Digital Currencies and the Deep State

When crypto currencies hit the digital streets, roughly coinciding with the great crash of 2008, they were seen by many as a manifestation…

When crypto currencies hit the digital streets, roughly coinciding with the great crash of 2008, they were seen by many as a manifestation of radical libertarianism. Bitcoin advocates argued that only through the rigid control of supply could these new coins act as a store of value. Fiat currencies (e.g. dollars and pounds) had, in effect, been debased given the need for bank bailouts and monetary easing sustained by debt and central bank manipulated interest rates. Bitcoin (and a raft of competing currencies) offered the hope to restore trust in currency value.

It didn’t quite work out like that. Since 2008, to now, central banks (in most of the developed West) have maintained quantitative easing policies followed by near zero interest rates (or even negative interest rates). Interest is something from the pre-crash age. Meanwhile, despite the availability of cheap money, many business sectors have become zombified with consumer spending stifled by concerns about systemic risk. No assets are deemed to be safe anymore. And crypto volatility has hardly inspired confidence. Dodgy get-rich-quick ICOs (initial coin offers) have not exactly helped to create a crypto-revolution. It’s still a niche group pursuit with a whiff of dodgy.

However, with lockdowns de rigeur again and a Presidential election mired in controversy, bitcoin has broken a $15,000 barrier again. Sure, no asset classes are seen to be safe. But perhaps short-term volatility is the trade-off for long term performance of bitcoin. It certainly seems a better prospect than 50-year gilts with near-zero yield.

Think about that for a second, though. Crypto, and gold, are increasingly seen to be the definitive stores of value because their supplies are limited. Central banks, meanwhile, are killing what used to be money, through over-supply. With manipulated interest rates, money has nowhere to go. Sovereign debt is at eye-watering levels.

Meanwhile, under the cover of Covid-19, the deep state is back in play. Cash has never been so out of favour. Locked at home citizens are also locking up their savings and what little spending they are doing is online or via contactless payments in the few stores left open. Cash, apparently, is dead. Back in 2008 those cyber-punks could hardly have contemplated that digital payments would, indeed, take over the entire world. It’s just the wrong sort of digital.

The irony is that the citizenry of more egalitarian states, like Sweden, are driving the development of digital currencies, spurred on by the death of cash. Cash, after all, works for people. The unbanked can resort to cash. If it is not accepted anymore, that’s a problem — but it needn’t be.

Clearly, digital (fiat) currencies, can be centralised or they can be distributed. Think of old cash (notes and coins) as distributed and electronic bank balances as centralised. Public blockchain based cryptocurrencies have shown the way in being distributed. Hold a wallet of bitcoin, and only you know about it. The same thing can apply to digital fiat currencies.

Although, of course, if the state weighs-in with a centralised play then it’s curtains for anything approximating privacy-protected digital wallets.

As Ian Bogost put it in this article in The Atlantic, Anarcho-Capitalists just won’t stand for it.

The ancap worldview only supports sovereign individuals engaging in free-market exchange. Neither states nor corporations are acceptable intermediaries. That leaves a sparsely set table. At it: individuals, the property they own, the contracts into which they enter to exchange that property, and a market to facilitate that exchange. All that’s missing is a means to process exchanges in that market.

The means, of course, is to create digital currencies that don’t require intermediaries and that embrace the central core values of blockchain (the technology that gave us bitcoin) i.e. peer-to-peer networks.

Needless to say, Facebook’s proposed Libra coin doesn’t exactly tick that box. Facebook’s in the middle. Similarly, China’s digital yuan is issued and controlled by The People’s Bank of China, China’s central bank. This wasn’t exactly what the cyber-punk anarcho-capitalists had in mind.

So is it possible for central banks to have a crack at creating digital currencies that pass the peer-to-peer test?

There’s no consensus on this one. Some economists argue that central banks have no business getting involved in the doctrinal game of currencies overtly designed to cover people’s transactional tracks. Nouriel Roubini, for example, claimed, in a specially convened panel discussion on the subject at the World Economic Forum last year, that there could be no such thing as a CBDC (central bank digital currency) because there is simply no incentive for central banks to have transactions bypassing the various banks clearing systems.

But not all agree.

Laurence White of The Cato Institute puts it like this:

Proposals for “central bank digital currency” (CBDC) come in two basic types: account-based and token-based. I have been critical of proposals for an account-based system. Until recently, there didn’t seem to be much active interest in a token-based system.

White points out that the Digital Dollar Project is one approach to the creation of a token based, peer-to-peer digital dollar — a stark contrast to centralised CBDCs.

A similar approach is also being pursued in Sweden, where cash is disappearing fast (as in most Western economies). The digital krona is seen as a means of replacing cash with a digital version — with all the advantages that cash brings to the party, including social inclusion, privacy of transaction and a central bank guaranteed value. Trust the Swedes to come at things from the point of view of liberty and social inclusion.

CBDCs will, undoubtedly, emerge. And the debate is happening. Soon, there’s likely to be a global race for digital currency advantage in trade and to underpin free trade agreements. But the debate is by no means being won by big state afficionados. The tech is there to allow the development of digital currency platforms to make trade easier and payment more seamless without throwing liberty out with the bath-water. The challenge is to figure out how.