Money, wrote the French sociologist Marcel Mauss, is a social fact, best understood as an evolving social institution. In the heteronomous world of the Middle Ages, a plurality of private and public currencies circulated in commerce. It was not until the centuries since the 1648 Peace of Westphalia did state-issued currencies dominate. Today, the world is on the verge of another major transformation in money. In his renowned 1976 work The Denationalization of Money, Nobel Economics laureate Friedrich Hayek espoused free competition in the supply of money. The digital revolution since then has made Hayek’s vision a reality. From Bitcoin, the digital wallets of WeChat and Alipay, Facebook’s Diem, to the foray into central bank digital currencies (CBDCs) by governments around the world, a Darwinian struggle for currency supremacy is upon us.
To make sense of the impending age of currency competition, it is useful to adopt political economist Benjamin Cohen’s monetary geography, as outlined in his 1998 opus The Geography of Money. At one end of the spectrum is the state-centric Westphalian model with governments retaining their monetary sovereignty, albeit with far-reaching competition and hierarchy among national currencies. The other extreme is a market-driven world of denationalized money advocated by Hayek. Somewhere in between is the co-existence of, and even partnership between, public and private monies and payment systems. Digitization has accelerated developments across the entire spectrum.
First, technology is set to create fiercer competition among national currencies. To be sure, the inter-penetration of national monetary spaces occurred long before the digital age, as exemplified by “dollarization” in countries with unstable domestic currencies, or within the old Soviet ruble zone and the yen bloc in Asia Pacific. But technological advancement will only make cross-border currency usage easier, with a larger number of monies facing domestic competition from more currencies that originate abroad. Furthermore, CBDCs have the potential to create new monetary systems for countries to form economic alliances and avoid sanctions, a risk exemplified by US financial sanctions in response to the Russian invasion of Ukraine.
It is therefore not a surprise that governments around the world are advancing considerations for CBDCs to preserve their monetary sovereignty and technological competitiveness. According to a survey by the Bank for International Settlements (BIS), the vast majority of central banks – 86 percent – are exploring CBDCs. As a national currency that dominates in the digital sphere would create enormous geopolitical power, JPMorgan Chase calls digital currency an exercise in “geopolitical risk management”.
China is a frontrunner in CBDC. The People’s Bank of China (PBoC) began experimentation with its CBDC, now called the e-CNY, as early as 2014. With its convenience, efficiency and low cost, the e-CNY can increase the use of the renminbi in China’s sphere of influence along the Belt and Road countries. In response, there are increasing calls in the US for a digital dollar to maintain its status as the world’s reserve currency. With a new payment architecture, the argument goes, a US CBDC would enshrine longstanding US values such as economic stability, technological innovation, liberty, and free enterprise into the digital age. Partly motivated by geopolitical competition, the European Central Bank (ECB) is also launching the digital euro project.