In the new monetary geography, writes technology policy expert Andy Yee of the University College London Centre for Blockchain Technologies, the authority of states is by no means eliminated, but they have to operate with reduced monopoly power. With the emergence of Bitcoin and other decentralized crypto-currency and central bank digital money such as China’s e-CNY, governments must now act like strategic oligopolists, competing for the allegiance of end users for their currencies. This suggests a future of public-private partnership, with central banks creating their digital currencies, while outsourcing the distribution, innovation, and consumer-facing activity to the private sector.
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.
Second, the advent of cryptocurrencies is opening up a new Hayekian world of denationalized money. Ever since Bitcoin’s invention in 2008, hundreds of cryptocurrencies worth around US$2 trillion have emerged. They feature innovations that are unbundling the functions served by government-issued fiat currencies, challenging the monetary sovereignty of central banks. As economic historian Harold James wrote, “the world is quickly moving to money based on information rather than on the credibility of a particular government.”
More recently, a range of private entities are moving to issue their own digital currencies. The canonical example is Facebook’s Diem. It points to a future where digital platforms re-bundle monetary functions with their functionalities, data, and social networks, creating formidable network effects in their own ecosystems. In an extreme scenario pointed out by some scholars, the prevalence of systemically important platforms could lead to the emergence of “digital currency areas” that transcend national borders.
Another important development is the rise of stablecoins such as Tether, cryptographic tokens which peg their values to sovereign currencies. They have grown rapidly to worth over US$180 billion from a standing start only a few years ago. With a crypto-financial infrastructure that exists outside the confines of the traditional financial system, they provide a settlement network that is insulated from the demands of regulators. This effectively reintroduces “free banking” into the realm of possibility – prior banking epochs in the US and Scotland during the 18th and 19th centuries when private entities issued money outside of state control.
Third, governments will not stand by while their monetary authority is being eroded by private competition. The fact is that governments can combine their role as catalyst, overseer, and operator to defend their position and shape market developments. The eventual divestment of Diem by Facebook after intense regulatory pressure is a good example. On the other hand, central banks can harness the networks and technologies of private entities to strengthen the appeal of their monies, in turn gaining an upper hand in the Wesphalian competition between sovereign currencies.
This points to a future of public-private partnership. In fact, the concept of a “synthetic CBDC” proposed by the International Monetary Fund (IMF) is exactly that. In this model, central banks create their digital currencies, while outsourcing the distribution, innovation, and consumer-facing activity to the private sector. For central banks, not only is this model cheaper and less risky, it also allows their digital currencies to be associated with large platform ecosystems, while bringing private entities into regulatory oversight.
China’s e-CNY is following this approach. It has carved out a role for commercial banks and digital platforms such as Alibaba and Tencent to distribute and utilize e-CNY, thus extending its reach and influence. Diem was originally designed to allow central banks to connect their CBDCs to a rich digital ecosystem. More recently, US policymakers have recognized the opportunities for US dollar-backed stablecoins to strengthen the domestic currency through private sector innovations.
In this new monetary geography, the authority of governments is by no means eliminated, but they have to operate with reduced monopoly power. They must now act like strategic oligopolists, competing for the allegiance of end users for their currencies. A game-theory assessment of the above three developments along the monetary spectrum suggests that governments would most likely leverage digital network effects to gain an upper hand over other public and private currencies.
In such a world, central banks have tremendous opportunities to harness technological progress to modernize their sovereign currencies and payment systems. For this to happen, regulatory standards are needed to ensure open competition among private sector intermediaries and allow innovation to flourish. Such standards should also guarantee interoperability, ensure security, safeguard privacy, and mitigate money laundering and illicit financing.
The risks, however, are equally profound. Money and credit are the single biggest influence on how the wealth and power of nations rise and decline. As such, it has long been a hotly contested battleground. It is true that digitization can open new possibilities for value exchanges and international monetary relations. However, the divergent digital ideologies of the US, Europe and China, with the fragmentation of data flows, applications and technology stacks, could extend into the digitized monetary geography. It is therefore all the more important for us to guard against a future of digital currencies that could evolve unpredictably, and work to ensure that it remains beneficial for humankind.
Auer, Raphael; and Boehme, Rainer. (June 8, 2021) “Central bank digital currency: the quest for minimally invasive technology”, BIS Working Papers, no. 948, Bank for International Settlements (BIS), Basel, Switzerland.
Auer, Raphael; Boar, Codruta; Cornelli, Giulio; Frost, Jon; Holden, Henry; and Wehrli, Andreas. (June 11, 2021) “CBDCs beyond borders: results from a survey of central banks”, BIS Papers, no. 116, Bank for International Settlements (BIS), Basel, Switzerland.
Auer, Raphael; Frost, Jon; Gambacorta, Leonardo; Monnet, Cyril; Rice, Tara; and Shin, Hyun Song. (November 4, 2021) "Central bank digital currencies: motives, economic implications and the research frontier", BIS Working Papers, no. 976, Bank for International Settlements (BIS), Basel, Switzerland.
Yee, Andy. (March 22, 2018) “Blockchain in China: Tussle Between Control and Openness”, AsiaGlobal Online, Asia Global Institute, The University of Hong Kong.
University College London Centre for Blockchain Technologies