Libra, the U.K.’s pending exit from the EU, and the U.S.-China trade war with its effects on economies around the world. This new “Synthetic Hegemonic Currency (SHC)” in Carney’s view could be created as a network or “basket” of central bank digital currencies to facilitate cross-border trade and international payments, in essence creating a public-sector-sponsored multinational cryptocurrency.
We would like to offer a few thoughts on Carney’s proposal:
First, we agree with Carney that advances in financial technology have made this new currency possible — we at BitOoda are witnessing the development and application of these new technologies every day — although realistically the scope of the proposed change, bureaucratic inertia, and the inherent challenges of international politics probably will lengthen the timeframe for this vision to progress to action. Nevertheless, we judge it is more likely for a group of governments (especially via an existing forum such as the G7) to agree on the creation of a joint virtual currency, given the power it would give them to guide their national economies with a greater range of policy options (for example to mitigate the impact when the U.S. picks a fight with an economic rival), as opposed to a private-sector consortium trying to achieve the same level of global adoption and influence.
Second, we analyzed the Euro as a precedent for a multinational currency and looked at what challenges it has faced that a multinational virtual currency could address. Would a G7-backed virtual currency enable participating economies to improve financial and monetary stability while offering a viable set of services and applications for users (such as online and cross-border payments) in ways that improve on the efficiency and usability of the existing system? In a word, yes. The Euro has successfully facilitated cross-border payments and increased trade volumes within the eurozone, and state policies have driven adoption and use among both governments and populations. However, the Euro’s ties to EU policies and politics make it dependent on factors other than monetary issues (such as immigration and nationalist sentiment), while a global virtual currency could operate more independently and be less subject to instability driven by political ideology. The key challenge for a global virtual currency would be establishing an infrastructure to allow people and institutions to acquire, store, and use the currency in accordance with local norms and processes.
Third, a truly global virtual currency managed by recognized monetary authorities could very well be met with a more positive reception than Libra has received from both regulators and users, in part because of the absence of central banks’ inherent incentive to pursue profit, unlike the bottom-line goals for Facebook and commercial banks. Related to this question of adoption is whether the SHC would advance or counter Libra’s argument of bringing banking services to unbanked populations. With banks in Denmark and Switzerland recently starting to charge clients for holding large cash deposits as countries on the brink of recession lower interest rates to encourage borrowing and spending, a multinational virtual currency could guide would-be depositors away from traditional banking and toward crypto.
Lastly, we considered whether Carney’s proposal would decentralize global economic control (consistent with Libra’s stated vision), or whether it would further solidify the authority and role of central banks. Two months ago, we argued that the reaction to Libra showed central banks will not cede control over their national currencies; Carney’s comments in our opinion confirm this view, representing a government counter-proposal to Libra that would retain top-down economic governance while also moving toward a system that realizes the benefits of virtual currencies.
Overall, a G7 venture to create a central bank-sponsored multinational virtual currency could lead to transformative changes to the international monetary and financial system, enabled by an ecosystem of private-sector partners able to compliantly integrate the new currency into the regulatory structures of the U.S. and other jurisdictions. BitOoda’s robust regulatory stack positions us to be ready to pivot quickly to compliantly handle Mr. Carney’s or any other type of digital asset safely and securely, and our decades of experience in multiple financial sectors enable us to develop bespoke strategies to help our clients take advantage of any development in the virtual currency space.