Money In The 21st Century
Digital money is coming...and it won't be Bitcoin
When my son graduated high school in 2022 he decided to travel overseas alone. After he left I wandered into his room and discovered a to-do list for the trip (see below). While I was pleased that he managed to ‘find a good book’ and ‘bring up the garbage’, I also noted with some alarm that he had left for Europe without any euros.
Turned out, it didn’t matter. He managed to schlep around the continent for several months using some combination of Apple Pay, a debit card and the kindness of strangers.
While the ability to travel for months across multiple countries without using cash surprised me, to Richard Holden it’s just the start. Holden is a Professor of Economics at the University of New South Wales in Sydney and author of the new book: Money in the Twenty-First Century: Cheap, Mobile and Digital. He thinks big changes are coming to money and says we face the choice of pro-actively managing that change or having it thrust upon us.
Holden says we are heading for a society where digital money replaces cash. But cash won’t be replaced with Bitcoin or other crypto currencies. Their transactions costs are too high, their values too unstable and the energy requirements of their distributed virtual ledgers too demanding. Instead, serious competitors will emerge from private companies or foreign countries, that can layer digital money on to an existing large network.
Bezos Bucks?
Holden uses the hypothetical prospect of a digital currency launched by Amazon to illustrate how a private monetary alternative to the dollar could gain a foothold. Imagine if your Prime membership came with an allocation to Amazon’s own currency (the Bezos buck, $BEZ) and you could use it to buy anything on their network. What if the prices for initial users of $BEZ were 5% or 10% lower. It would be tempting to try, right?
Once momentum started to build, Amazon could offer to pay employees and suppliers in $BEZ, again perhaps offering a premium to incentive usage. $BEZ would be an international currency. You could use it to pay for deliveries in any country where they operated. Foreign workers could send money back home in $BEZ, saving the usurious fees they now pay on currency transfers.
There is more. To ensure confidence and stabilize the value of $BEZ, Amazon could back back it 100% with safe investments in bonds issued by major currencies. Unlike existing crypto stablecoins that operate this way, $BEZ wouldn’t need to make any profit from its reserve investments. The value of having its own currency would be so vast that Amazon would not to take risk with its reserve funds to earn extra yield, making it very safe.
That’s good right?
But think about the implications. As $BEZ grew so to would its reserve fund, which could end owning vast amounts of government bonds in multiple currencies. Amazon would gain a new lever of power. For example, if it didn’t like a particular country’s tax policy, it could decide to reduce the amount of that nation’s currency in the reserve fund, which would push up interest rates and drive down the exchange rate. Or, as a reward to friendly policy, it could do the reverse. Janet Yellen blocked Facebook’s attempt to launch its own currency (diem) in 2021 because she realized the enormous power that a successful private digital currency could amass and how difficult it would be to claw back.
Paying For A Cab Ride in Sydney with e-CNY
A digital competitor could also emerge from another country. Maybe a country with a vast global network of trading relationships and ex-patriots. Like…China. As Holden says, China is not just trialing a digital currency, it’s rolling one out. The e-CNY is already used in its major cities and just a few months ago was introduced in Hong Kong.
What surprised me was Holden’s remark during our podcast that some cab drivers in Sydney also take it. Of course, it’s not legal tender in Australia. But if the driver plans to buy stuff on Alibaba, China’s dominant ecommerce company, or wants to transfer some e-CNY to a relative in China, then it might be preferable to Aussie dollars.
It might seem a big leap to go from cabbies in Sydney accepting e-CNY to a genuine threat to the US$. But listen to Holden:
China might turn the e-CNY into a full-fledged retail currency while the United States stuck with the physical dollar…This would give China an efficiency advantage in its payment system…it would also put the e-CNY in prime position to be at the center of a wholesale central bank digital currency (CBDC) settlement regime…Without even a wholesale CBDC, the United States would be unable to participate or organize a competing network.
He thinks this could eventually make the e-CNY the world’s reserve currency. I’m skeptical - not because these aren’t meaningful advantages, they are. But capital still can’t flow freely in and out of China and the range of available investments for those who would want to hold e-CNY isn’t remotely comparable to what’s available in the US.
Still, complacency is not a great strategy.
Fedcoin
Holden’s makes the case for heading off these threats by introducing what he calls fedcoin - a US digital currency.
I’ve seen visions of digital dollars where we all hold accounts directly with the Fed. These seem like non-starters because they threaten the viability of banks. Holden’s vision is different. All fedcoin holders would have digital wallets in which their transactions would be recorded and the Fed would maintain a core ledger to ensure these were legitimate. But we would still have bank accounts. Banks would still compete by offering accounts with different interest options and fees. They would continue to match lenders and borrowers. We wouldn’t notice much change, except the disappearance of physical cash.
There are clear ‘defensive’ benefits to this - it would thwart digital competitors and preserve the enormous power that comes with the dollar’s dominant position. But Holden also lists a number of ‘offensive’ reasons for making the change.
Retiring cash would eliminate its use in illegal activities. Yes, you and I would lose some privacy, but by far the main beneficiaries of the anonymity of cash are drug dealers, human traffickers and tax evaders.
Also, if fedcoin was designed as a digital token it could unlock the promise of Web 3.0, a conception of the internet that moves us away from the control of centralized technology platforms. With fedcoin as the trusted token underpinning the payments network, the oft-promised but so far undelivered vision of smart contracts and ultra low-cost and near instantaneous transactions might come to pass. I’m over my skis here, but these sections of the book are worth spending some time with.
Will Fedcoin Happen?
Holden’s book does a great job of outlining the risks of the status quo. The threats seem credible, but I struggle to see his proposal gaining traction yet. First, the libertarian streak runs deep in America. Even if cash mainly protects criminals, eliminating it would be opposed strongly on privacy grounds.
Second, fedcoin designed as a digital token would threaten ether and bitcoin. The crypto lobby would put up a massive fight. A Trump administration would have no interest in pursuing it.
Third, commercial banks would lose power to create money by making loans. Right now, if a bank gives you a loan for $100,000, it simply deposits that money into your bank account. Bingo, that deposit is newly created money. Under Holden’s system only the Fed could issue fedcoins, so that power would disappear. Commercial banks don’t actually make a ton of profit from ‘money creation’, but Holden’s setup would represent a very big change to how monetary policy operates. That’s not a deal breaker - monetary policy is vastly different now than it was a mere 15 years ago. But that change has happened by stealth, in reaction to crises. This would require entirely new laws and regulations.
It’s a book worth reading because these issues are not going away just because there are big hurdles toward the US adopting digital money. I think it’s something that will happen, but probably not until the threats Holden outlines become much more apparent.
Listen to my conversation with Richard Holden:
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99.9% of my transactions are already digital … how does a digital coin as opposed to a digital transaction help me? I’m still struggling to understand the value w/i the US … perhaps there is value across currencies, as in your AUS taxi driver example