Some things are moving faster than others.
Representatives of more than 90 central banks met in June 2016 at an event organized by the Federal Reserve Bank of the United States, the International Monetary Fund and the World Bank.
The three-day Conference on ‘Policy Challenges for the Financial Sector’ included discussion on distributed ledger technologies in banking.
Meanwhile, there is rapid movement taking place on another front.
It’s coming and it’s coming fast.
Central banks around the world are either exploring or taking the first steps towards establishing digital versions of national (or “fiat”) currencies.
Central bank-issued digital currency is under consideration in Canada, China, Sweden and the United Kindgom. India withdrew 86 per cent of all cash as legal tender in November 2016.
1.27 billion people were given four hours notice.
Last month, we saw early signs that the European Central Bank is considering the feasibility of “digital-based money.”
Commercial banks are taking the first steps to issue their own crypto-currencies, such as Bank of Tokyo-Mitsubishi UFJ Ltd.
International organisations lead the chorus of support for related initiatives toward the digitization of cash.
Organizations dedicated to advancing the technology and its adoption are emerging. They include E-Currency, the sole purpose of which is to promote “central bank-governed digital fiat currency.”
Influential individuals are lending their support by calling for a ban on cash in its large denominations. They include Professor Kenneth Rogoff of Harvard University, a former Chief Economist of the IMF.
Rogoff is sought after by central banks and is the author of such works as The Curse of Cash.
In case his view on the matter wasn’t clear from the title of his book, he followed it up in the Wall Street Journal with ‘The Sinister Side of Cash.’
Numerous official sources, as well as commissioned works, have laid out the benefits of central bank-issued digital currency.
The Foundery blockchain team at FirstRand Bank Limited in South Africa lay out the case in their paper, ‘The Advent of Crypto-banking: A New Paradigm for Central and Commercial Banking.’
It describes central bank-issued digital currency as a hybrid form of monetary value. It combines a bearer instrument (such as cash) with a registered instrument (for instance, bonds, equities or money held in a digital savings account).
The paper goes on to explain:
The crypto instrument is a digital hybrid instrument with characteristics of both bearer and registered instruments: it’s similar to a bearer instrument because the holder of a digital private key is the presumed owner of the value it controls, and it’s also similar to a registered instrument because that value is recorded on a ledger (albeit a distributed one).
The paper is revealing. It makes three central claims that are worth testing, even challenging.
First, the paper assumes that human beings are instinctively competitive to the point of violence. It implies that societal interpretation of value is the product of a zero-sum game.
The authors present a scenario in which a hypothetical hunter in the distant past risks violent conflict or the loss of land when s/he leaves it to search for food.
This is a straw man argument. There is little evidence in the archaelogical record that suggests nomad hunter-gathers occupied fixed habitats for any extended period of time.
It is also unlikely that human civilization would have progressed to its present (albeit troubled) state if the only outcomes of dispute were absolute loss or violence, or both.
This is a simplistic representation, and reduces human interaction to naked competitive choice. It is not a credible basis on which to make a case for trusted third parties.
Second, the paper assumes that we live in a world ceteris paribus (that is, where all other things are equal).
Unfortunately, we don’t. Equilibrium is a theoretical premise for modelling. It does not survive its first contact with a world in which uncertainty and complexity prevail.
Indeed, all other things are very far from equal at present.
Oligopolistic power dominates political systems, pushing back against democratic accountability.
Debt overhangs continue to depress consumer demand; a glut of supply in commodities and tradable goods creates deflationary pressure; and companies prefer to write off debt or buy back their stocks rather than invest.
Central banks have stepped in to finance borrowing at interest rates so low that it has unleashed a war between speculators and savers (and savers are losing, badly).
In the ceteris paribus world, this is not supposed to happen. Central banks seem to have become both cause and casualty, misallocating resources to shore up a system and losing credibility while doing so.
Third, the paper makes a leap of faith to suggest that central bank-issued digital currency can bring trust to a trustless distributed ledger, and moderation to negative human instincts.
For instance, it makes a case for banks to serve as “trusted intermediaries” to verify ownership, and even to safely retain private keys. This without any reference to the separation of deposit and investment functions, or to fractional reserve banking.
Is any of this credible or desirable?
The main case for central bank-issued digital currency boils down to the following:
- It can combat numerous ills, including illicit financial flows, money laundering, organized crime and terrorist activity;
- It can help to address tax evasion, which could enjoy popular support; it could also stabilize and even increase the tax base; and
- It can promote financial inclusion.
Most of the voices advocating for central bank-issued digital currency do not, in my view, draw sufficient attention to the following:
First, cash has played little or no part in the largest financial crimes in history.
These include the rigging of the London Inter-Bank Offer Rate (or ‘LIBOR’), in which several of the world’s most prominent banks were complicit and are responsible.
These institutions siphoned off gains from a derivatives market that was worth between US$300 and US$350 trillion. Their misdemeanors extends to securities and commodities fraud, corporate fraud, and mortgage fraud.
Accountability? Fines aplenty but no criminal action of significance. In the United States, the latest ‘Financial Crimes Report’ of the Federal Bureau for Investigation available online dates from 2011. They appear to have been discontinued.
Second, unaccountable institutions with new and far-reaching powers over money are quite capable of intruding into the lives of people and groups.
Imagine programmable money issued by central banks directing what you can and cannot do.
If you live a lawful life you might maintain that you have nothing to fear, in the same way as you do not mind the harvesting of your personal data on the promise that it makes you safe.
Then, one day, your money is ‘turned off’ because of some infraction that you may or may not have committed.
Mass, digitized surveillance makes this possible today. A central bank-issued digital currency can very, very easily become another tool of social control.
Third, and to address the above, the United Nations World Summit for the Information Society +10 year review in 2015 laid out what people across the planet need from a digital world.
Any steps taken in building the digital world must protect and promote human rights: the central purpose of technological innovation.
Information and communication technologies need to have broad-based benefits for society (and not narrowly for the State or for commerce).
Closing the digital divides, including between women and men, are a sine qua non for human progress.
We need an ‘enabling environment’ that is open, accountable and that can confer full-spectrum benefits to all sections of the community.
Digital innovation needs to build confidence in security, not just for the state, but for individuals, communities and companies.
The way it is all governed must give voice to all: not just institutions and technologists and entrepreneurs, but citizens who can hold public entities to account; and consumers who can do likewise to private entities.
It is unclear if — or to what extent — central banks and actors advocating for a ban on cash are applying these considerations.
Central banks and international financial institutions represent — and work for — creditors first and people second. That is why they can be serially wrong with so little direct consequence.
Western creditors were morally and economically wrong about the African debt crisis in the 1980s and 1990s. They were wrong with the Asian financial crisis in the 1990s. They have been wrong with the crisis in the Eurozone.
They continue to misdiagnose the nature of the current “balance sheet recession.” You cannot overcome debt and debt trauma with more supply.
In each episode the negative human consequence has been large and manifold.
These are monumental failures.
Their effects can be measured in the spike in suicides, social dislocation and delinquency, structural levels of unemployment and under-employment, inter-generational inequality, environmental degradation, demonisation of minorities, political reaction, and so on.
This is the backdrop against which we are invited to trust the banking system with central bank-issued digital currency against.
“Sinister?” I’m not sure. I don’t think demonisation helps. The only thing I can say is that central bank-issued digital currency is a huge deal.
A huge deal that needs a big discussion.