Money

Defining money

• It is necessary here to briefly examine what money actually is in the world outside of metaverses, so we can understand it in the context of a virtual global space. In the previous section Bitcoin can be viewed in a couple of different lights. As a self custody digital bearer asset it can be viewed as ‘property’, like gold, i.e. not a liability on someone else’s asset sheet. Indeed this has long been one of the assertions of the community and it finds favour in law, possible most ironically in China, which of course banned mining. ‘Money’ though is a far more slippery concept to grasp. It seems very likely that Bitcoin is evolving as a “base money”, and it’s important to define that, but there are many other kinds of money within the online world which can potentially transfer value within virtual social spaces.
• Money is an economic good, that is generally accepted as a medium of exchange. This simple and specific description doesn’t do justice to the complexity of everything that humans consider to be money. Even the Encyclopaedia Britannica strays from this immediately in their definition:
  • “money, a commodity accepted by general consent as a medium of economic exchange. It is the medium in which prices and values are expressed; as currency, it circulates anonymously from person to person and country to country, thus facilitating trade, and it is the principal measure of wealth.”.
• In which it can be seen that the principle measure of wealth might not be money at all, but rather property, credit, etc. So are these things money? Is a promise on a ledger money? The assertion at the top of this section is challenged by different schools of economic thinking. Global debt is around an order of magnitude larger than base money, and most wealth is stored in illiquid land/built environment (some $300T), and yet the system seems to work fine. The debt theory of money offered by anthropologist David Graeber suggests that money is an abstraction of barter, and thereby ‘credit’, but credit clearly pre-dates money, and needs no barter, commodity, intermediary nor underlying asset.homer1996history This suggests that money is something slightly different.
• Money seems to have evolved for two principle purposes; trade outside of a village context, and inheritance.szabo2002shelling In doing this somewhat replaced and augmenting ‘credit’, which as said above, was a promise between parties based on future actions, and likely as old as rudimentary language itself. The anonymous Heavyside blog powerfully argues that it is the relative stability of money over time which creates a less discussed composite feature; that of ‘confidence’ in being able to defer labour into money, basically credit again.
• Money can be divided into two categories, which are fungible (interchangeable) from the point of view of the users. Base money is ‘commodity’ money which is backed by assets, or tangible physical (or digital) goods through the actions of a central bank ledger, and is around $30-$40T. Everything else is ‘fiduciary media.’selgin1996defense
• All fiduciary money is credit but not all credit is fiduciary money .Nobody knows the extent of the global supply of fiduciary media. It encapsulates all the new digital money platforms like PayPal, gift cards, offshore accounts and all manner of other vehicles, and is thought to be many tens of trillions ofpoundsborio2017fx.This somewhat muddies the waters since money that is backed by‘something’ blends away into money which cannot reasonably be assayed. This in turn undermines the assertion that money is backed. It seems that a combination of available raw materials and labour, central banks and their associated political structures,barsky1987fisher and global markets drive the value of money up and down relative to “stuff” in the shops. This manifests as ‘inflation’, which is ‘possibly’ the effect of not pegging money to an asset such as silver, or gold as in the past.hall2009inflation While the gross drivers of inflation seems to be accepted and understood, nobody seems verysurehow the various aspectsinteract.Dickson White wrote in 1914 about hyperinflation in France due to excessive money printing, and this driver and causal link persists as aprimary hypothesis for inflation and hyperinflation, a cautionary tale especially today after the huge fiscal responses to the 2008 global financial crisis and COVID.white1914fiat It may be that central banks actually have no decent response to global monetary pressures and areoverdue a paradigm shift, as explained by DanielaGabor (Professor of economics and macro finance at UWE Bristol):
  • “…last stage of a central banking paradigm, when it implodes under the contradictions of its class politics? Under the financial capitalism supercycle of the past decades, inflation-targeting central banks have been outposts of (financial) capital in the state, guardians of a distributional status-quo that destroyed workers’ collective power while building safety nets for shadow banking. The limits of this institutional arrangement that concentrates (pricing)power and profit in (a few) corporate hands are now plain to see. If the climate and geopolitical of 2022 are omens of Isabel Schnabel’s GreatVolatility that most central banks and pundits expect for the near future, then macro-financial stability requires new framework for co-ordination between central banks and Treasuries that can support astate more willing to, and capable of, disciplining capital. But such a framework would threaten the privileged position that central banks have had in the macro-financial architecture and in our macroeconomic models. The history of central banking teaches us thatpolicy paradigms die when they cannot offer a useful framework for stabilising macroeconomic conditions, but never at the hands of central bankers themselves.”
• All this makes it hard tofind a universally acceptedand explicable definition of money. The best approach may be to look atthe properties of a thing which is asserted to be a money. In his book‘A history of money’, Glyn Davies identifies “cognisability, utility,portability, divisibility, indestructibility, stability of value, and homogeneity.”davies2010history
• Stroukal examines Bitcoins’ likely value as a money from an Austrian economics perspective and identifies “portability, storability, divisibility, recognizability, homogeneity and scarcity.”stroukal2018can
• A helpfully brief and useful web page by Desjardins from2015describes some properties and explains them in layman’s terms below:
  • Divisible: Can be divided into smaller units of value.
  • Fungible: One unit is viewed as interchangeable with another.
  • Portable: Individuals can carry money with them and transfer it to others.
  • Durable: An item must be able to withstand being used repeatedly.
  • Acceptable: Everyone must be able to use the money for transactions.
  • Uniform: All versions of the same denomination must have the same purchasing power.
  • Limited in Supply: The supply of money in circulation ensures values remain relatively constant.

The origins of money

• Lyn Alden has written an excellent book which leads through the history and mechanics of money as a technologyAlden2023
  • Origins and Early Forms
    • • Money originally emerged to solve issues with barter and the double coincidence of wants
    • • Early forms of money included commodities like shells, cocoa, salt, furs, feathers
    • • These served as money due to properties like portability, divisibility, durability, fungibility
    • • Social credit also played a role, enabling delayed settlement between known parties
  • Precious Metals as Money
    • • As societies advanced, precious metals like gold and silver emerged as the dominant monies
    • • They survived debasement from more technologically advanced societies
    • • This was due to their scarcity and difficulty to produce more even with modern techniques
  • Layers Added to Enhance Metals as Money
    • • Coinage added verifiability of weight and purity to raw metals
    • • This involved blending metals with authority of issuing institutions
    • • Legal tender laws mandated acceptance of certain coinages
  • Emergence of Paper Money and Banking
    • • Paper money initially emerged to enhance metals for long distance trade
    • • Evolved from bilateral credit channels to broadcast systems of bank notes
    • • Allowed easier transfer and divisibility without physically moving metals
  • Credit Theory vs Commodity Theory of Money
    • • Credit theory sees money as shared ledger, its value comes from authority
    • • Commodity theory sees money emerge naturally due to properties of commodities
    • • Debates center around role of state and intrinsic value of money
  • Flaws of State Controlled Money
    • • State controlled money allows non-transparent taxation via inflation/debasement
    • • Credit theory underestimates degradation of state controlled monetary systems
    • • Most state currencies have experienced high inflation or hyperinflation over time
    • • Incumbent currencies survive due to lack of convenient alternatives, not soundness
  • She argues that as societies advanced, precious metals like gold and silver became the dominant monies. Unlike other commodities, precious metals maintained their value even when more technologically advanced societies attempted to debase them by mixing in other metals. This durability was due to the metals’ scarcity and the difficulty of acquiring more even with modern mining techniques.
  • To enhance the use of precious metals as money, layers were added on top. The creation of coinage allowed the weight and purity of raw metalsto be verified. Coins also blended the intrinsic value of metals withthe authority of the institutions issuing them. Legal tender laws mandated the acceptance of certain coinages for debt repayment.
  • The emergence of paper money and banking provided another layer of enhancement. Paper banknotes initially facilitated long distance trade by avoiding the need to physically move heavy metals. This evolved from bilateral credit channels between specific parties to broadcast systems where banknotes could circulate among many holders. Banknotes increased transferability and divisibility of money without moving the underlying metals.
  • Debates arose between the credit and commodity theories of money. The credit theory views money as a shared ledger, with value derived from the authority of the issuer. In contrast, the commodity theory sees money emerge naturally due to the properties of the underlying commodity. Disagreements still center on the role of the state and whether money requires intrinsic value.
  • Alden thinks that over time, flaws became apparent in state controlled monetary regimes. The ability to non-transparently tax through inflation and currency debasement led to the degradation of monetary systems. Most state currencies have experienced high inflation or hyperinflation. They survive due to lack of alternatives rather than soundness.Commodity-based monies constrained state overreach and lasted longer before breaking down.
• Jesse Myers has an excellent in depth post on the origins of money and the connection to Bitcoin as the “apex predator” of commodity collectible acting as money. Works like these feel like they are fitting priors to research, seeking justification for Bitcoin as a money, but it seems possible that more work will be done.

Understanding money creation

• There are two main types of money in our current system: financial money and real economy money. Financial money refers to bank reserves, which are created by central banks through quantitative easing (QE). The central bank buys bonds from banks and credits their reserve accounts with new digital bank reserves. Bank reserves are an asset for commercial banks. Reserves allow banks to settle transactions with each other and meet liquidity requirements set by regulators. Importantly,bank reserves do not directly translate into increased lending or stimulus for the real economy. There is no direct channel for reserves to enter the broader economy. The amount of reserves does not drive bank lending. Real economy money refers to money that households andbusinesses can use for transactions. This includes physical currency and bank deposits. Real economy money is created through government deficits and private sector credit expansion.

  • FINDING THE MONEY Film on X: “CLIP: We hear a lot about the national debt. But do currency-issuing governments really ‘borrow’ their own currencies? The answer might surprise you. Watch FINDING THE MONEY documentary, In Theaters and On Demand TOMORROW May 3: https://t.co/H1e5fEuV7t https://t.co/MA3AGIcCXi” / X (twitter.com)

  https://twitter.com/FindingMoneyDoc/status/1786050601236779078

Government deficits drive money creation and inflation

• When the government spends more than it taxes, it is creating net new financial assets in the economy. Government deficits add net financial wealth to the private sector. This increases private sector deposits and spending capacity. When people then spend this new money, it stimulates aggregate demand and economic activity. Several empirical examples demonstrate how increasing government deficits leads to higher GDPgrowth and inflation by injecting more money into the real economy.Conversely, austerity policies that reduce deficits, like higher taxes or less spending, destroy private sector financial assets and reduce economic activity. Therefore, government deficits and surpluses have a much more direct impact on the real economy compared to central bank operations that alter the supply of bank reserves.
• In their paper for the 2023 central bank meeting at Jackson HoleEichengreen and ArslanalpEichengreen2023 argue that the 2008 global financial crisis and COVID-19 pandemic have caused public debt levels to balloon to unprecedented heights across advanced, emerging, and developing economies, and that contrary to the calls of major financial institutions, high public debts are unlikely to meaningfully decline in the foreseeable future.
• They say this is because the conventional options for debt reduction like running large primary budget surpluses, relying on higher growth rates, or using inflation to erode real debt burdens are politically and economically infeasible today (though AI perhaps offers a slim productivity ‘out’). At the same time, changes in the global financial system like the rise of private creditors have made coordinated debt restructuring more challenging. As a result, the world will have to learn to live with persistently high public debts. This may be manageable for major advanced countries like the US that benefit from structural demand for their safe assets. But it poses greater risks for emerging and developing economies that lack this advantage. Creative solutions like GDP-indexed bonds, credit enhancements, and legal reforms are needed to facilitate sustainable debt restructuring for weaker countries weighed down by debt overhangs. Overall, the shift from bank to bond financing and the changing composition of creditors have reduced options for unwinding high public debts accumulated due to recent crises. It’s a mess.

Central Bank Balance Sheets and Liquidity

• King argues that the change in reserves, rather than the size of central bank balance sheets, is the critical factor. Since 2009, global central banks have added approximately $18trillioninreserves,yetonlyabout$500 billion has been dialed back during QT. He posits that even when reserves appear to decline, a “stealth QE” effect often persists, contributing to an easing of financial conditions, BIS.

Market Sensitivity to Reserves

• King’s analysis suggests that the market’s sensitivity to changes in central bank balance sheets remains consistent, despite economic conditions that might warrant tighter policies. He illustrates that when reserves fall, market assets—whether equities, credit spreads, or cryptocurrencies—experience price drops. Specific market downturns in 2022 corresponded with declines in reserve levels, reinforcing the relationship between liquidity and market performance.

Credit Growth vs. Monetary Policy

• Despite expectations that higher rates would restrain credit growth, King highlights that borrowing remains lackluster. He attributes credit creation primarily to fiscal policies rather than private sector demand. This disconnect between interest rates and actual borrowing underscores his argument that monetary policy, especially rate hikes, does not always work as anticipated.

The Role of Fund Flows

• King emphasizes the concept of “flows before pros,” suggesting that asset prices frequently rise not from fundamental valuations but from flows into mutual funds and ETFs driven by central bank liquidity. The substantial $600 billion in inflows observed in 2023 reflects the crowding in of capital towards riskier assets due to available liquidity, further distancing market valuations from fundamental realities.

Potential Future Trends

• Looking ahead, King warns that the current market rally might be reliant on fragile liquidity conditions. As central bank support wanes, particularly with tighter fiscal policy, he anticipates increased volatility and vulnerability within the markets. He suggests that while rate cuts might be anticipated, they may not stimulate the desired credit growth and could reveal existing market weaknesses.

Political and Geopolitical Risks

• King expresses concerns about the pricing of political risks in the current environment, emphasizing that markets tend to underestimate the potential for significant regime shifts or drastic economic changes due to accumulated debt. Political factors often lead to abrupt market re-evaluations, typically occurring when confidence erodes suddenly and unexpectedly.

Change in Market Fabric

• Over the years, King has adapted his analytical framework, moving away from traditional fundamental analysis towards understanding the dominant role of central bank actions in shaping market dynamics. His adaptive approach highlights the critical need for investors to focus on liquidity patterns rather than solely economic indicators, as the former appears to dictate market behaviors increasingly.

Counter Opinions

• Some analysts argue that large central bank balance sheets can have adverse effects on market functioning. For instance, the Bank for International Settlements (BIS) notes that while central bank balance sheet expansions initially had positive effects, they also led to concerns about market distortions and long-term financial stability risks. Additionally, the European Central Bank (ECB) has highlighted that excessive risk-taking by central banks can undermine their credibility and the public’s perception of their ability to deliver on their mandates.

Private credit drives money creation and asset inflation

• Private credit creation through bank lending also increases the money supply by allowing households and businesses to purchase assets they couldn’t otherwise afford. When banks create new loans, they are simultaneously creating new purchasing power in the form of deposits for the borrower, allowing asset purchases with new credit. This increases broader money supply and spending capacity, but also creates anoffsetting debt liability owed back to the bank. Rapid private credit growth risks fueling asset bubbles and financial instability if debts can’t be repaid. This primarily benefits those who already own assets.Private credit growth is more disciplined by market forces compared to unchecked government deficits, but still risks inflating asset prices.

The risks of the current system and alternatives

• The current elastic credit money system aims to prevent recessions by constantly expanding credit. However, this artificial stability leads to financial instability long-term. Alternatives like Bitcoin have a firm supply anchor and cannot rapidly expand the money supply. This prevents runaway credit growth and provides monetary discipline. However, Bitcoin and hard money standards also provide less flexibility to respond to economic crises by expanding credit. There are trade offs between flexibility and discipline. Our current monetary system relies heavily on expanding real economy purchasing power through government deficits and private credit in order to drive economic growth. However, this constant elasticity promotes financial instability and inequality over the long-run, mainly because of shorter term political incentives. We will see that potential alternatives like Bitcoin offer more stability through monetary discipline, but sacrifice flexibility. It’s likely that trading off a known flawed system for an unknown replacement is far too risky, but with sufficient adoption there may be a ‘flight to safety’.Bitcoin represents a serious risk if it compounds the worst elements and outcomes of a mishandled cyclical credit based system.

Global currency interactions

• The legacy moniker “third world” came from a division of the world along economic lines.tomlinson2003third At the time this was the petrodollar / neo-institutional hegemony,caballero2008financial; @spiro2019hidden vs the economic superpower of the soviet block, and then ‘the rest’; unaligned economic powers.
• This old framework has fallen away with the associated terminology, but it’s useful to look at what money ‘is’ from a global viewpoint, because all money is effectively trust in the liability held by some defined counter party.
• Right now the dollar system is still predominant, but it seems likely that there are new axes forming, especially around the ChineseYuan.It’s clear that central banks have been aware of this potential transition away from a global dollar / energy system. The Dollar has potentially suffered from the radical expansion of the money supply over the last 70 years or so under the private “Eurodollar” system.grewal2020struggling Macro markets commentator Peccatiello describes this asfollows: it“Our monetary and credit system is USD-centric: the lions share of international debt, trade invoices, asset classes and FX volume is settled or denominated in US Dollars. Funnily enough though, direct access to $liquidityisonlyavailabletoentitieslocatedintheUnitedStatesbutinacredit-basedsystemtherestoftheworldalsohasanincentivetoleverageinUSDollarstoboostorenhancetheirglobalbusinessmodels.ThatmeansEuropeanbanks,BraziliancorporatesorJapaneseinsurancecompanieswhichwanttodoglobalbusinesswillmostlikelygetexposureto$-denominated assets and liabilities ($debt) despite being domiciled outside the United States.”
• Some policy makers have been looking back to the great economist John Maynard Keynes’ ideas for a neutral basket of assets as a global synthetic hegemonic currencycarney2019growing; @piffaretti2009reshaping which wouldalmost certainly consist partly of gold.stoeferle2018gold Gold as a utilitarian commodity trades at a premium because of it’s history as a money, and like Bitcoin, there are serious consequencesto it’s perceived value to humans.
• Use of the dollar system has recently been shown more and more to be contingent on adherence to US defined political principles. This is evidenced most starkly by the seizure of Russian central bank foreign reserves,a new and untried projection of monetary power. Counter intuitively this allowed Russia to demand sale of it’s natural resources in their native Ruble, rapidly increasing the buying power of their currency. It seems that the ‘currencywars’are accelerating. Putin (who to be clear, is a dictator and aggressor)recently saidit“The technology of digital currencies and blockchains can be used to create a new system of international settlements that will be much more convenient, absolutely safe for its users and, most importantly, will not depend on banks or interference by third countries”

Sanctions and weaponisation of the dollar

• Stephen Fallon on How American Regulators Captured Global Banks - YouTube
• Instrument in Support of Trade Exchanges (INSTEX) was established by European governments, primarily the UK, France, and Germany, to maintain trade with Iran following the United States’ withdrawal from the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran nuclear deal. INSTEX was designed to provide invoice discounting services, connecting European and Iranian financial institutions that had been cut off from the global financial system due to renewed US sanctions. Initially, INSTEX aimed to process billions of euros in transactions across various sectors. However, over time, its ambitions were significantly scaled back due to political and practical challenges.
• The United States authorities have leveraged the dominant position of the US dollar in the global economy to exert significant control over the international financial system. This has resulted in global banks modifying their behaviours and practices to conform with American regulatory guidance. The extent of this influence has led some observers, including Stephen Fallon, to argue that US regulators have not merely influenced global banks but have effectively captured them.
• The Trump administration viewed INSTEX as anti-American and perceived it as a threat to US financial power. This stance created significant challenges for European companies attempting to maintain business relationships with Iran under the renewed sanctions regime. INSTEX struggled to effectively bridge the gap between commercially-minded businesses seeking practical solutions and politically-minded government officials focused on broader geopolitical concerns.
• As INSTEX evolved, it moved from offering unregulated forfaiting services to exploring the possibility of becoming a fully-fledged bank. This evolution was driven by the realisation that its initial structure and services were insufficient to meet the complex needs of businesses operating in the challenging environment of renewed sanctions.
• From 2005 to 2020, the United States successfully modified the international financial system, further separating itself from other states in the global financial hierarchy. This was achieved through various means, including expanding conceptions of US jurisdictional reach, implementing secondary sanctions, and emerging as the dominant financial power with no peer in this domain.
• The United States leveraged sanctions and financial regulations to reshape the international system. This involved entering into state-on-state competition in the financial domain, resetting expectations for US organisations, banks, and third parties, and effectively ending the concept of neutrality in the global financial system.
• As a result of these changes, global banks now operate according to US norms and expectations, even when they are not headquartered in the United States. These norms and practices are disseminated throughout the banking sector, from larger institutions to smaller banks, and ultimately into the non-financial economy.
• A notable case study in this context is the 2012 deferred prosecution agreement (DPA) between the US Department of Justice and HSBC. HSBC was fined for knowingly violating US sanctions, and the DPA was used as a tool to fundamentally restructure HSBC’s global business. The agreement required HSBC to hire new leadership, including former US Treasury officials, cut relationships with over 100 correspondent banks worldwide, sell more than 80 subsidiary businesses, and cease operations in 20 countries deemed high-risk by US authorities.
• This case exemplifies how US regulators have effectively extended their jurisdiction to nearly every reach of the global financial system. Banks and other financial institutions face a binary choice of either cooperating with US demands or facing severe consequences, potentially including loss of access to the US financial system. This influence extends beyond banking to areas such as export controls, where similar mechanisms are used to ensure compliance with US policies.
• European officials have struggled to counter US financial influence, as evidenced by the challenges faced by INSTEX. The failure of INSTEX to effectively facilitate trade with Iran highlighted the difficulties in creating financial mechanisms independent of US influence. There is limited evidence that European officials have learned lasting lessons from this experience or developed effective strategies to address the issue of US financial dominance.
• The influence of US regulators over global finance is likely to persist regardless of changes in US administration. However, this influence may become more pronounced under administrations that take a more unilateralist approach to foreign policy and financial regulation.
• The real-world impact of these financial sanctions and regulations is illustrated by personal experiences, such as the difficulties faced when travelling to sanctioned countries like Iran. Travellers may find themselves unable to access funds through normal banking channels, necessitating the carrying of large amounts of cash and facing potential financial difficulties in emergency situations.
• The Chinese Yuan/Renminbi is potentially stepping in where the petrodollar is now waning.mathews2018china The effects of this expansion of economic influence by China, through a potential petro-Yuan, and the belt and road initiative,huang2016understandingare not yet felt, but the lines are fairly clearly defined and may be felt over the coming decades. The Euro system is potentially even less stable because of recent energy supply pressures, and internaltensionsin the bond markets. Though it seems to be less ‘weaponised,’hudson2021destiny it comes with it’s own restrictions for use, especially through the International Monetary Fund (IMF). They are opposed to global fragmentation and multi-polarity, seeing is as disproportionately impacting emerging economies. They say in their 2023 outlookreport that the rise of geoeconomic fragmentation could cause shifts in foreign direct investment (FDI), hitting emerging economies the hardest. They feel that policymakers and companies are focusing on making supply chains more resilient by moving production closer to home or to trusted countries. As a result, FDI flows are becoming more concentrated within blocs of aligned countries. It is likely true that emerging market and developing economies are more vulnerable to FDI relocation, as they rely more on flows from geopolitically distant countries, though this could be viewed as a reduction in economic imperialism. Such economies may face reduced access to capital and technological advancements. It is into this gap that our work presenting AI collaborative tooling wishes to step.
• To give context to this it is useful to paraphrase Whittemore’spodcast which gave a high level view of Gladsteins critique of theIMF:it“The terms of the most recent IMF loans to Argentina; one that was just finalized this year was that the country’s leadership had to try, as part of their agreement, to discourage citizens from engaging in the use of cryptocurrencies. The most recent deal was a 45 billion dollar deal which is a restructuring of that 57 billion program that Alex mentioned. The provision in question was called ‘strengthening Financial resilience’, and says ‘to further Safeguard Financial stability we are taking important to discourage the use of cryptocurrencies with a view to preventing money laundering informality and disintermediation’. They explicitly do not want citizens of that country to disintermediate. They want them to have to go through the system that the IMF is“ restructuring”, meanwhile inflation this year is around 72 percent. Last year it was 48 the year before 42 the year before that 53 percent clearly something is not working. It’s not surprising to me then that Argentina is an absolute hotbed for people who are involved in Bitcoin”
• The IMF have a working paper on Bitcoin for cross border payments and flows. They concede that it is very hard to track capital globally on the network, and that the numbers are significant, and post the launch of large ETF funds there is now worrisome convergence of “users” which will complicate policy responses (make is hard to ban).
  • ..we show that the use of Bitcoin for cross-border transactions is geographically very widespread, with relatively high intensities across regions both for off-chain and for on-chain flows, and some punctual differences driven by the underlying data coverage and estimation assumptions. The magnitudes of the estimated Bitcoin cross-border flows are sizeable with respect to several countries’ GDP, especially in those which experience smaller capital flows..
• The new ‘third world’ who are excluded from the Dollar and/or Yuan poles of the global economy might drift toward the ‘basket of assets’ discussed by Keynes and Carney above. As mentioned this will certainly have a component of gold, and likely other commodity assets such as rare metals. This is described at length by Hudsonhudson2021destiny. For our purposes here it’s also possible that there would be a small ‘hedge’allocation of Bitcoin or even a globalaxisof ‘unaligned’ nations using theasset.hendrickson2021value; @ferranti2022hedging Block and Wakefield research found that in developednations Bitcoin is treated as an investment, while in less wealthy demographics there is interest in the utility. This is evidenced in the early nation state adoption seen and described to date, and the game theory incentive explained by Fidelity in the introduction. It’s too early to tell if this ‘unaligned money’could constitute a global economic pole, but it’s interesting that some commentators are now even discussing this, and that carbon neutralityresearchis being undertaken specifically for this application.

Central Banks

• Central banks were established to be lenders of last resort, providing liquidity to commercial banks during financial crises to prevent bank runs and systemic crises. This remains a core function.
• Over time, many central banks have expanded their role as lender of last resort beyond just commercial banks to also support non-bank financial entities that face liquidity shortages in crises. Central banks have effectively become backstops for the broader financial system.
• Central banks control short-term interest rates through policy tools like adjusting benchmark rates (e.g. fed funds rate), reserve requirements, open market operations, etc. This allows them to influence longer-term rates and overall financial conditions.
• Central banks engage in quantitative easing and asset purchase programs to lower longer-term rates. They buy financial assets like government bonds and mortgages to inject liquidity and expand the money supply.
• As a result of asset purchases and liquidity programs, most major central banks have dramatically expanded their balance sheets and the monetary base since the 2008 financial crisis.
• Central banks earn income on assets purchased but also pay interest on reserves. Most remit profits back to national treasuries/governments after covering expenses. Some now face losses.
• While politically independent, central banks face pressure from politicians and the public. They have mandates like inflation targeting, financial stability, employment, etc. that shape policy.
• Central bank policies like QE and low rates for long periods are criticized for enabling fiscal deficits and debt levels to rise and inflating asset bubbles. But also defended as supporting growth.
• Extraordinary central bank actions during crises like COVID-19 have fueled high inflation worldwide. They face challenges normalizing policy and credibility issues.
• As lenders of last resort with balance sheet expansion power, central banks have uniquely influential roles in national and global finance. Their policies have major economic and political impacts.

International money transfer networks

• Transferring money from one financial jurisdiction to another is itself a global marketplace which has accreted over the entire course of human history. It’s far less useful here to discuss the mythos of salt and seashells as a mechanisms of international remittance andtaxation.gainsford2017salt; @goldberg2005famous Suffice it to saythat there are dozens, if not hundreds, of cross border payment companies who make their business from taking a percentage cut of an international money transfer. There are also hundreds if not thousands of banks who offer this service as part of their core business portfolio. This section looks at some of the major players, and theirmechanism, to contextualise the more recent shifts brought about bytechnology.

Swift, ISO 20022, and correspondence banking

• Society for Worldwide Interbank Financial Communiactions (SWIFT) was initially formed in 1973 between 239 banks across 15 countries. Theyneeded a way to improve handling of cross border payments. It is now the global standard for financial message exchange in over 200 countries, and has recently found itself under afresh spotlight, during the invasion of Ukraine. The system handles around 40 million short, secure, code transmissions a day, whichrepresent crucial data about a transaction and the parties involved. Itis used by both banks and major financial institutions to speed up settlement between themselves, on behalf of the clients and customers. It replaced the Telex (wire transfer) system. The new incoming standardto replace SWIFT isISO20022 is a complex anddata rich arrangement. The SWIFT consortium are promoting this newstandard to their 11,000 plus global user base. A group of‘crytocurrencies’ are heavily involved in the ISO20022 standard, and there’s been experimentation with private permissioned distributed ledger technologies. It’s somewhat unclear what value they bring, andpossible that the relationship of these public ledgers to international bank to bank messaging is a marketing distraction. The Bank Of England is transitioning to thesystem in June 2023. Note that SWIFT, ISO20022, and the associated tokenswithin crypto are all themselves products which have a business model.They are all intermediaries which will demand a mediating fee somewhere.All of this proposed functionality could be replaced by central bank digital currencies, which will be discussed later in the section.

FEDNOW

• Seemingly in direct response to the pressures of cryptocurrencies TheUSA is launchingFEDNOW.This section will get revised.

SPFS and BRICS

• https://www.londonreviewbookshop.co.uk/stock/westlessness-the-great-global-rebalancing-samir-puri
• While media outlets like the Financial Times are seemingly concernedabout the proposal for a BRICS based currency, and a multi-polar economic world (as we have suggested), Nunnopines Brazil’s reliance on China for inward investment and the impact of USforeign policy. He highlights that Brazil has no choice but to trade with China, who sets the rules. Nunn also points out the reluctance of Brazilians to hold Chinese treasuries. He emphasizes the misunderstanding of international currency usage and states that the Euro-Dollar system, supported by currencies like the Pound and Yen, dominates the market. Nunn argues that the possibility of the US dollar losing reserve currency status is sensationalist nonsense. Meanwhile, chief foreign policy advisor in Brazil has said:
  • “I think the two countries can also have an important role in building a more multipolar world, in which power is less centralized and there is no hegemony. I think this is a very important aspect in which China and Brazil can play important roles.”

VISA and Mastercard

• Both major credit card companies are building out their “crypto”capabilities. Mastercard have launched a back endplatformto mitigate fraud when buying digital products with their cards. VISAhave announced a “crypto business to business supportunit”.They have also published a whitepaperto allow users to improve their experience.

Money transfer operators

• International Money Transfer Operatorsanalysis
• western union etc, moneygram, transfer-wise,

Digital disruptive fintech

• It seems that the neobank providers of digital banking apps are likely to converge with native digital asset “wallets”. This is also the thesis advanced by the Ark investments Big Ideas paper.
• CNN have a usefulprimer of the most prevalent mobile digital payment methods. This can be seen in Figure4.1. ![]./assets/CNNmobile.jpg Comparison of mobile based payment systems
• This comparison makes it pretty clear that Bitcoin is not ready as a personal mobile payment system. That’s not to say that there isn’t aplace for the underlying technology in global payment processing. The most interesting example of this is Strike, a product in the international fintech arena. It is a ‘global’ money transmitter which uses bank connections in local currencies, but a private version of theLightning network with settlement on the Bitcoin main chain. In practiceusers connect the app to their bank and can send money to the bank connected Strike app of another user instantly, and without a fee. This is a far better product than those previously available. In principle it’s open API allows many more applications to be integrated into theStrike back end. Twitter already uses this for international tipping(and remittance). It seems that this is a perfect contender for supporting transactions in open metaverse applications, and that may betrue, but Strike is currently only available in three countries (USA, ElSalvador, Argentina).
• Paypal, xoom, Strike, servicing smaller payments, cashapp, venmo,revulot, Paypal especially is noteworthy for their recent Orwellian gaffe suggesting in their terms and conditions that they would be ableto fine users $2500 for “disseminating informational”. They quickly walked this back but this kind of private fintech action is highly suggestive of a need for uncensorable money such as Bitcoin.
• Apple has recently introduced a high-yield Savings account with an impressive 4.15 % APY, far surpassing the national average of 0.35 %APY. This development represents another milestone for the tech giant as it progresses towards potentially becoming the world’s largest bank. The Apple Savings account, established through a collaboration with Goldman Sachs, offers numerous benefits, including an interest rate more than ten times the national average, zero fees, no minimum deposit or balance requirements, and an efficient, user-friendly interface. Additionally, it provides FDIC insurance for balances up to $250,000. Although the4.15 % APY is lower than returns from money market funds and 1 % below the 3-Month Treasury Bill Yield of 5.2 %, most people may not be aware of these alternatives. The key factors driving demand for Apple’s offering are convenience and the strong brand trust it enjoys. With products such as Apple Pay, Apple Cash, mPOS, Apple Card, Apple Pay Later, and now Apple Savings, the company is strategically constructing an Apple Finance empire poised to disrupt the traditional financial services landscape.

Money and Law

The evolving US position

• In most regards the legislative front line is happening in the USA. Treasury Secretary Yellen responded to the collapse of Terra/UST saying that: it“A comprehensive regulatory framework for US dollar stable coins is needed”. She also said that the stablecoin market is too small to pose systemic risk at this time. This is clearly an evolving situation, but the incredible consumer exposure to these risky products is likely to elicit a swift and significant response, and the timing seems right for intervention. The markets suggest that USDC will be the eventual winner.
• Koning meanwhile has looked into the different regulatoryapproachesused by various stablecoins.
  • The highly regulated New York state financial framework (Paxos, Gemini)
  • Piggyback off of a (Nevada) state-chartered trust [TrueUSD, HUSD]
  • Get dozens of money transmitter licenses [USDC]
  • Stay offshore [Tether]
• Proposedlegislationspecific to the concept of stablecoins has been advanced by Sen Toomey.There are many provisions in the bill, mostly pertaining to convertibility and the ever present problem of attestation of the‘backing’ of these products. Mention has already been made of the major bill advanced by Sen. Lummis and Gillibrand. This bill also includes significant provision around stablecoins. Lummis said it “Stablecoinswill have to be either FDIC insured or more than 100% backed by hard assets.”. This is good news for this section of the digital asssets space.
• Crucially there is also more clarity on privacy. This is a huge threatfrom digital money systems, and the USA is likely to lead. Remember though that none of this is yet law.
• Valkenburg, the lead researcher of a US think tank in digital assetssays thefollowing:it“Stablecoin TRUST Act, is a discussion draft mostly about stablecoins,but it also has important privacy protections for crypto users broadly:it puts real limits on warrantless surveillance by narrowing what info can be collected from third parties. Last summer we fought a provision in the infrastructure bill that damaged the privacy of crypto users by expanding the broker definition (who needs to report information about transactions to the IRS) & crypto 6050I reporting (reports on businessvtransactions over $10,000). The winter before we fought and successfully delayed a rushed proposal from the outgoing Trump administration tomandate that exchanges collect information about persons who are nottheir customers, who hold crypto at addresses in wallets they control directly. the Stablecoin TRUST Act would stop these encroachments,constrain the treasury from collecting any non public information unless they get a search warrant or collect only information voluntarily provided to an exchange by a customer and for a legitimate business purpose. If “voluntarily provided for a legitimate business purpose”sounds familiar to you, that’s b/c it’s the constitutional standard articulated by the Court in Carpenter describing LIMITED circumstances where warrantless searches of customer data are ok.It’s the standard we’ve advocated must also limit warrantless data collection at cryptoexchanges. If exchanges must collect information about non-customers,that information is, by definition, not voluntarily provided for a legitimate business purpose.”
• The ongoing battle for control over emerging stablecoins by the CFTC andthe SEC seems to be pushingthe American government into legislation. They have published a draftbilland there have been some congressional hearings over the matter. At this time the bill is nascent, and there are as yet no firm decisions, thoughas seems typical in the USA there are hardening opinions along political lines.

Paypal

• The mainstream stablecoin
  • Paypal accomplish what Libra did not, and have launched a dollarstablecoin into the aggressive regulatory landscape in the USA.
  • PayPal is launching a new ERC-20 stablecoin called PayPal USD (PYUSD) pegged 1:1 to the US dollar and issued by Paxos
  • It will be compatible with the Ethereum ecosystem and can be transferred between PayPal and Ethereum wallets
  • The stablecoin will support P2P payments, PayPal checkout integration, and convertibility to other cryptocurrencies
  • PayPal’s massive reach could drive significant crypto adoption if users take up the stablecoin
  • Regulatory comfort with PayPal’s stablecoin shows preference for tradfi over non-compliant crypto firms. This embrace by lawmakers signals a shift to encourage crypto innovation from compliant US firms, not “shady” crypto natives
  • Likely pressures Congress to finalize clear stablecoin regulation to enable innovation
  • Fits growing trend of tradfi firms like BlackRock entering crypto as regulation tightens

The evolving European and UK position

• Societe Generale is a leading European financial services group, basedin France. Founded in 1864, it provides a wide range of services,including retail banking, corporate and investment banking, asset management, insurance, and financial solutions for both individual and institutional clients. The bank operates globally, with a strong presence in Europe, Africa, and the Middle East, as well as a growing presence in the Americas and Asia-Pacific regions. Societe Generale is recognized as one of the largest banks in Europe. They have announced aEuro basedstablecoininitiative on the Ethereum blockchain, which has been met with howls ofderision from the crypto and Bitcoin communities, since everytransaction needs to be manually approved by the banking groups. In addition there is code in the contracts allowing them (or any party withaccess) to remotely ‘burn’ or revoke themoneyfrom a wallet. This is “decentralisation theatre”. The stablecoin isavailable only for institutional clients only, ‘aiming to bridge the gap between traditional capital markets and the digital assets ecosystem’.It is likely that this project is too clunky and experimental to ever see adoption.
• As mentioned briefly in the introduction the UK has recently signalledanenthusiasmfor stablecoins as “means of payment”. This is a stark reversal of their previous legislative momentum is possibly a response to the tighteningofrhetoricin Europe around such assets. The Financial Services and MarketsBill.became law in July 2022. An excerpt pertaining to stablecoins can be seen in Figure4.2.
• The U.K. Financial Conduct Authority’s chief executive, Nikhil Rathi,outlined the FCA’s regulatory goals at the Peterson Institute forInternational Economics: it“The U.S. and U.K. will deepen ties on crypto-asset regulation and market developments — including in relation to stablecoins and the exploration of central bank digital currencies.”
• The timing seems right to explore the use of stablecoins in metaverse applications up the list of choices. !
• []./assets/ukdigitalbill.png
• The UK signs into law regulation of digital representatives of value

Stables in metaverse applications

• It makes a lot of sense to consider stablecoin transfer as the moneyin metaverses. USDC is furthest along this possible adoption curve. Their partnership with global payment provider Stripe has enabledglobal dollartransfer within Twitter for users of their ‘Connect’ platform. This leverages thePolygon chain (mentioned in the blockchain chapter). Many digital wallets can be connected from the user end, with Metamask potentially being the easiest to integrate. The downside of this for our open platform is that none of these elements are particularly open, or distributed, and the users of the platform will still need to use an exchange to get the USDC to spend.This approach makes it easier for the vendors and product providers inthe metaverse applications to accept USDC, but everything else isactually harder.

Central bank digital currencies

• If 2023 was the year of the stablecoin then 2024 is likely to be theyear of the central bank digital currency (CBDC). CBDCs would likely notexist without the 2019 catalyst of FacebookLibrecrypto currency project, which is nowcancelledand defunct, pressure exerted on centralbanksby the concept of Bitcoin, and the stablecoins which emerged from the technology.
• It now seems plausible that the world is moving toward a plurality of national and private digital currencies. Figure4.3from the Bank for International Settlement, shows the growing acceptance within central banks. Their 2022 annual economic report dedicates a 42page chapter to thesubject. Hyun Song Shin, head of research at BIS said it “Our broad conclusion is captured in the motto, ‘Anything that crypto can do, CBDCs can do better.“
• Bank of America analysts Shah and Moss think that CBDC’s are‘inevitable’ by 2030, and believe that in the meantime stablecoinswill fill what they perceive to be this market gap.
• This text from the thinktankVoxEUhighlights the pressure on not to be ‘leftbehind’:it“Given the rapid pace of innovations in payments technology and the proliferation of virtual currencies such as bitcoin and Ethereum, it might not be prudent for central banks to be passive in their approach to CBDC. If the central bank does not produce any form of digital currency, there is a risk that it loses monetary control, with greater potential for severe economic downturns. With this in mind, central banks are moving expeditiously when they consider the adoption of CBDC. ”The Atlantic Council have a website which tracks global adoption.

More than half of central banks surveyed by theBIS said they saw issuance of a CBDC as possible.

• CBDCs are wholly digital representations of national currencies, and assuch are centralised database entries, endorsed and potentially issuedby national governments. The USA’swhitepapershows the approach. This thinking seems to have emerged in part from the‘Digital Dollar Project’, an Accenture funded think tank founded by exCFTC chairman Giancarlo.giancarlo2021cryptodad Curiously only TheBahamas seem to have a successful implementation, but it is a rapidly evolving space, and many nations arenow scrambling to catchup. A poston the LinkedInpageof the Bank of International Settlements highlights a research projectbetween 20 Asian banks which settles tens of millions of dollars usingCBDC tooling.
• The following text is taken from the March 2021 Biden government“executive order” on digital assets, and defines the current globall egislative position well.
  • Sec. 4. Policy and Actions Related to United States Central BankDigital Currencies. (a) The policy of my Administration on a UnitedStates CBDC is as follows: (i) Sovereign money is at the core of a well-functioning financial system, macroeconomic stabilization policies, and economic growth. MyAdministration places the highest urgency on research and development efforts into the potential design and deployment options of a UnitedStates CBDC. These efforts should include assessments of possiblebenefits and risks for consumers, investors, and businesses; financial stability and systemic risk; payment systems; national security; theability to exercise human rights; financial inclusion and equity; and the actions required to launch a United States CBDC if doing so is deemed to be in the national interest. (ii) My Administration sees merit in showcasing United States leadership and participation in international fora related to CBDCs and in multi country conversations and pilot projects involving CBDCs. Any future dollar payment system should be designed in a way that isconsistent with United States priorities (as outlined in section 4(a)(i)of this order) and democratic values, including privacy protections, and that ensures the global financial system has appropriate transparency,connectivity, and platform and architecture interoperability or transferability, as appropriate. (iii) A United States CBDC may have the potential to support efficient and low-cost transactions, particularly for cross‑border funds transfers and payments, and to foster greater access to the financial system, with fewer of the risks posed by private sector-administered digital assets.A United States CBDC that is interoperable with CBDCs issued by other monetary authorities could facilitate faster and lower-cost cross-borderpayments and potentially boost economic growth, support the continued centrality of the United States within the international financial system, and help to protect the unique role that the dollar plays in global finance. There are also, however, potential risks and downsides to consider. We should prioritize timely assessments of potential benefits and risks under various designs to ensure that the UnitedStates remains a leader in the international financial system.
• In traditional nation state currencies the central banks control the amountof currency in circulation by issuing debt to private banks, which is then loaned out to individuals.wang2021central The debt is ‘destroyed’ on the balance sheet to remove currency through the reverse mechanism. They also facilitate government debt,filardo2012centraland work (theoretically) outside of political control to adjust interest rates, in order to manage growth and flows of money.
• It is somewhat surprising that Powell, chair of the US Federal Reservehas recentlysaidit“Rapid changes are taking place in the global monetary system that may affect the international role of the dollar. A US central bank digital currency is being examined to help the US dollar’s international standing.”. This is a rapid evolution of the narrative, with implications. It seems unlikely that the world would sacrifice the traditional banking system in favour of centrally controlled money, but many things which cannot be done with traditional nation state money systems are possible with CBDCs, because they remove themiddlemanof private banking between the end user and the policy makers.
• Negative interest rates are possible, such that all of the money can lose purchasing power over time, and at a rate dictated by policy. This “removal of the lower bound” has been discussed by economists over the last couple of decades as interest rate mechanisms have waned in efficacy. It is not possible in the current system, and instead money must be added through quantitative easing, which disproportionately benefits some though Cantillon effects.cantillon1756essai; @bordo1983some
  • Ubiquitous basic income is possible in that money can be issued directly from government to all approved citizens, transferring spending power directly from the government to the people. This also implies efficiency savings for social support mechanisms.
  • Asset freezing and confiscation are trivial if CBDCs can replace paper cash money completely, as a bearer asset. Criminals and global ‘bad actors’ could have their assets temporarily or permanently removed, centrally, by suspending the transferability of the digital tokens.
  • Targeted bailouts for vital institutions and industries are possible directly from central government policy makers. Currently private banks must be incentivised to make cheap loans available to sectors which require targeted assistance.
  • Financial surveillance of every user is possible. In this way a ‘panopticon of money’ can be enacted, and spending rulesets can be applied. For instance, social support money might only be spendable on food, and child support only on goods and services to support childcare. This is a very dystopian set of ideas. Eswar Prasad says “In authoritarian societies, central bank money in digital form could become an additional instrument of government control over citizens rather than just a convenient, safe, and stable medium of exchangeprasad2021future.” This is possibly already happening in China through integration of outstanding debt data with the social credit system.
  • It’s a virtually cost free medium of exchange, since there is no physical instrument which must be shipped, guarded, counted, assayed, and securely destroyed.
  • The counterfeiting risk is significantly reduced because of secure cryptographic underpinnings rather than paper or plastic anti counterfeiting technologies.
  • Global reach and control is instantly possible for the issuer. This is a big problem especially for a reserve currency such as the dollar. Two thirds of $100 bills are thought to reside outside of the USA.
  • System level quantitative easing and credit subsidies are made far simpler and less wasteful when centrally dictated.
  • Transfer of liability and risk to the holder globally reduces the management costs for global deposits of a currency.
  • It may be possible to automate the stability of a currency through continuous adjustment of the ‘peg’ through algorithms or AI.
• The UK had been signalled that it is not interested in developing a CBDCstating that it seemed to be a solution in search of a problem,with the Lords economic affairs committee saying:it“The introduction ofa UK CBDC would have far-reaching consequences for households,businesses, and the monetary system for decades to come and may pose significant risks depending on how it is designed. These risks include state surveillance of people’s spending choices, financial instability as people convert bank deposits to CBDC during periods of economic stress, an increase in central bank power without sufficient scrutiny,and the creation of a centralised point of failure that would be atarget for hostile nation state or criminal actors.”
• Since those initial statements however it seems that the previously mentioned “fear of missing out” has forced legislators hand. The UKTreasury and the Bank of England are now exploring the possibility of launching a retail central bank digital currency (which they desperately hope will not end up called ‘Britcoin’), judging that “it is likely a digital pound will be needed in the future”. They have released aconsultationpaperinviting public comment. The consultation is aimed at informing the decision on whether to build the infrastructure for a digital pound,with a pilot test not expected before 2025.
• One of the key points raised in the proposal is the potential to cap citizens’ CBDC holdings, with a range suggested between sterling 10,000to sterling 20,000, to strike a balance between managing risks andsupporting the usability of the digital pound. This limit would allow most UK wage earners to receive their salary in the form of a CBDC but would still allow for competition with commercial banks. The digitalp ound would not offer interest, enabling banks to offer competitive deposit accounts.
• They are once again clear about the risks, highlighting that banks currently use deposits as a cheap source of funding for loans, and without that flow, they may become more reliant on expensive wholesale markets, driving up borrowing costs for users. In a severe scenario, abank run could undermine the capital base for the commercial bankingsystem.
• The Bank of England has stated that it will not implement central bank initiated programmable functions, but instead provide the necessary infrastructure for the private sector to implement such features withuser consent. The digital pound is intended to have at least the same level of privacy as a bank account and users would be able to makechoices about data use. This is scant comfort, as such features are intrinsic to the technology, and we have seen time and again that iflegislative and economic bodies are given a hammer, they will eventually find a nail to hit. Carlo, the director of ‘The Big Brother watch’pointed to2021 comments from John Cunliff of the bank of England when he said“There’s a whole range of things that programmable money could do like giving the children pocket money but programming the money so it couldn’t be used for sweets”. Again, this raises the potential for government stimulus that has to be spent within a certain time or it disappears. As an interesting side note here it’s thought that up to 14%of American stimulus cheques went to buying crypto, most notably in less well off families.bertomeu2023uncle It’s easy to imagine that a CBDCwould be barred from such a thing.
• The main motivation for issuing a CBDC is the assumption that there isdemand for a safe and stable way to use money online. A digital pound,issued and backed by the Bank of England, could be a trusted,accessible, and easy-to-use form of payment. The infrastructure would allow firms to design innovative and user-friendly services. The civilservice is hiring a “Head of CBDC” as seen in Figure4.4. ![]./assets/treasury.jpg The UK is clearly making moves to staff a new department for CBDC.
• Meanwhile in Europe, ECB President ChristineLegardesaid: it“On your question concerning CBDC, you know my views on CBDC and you know that I have pushed that project. Fabio Panetta is working hardon that together with members in the entire Eurosystem with the high-level taskforce that is working really hard on moving forward. Butin a way, I am really pleased that attention is now focussed on the role that cryptos can play and the role that Central Bank Digital Currency can have when they are implemented. We have a schedule, as you know. TheGoverning Council decided back in October ’21 to launch a two-year investigation phase, and it is at the end of that investigation phase that the decision will definitely be made to launch the CBDCs and to make it a reality. We can’t go wrong with that project. I am confident that we will move ahead, but that’s going to be a decision of theGoverning Council. I think it’s an imperative to respond to what theEuropeans expect, and I think we have to be a little bit ahead of the curve if we can on that front. If we can accelerate the work, I hope wecan accelerate the work. I will certainly support that and I was delighted to see that in the United States there was an executive order by President Biden to actually expect similar effort and focus and progress on CBDC, cryptos. I think that it will take all the goodwill ofthose who want to support sovereignty, who want to make sure that monetary policy can be transmitted properly using our currency, will endeavour.”
• She has expanded on these points saying in a video interview that the digital euro will be decided in October 2023. If passed, the current paradigm of cash spending and transfers will become even more restrictive. Lagarde justified the move by saying that she did not wantthe EU to be ‘dependent on the currency of an unfriendly country’ or afriendly currency activated by a private corporate entity’. Sheidentified Meta, Google, and Amazon.
• India has expressed far more interest in the technology, and of course their addressable market is huge! They have published a ‘conceptnote’ in whichthey assert that a digital Rupee would be faster, cheaper, and easier tomaintain. The key difference in India’s situation is the large areas ofthe rural population where mobile internet is more patchy. In suchsituations a cash equivalent stablecoin token with cash finality which can be transferred between mobile phone wallets itwithout an internet connection is a huge boon. It seems very likely that India is moving toreact to the innovation threat posed by cryptocurrencies to their owncash infrastructure. They are piloting thetechnology already.Similarly there seems to be a strong, and predictablyilliberalpush for transition to digital money in Nigeria. Again this is an enormous number of people, and it is hard not to be suspicious of future abuse of the system by governments.
• In the USA this text from Congressman Tom Emmer shows how complex and interesting this debate is becoming.it“Today, I introduced a bill prohibiting the Fed from issuing a central bank digital currency directly to individuals. Here’s why it matters: As other countries, likeChina, develop CBDCs that fundamentally omit the benefits and protections of cash, it is more important than ever to ensure the UnitedStates’ digital currency policy protects financial privacy, maintains the dollar’s dominance, and cultivates innovation. CBDCs that fail to adhere to these three basic principles could enable an entity like the Federal Reserve to mobilize itself into a retail bank, collect personally identifiable information on users, and track their transactions indefinitely. Not only does this CBDC model raise “single point of failure” issues,leaving Americans’ financial information vulnerable to attack, but it could be used as a surveillance tool that Americans should never be forced to tolerate from their own government. Requiring users to open an account at the Fed to access a United StatesCBDC would put the Fed on an insidious path akin to China’s digital authoritarianism. Any CBDC implemented by the Fed must be open, permissionless, and private. This means that any digital dollar must be accessible to all,transact on a blockchain that is transparent to all, and maintain the privacy elements of cash. In order to maintain the dollar’s status as the world’s reserve currency in a digital age, it is important that the United States lead with aposture that prioritizes innovation and does not aim to compete with theprivate sector. Simply put, we must prioritize blockchain technology with American characteristics, rather than mimic China’s digital authoritarianism outof fear.”
• Most analysts now seem to think that there is little appetite to replace established ’Western’ cash with CBDCs. Most significantly such productswould need the support of retail banks, and it is not in their interestto service such a product. Their business model relies on using retail deposits for providing loans, and it is these deposits, not cash itself that would be the most addressable market for a CBDC. Banks don’t want people to self custody money. In addition it exposes the whole banking system to a higher risk of bank runs. Such a self custody, interestbearing, central government backed asset would have significantly less counterparty risk than even bank deposits, and at times of high systemic stress it seems likely that money would flow to where it’s thoughtsafest, exposing the retail banks to runs. Fabio Panetta of the ECBsaid: it“If we give access to a means of payment, which is relatively limited, there are no transaction costs because you only need to have a smartphone. There will be risks that people could use this possibility to move, for example, their deposits of other banks or their money outof financial intermediates.”
  • All of the proposed solutions to these problems such as caps and negative interest penalties seem poorlythought through. Held and Smolenski present a detailed and rigorousnegativecritiqueof the dystopian ramifications of the technology. In their conclusion they point out that: it“Central bank digital currencies (CBDCs)represent an extension of state control over economic life. CBDCsprovide governments with direct access to every transaction in that currency conducted by any individual anywhere in the world. As governments worldwide routinely share data with one another, individual transaction data will quickly become known to any government in a datasharing arrangement. Given the frequency with which government databases are compromised, this arrangement virtually ensures that anyone’s transaction data will eventually become available for global perusal.”

Global Centralised Ledgers

• Beyond even national CBDCs it is now possible to find discussion aroundweaving these together at a supranational level. Indeed it seems that competition is starting to emerge. The Bank for InternationalSettlements (BIS) and the International Monetary Fund (IMF) have both presented plans to deploy global ledgers to support programmable CentralBank Digital Currencies.

BIS proposal

• The BIS proposed the concept of a Unified Electronic Ledger, which wouldcombine Central Bank Digital Currencies, tokenized money, and assets ona single platform. This ledger would enable smart contract functionality similar to Ethereum on a global scale. The BIS emphasized the benefitsof integrating different types of money and assets on a unified ledger,such as reducing delays, uncertainties, and trade financing costs. They also highlighted the importance of policy harmonization across jurisdictions for the success of such a system.

The IMF’s Proposal

• The IMF proposed a global CBDC platform that would facilitate cross-border CBDC settlement. The stated aim is to enhance interoperability, efficiency, and safety in cross-border payments, while allowing individual nations to maintain capital controls and limits onthe flow of funds. The IMF envision a permissioned (closed, but distributed) ledger, perhaps controlled by a platform operator (in the manner of SWIFT), to ensure unique ownership descriptions and prevent double spending. They emphasized the need for maintaining capital controls during national financial crises.

The Bank of England’s Experiment

• The Bank of England, in collaboration with the BIS Innovation Hub,conducted a field test of CBDC technology known as Project Rosalind. Thetest explored various CBDC use cases, including offline payments, retail transactions, and micropayments. The test focused on a centralised ledger hosted by the Bank of England and involved the development of APIfunctionalities for different scenarios. The BIS considered these experiments informative for the ongoing discussions on CBDCs.

Risks and mitigations

• The introduction of CBDCs could have a significant impact on both individuals and the existing private financial sector.
• For individuals, the risks of CBDCs include:
  • Privacy concerns: CBDCs could potentially be used to track and monitor individuals’ financial transactions, raising concerns about privacy and government surveillance.
  • Lack of anonymity: Unlike cash, CBDCs could be easily traced and linked to individuals, which may compromise their financial privacy and security.
  • Cybersecurity risks: CBDCs could be vulnerable to cyberattacks, which could lead to the loss of funds and personal information.
  • For the existing private financial sector, the risks of CBDCs include:
  • Competition: CBDCs could potentially compete with private sector financial institutions, which could lead to a decline in the use of traditional financial services.
  • Disruption: CBDCs could disrupt existing financial systems and business models, which could lead to a decline in profits and revenue for private sector financial institutions.
  • Regulation: The introduction of CBDCs could lead to increased regulation of the private financial sector, which could increase compliance costs and reduce profitability.
  • CBDCs could have implications on monetary policy, financial stability, and international relations. For example, it could change the way central banks conduct monetary policy, and it could also impact the global financial system and the role of the US dollar as a global reserve currency.
  • CBDCs could also bring about significant changes in the global payment system, which could have major implications for the financial industry, and for the private sector as well as for the central banks.
  • A single global ledger, especially one controlled by large international bodies like the BIS and IMF, could potentially lead to an unhealthy centralization of power. This could exacerbate existing imbalances in global financial control and further marginalize countries with less political and economic power.
  • A centralized ledger system would necessitate a high degree of technological dependence, which could leave countries vulnerable in the event of technological failure or cyber attacks.
  • A global ledger system would require a high level of standardization. This could limit the ability of individual nations to adapt their financial systems to local conditions and needs, potentially leading to a “one-size-fits-all” approach that might not be appropriate for all contexts.
  • There are concerns that the shift to digital currencies could leave behind those without access to necessarytechnology, contributing to financial exclusion rather than mitigating it.
• In conclusion, the risks associated with CBDCs are significant and multi-faceted. It is (hopefully) more likely that a blend of stablecoins, private bank issued digital currency (with a yield incentive) and perhaps some limited CBDC, alongside the new contenderBitcoin, will present a new landscape of user choice. Different modelsof trust, insurance, yields, acceptability, and potentially privacy,will emerge.
• Clearly a global, stable, wholly digital bearer asset in a native currency would ostensibly be the ideal integration for money in a metaverse application, but the whole concept seems deeply ‘wrong’, and it is likely that a transition to such a technology would be complex and painful. Either way, it is certainly not ready for consideration now.It’s important that central banks and governments carefully consider these risks before introducing CBDCs, but it’s not clear this is happening. It is conceivable that by working closely with the private sector policy makers could minimize any negative impacts, ensuring that any new regulations are designed in a way that protects the rights andprivacy of individuals, while also promoting financial stability andeconomic growth. Gerard, an incredibly staunch critic of all things crypto points to woeful adoption and manifestcorruptionin the attempts so far. We are not particularly hopeful either.