Private Cryptocurrencies versus Central Bank Digital Currency (CBDC)
The issue of private cryptocurrencies versus central bank digital currency (CBDC) has two aspects. One is the systemic dimension; the other one is about the economic efficiency of the means of payment.
As far as the systemic dimension is concerned, this paper takes a chartalist view, i.e. money as a matter of a nation-state's sovereignty (commonly shared in the euro area). In the history of money since the formation of early ancient states, money has, with only a few temporary exceptions, always been the prerogative of kings and other rulers – traditionally as the prerogative of coinage, in modern times as the banknote monopoly of central banks as well as in the form of central-bank book money, the so-called reserves, for use by the banks in interbank payments. Central banks have been increasingly nationnalised over time, but they have also become increasingly independent of government directions, similar to the independence of the courts.
In addition, there is now also digital cryptographic money, digital tokens. Today's private cryptocurrencies – most famously Bitcoin, also Ethereum – claim to be money, just like state currencies. In practice, however, they are mainly used as a new type of financial asset, rarely as a means of payment, and if so, most likely as a vehicle for transferring funds between two national currency areas, as a faster and cheaper alternative to bank transfers. In some countries, digital money tokens are already available as Central Bank Digital Currency (CBDC) denominated in the national currency, for example in China. In Europe, the development of a digital euro is quite advanced, as is the case in a number of other countries.[1] However, most governments and central banks are ambivalent about actually introducing CBDC now, due to the divergence of interests between progressive supporters of CBDC and conservative defenders of the existing bankmoney regime.
Chartalism includes the concept of legal tender. This refers to money issued by the government (coins) or the central bank (banknotes, reserves, now also CBDC). Such money is to be accepted as a means of payment unless the parties involved agree on a different means of payment. In today's monetary system, legal tender serves as the monetary base or base money. This first level of money is the basis for second-level private money surrogates, today bank book money (bank deposits, account balances), then, for the last few decades, third-level e-money, money market fund shares and, more recently, stablecoins, which are pegged 1:1 to the exchange rate of an official currency, at present most often the US dollar.
According to I. Fisher, national monetary sovereignty is 'of constitutional importance'. For Keynes, the chartalist understanding of money was 'out of the question'. Monetarism was based on chartalism as a matter of fact. The young M. Friedman and the early Chicago School were, like I. Fisher, advocates of full reserve banking, a precursor to sovereign money theory. Scientifically and politically, chartalism was established by the British Currency School of the 1830s, in contrast to the Banking School of the time, which advocated private bank money independent of a central bank and government.
The term chartalism was coined by G. Fr. Knapp in 1905. According to him, money is 'a creature of law', of public law, not a matter of civil law and private contracts. Nota bene, this is about the monetary system, including monetary policy and the creation of money, as different from the uses of money. In an open and free economy, the use of money is an individual matter for the owners of the money, whether in the banking sector, firms, or other private and public households. The central bank should not be a parallel economic government or a central financial planning authority. For this reason, credit guidance by the central bank should not take place as a rule, if at all in an official state of emergency.
The independence of central bank monetary policy from government directives as well as the separation of monetary order/policy from the use of money are in fact elements of the separation of powers, elements of checks and balances – and principles that have been present in German ordoliberalism for a hundred years; in contrast to the libertarian Austrian School after L. von Mises, Fr. von Hayek and Huerta de Soto, most recently disseminated in America as the Neoaustrian School and Anarchocapitalism (M. Rothbard).
Nation-state monetary sovereignty is a thorn in their side and they want nothing to do with the notion of legal tender. Many of today's proponents and users of private cryptocurrencies consciously see themselves as supporters of such radical libertarian anti-state monetary policies. They propagate the 'denationalisation of money' (Hayek), and also those who may not be aware of this are in fact acting in the interests of such radical privatisation of money and the currencies in which the money is denominated.
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Now to the efficiency of the means of payment. Digital tokens can bring some additional benefits compared to today's book money. Depending on the system design, payments can be faster and cheaper than bank transfers are today. The tokens can be programmable by users in connection with smart contracts, making payments when certain conditions are met. This will be useful in the management of large companies and public administrations. Furthermore, the potential for unwanted big-brother-watching-you surveillance is rather lower, or at least no greater than in today's bankmoney regime.
Digital tokens can be seen as a modern form of cash. The tokens move directly from one digital wallet to another, like cash from hand to hand, no more book money, no more account balances that represent a bank liability on that bank's balance sheet - and therefore a default risk for the holders of the balances. Today's book money, our account balances, is fully exposed to the risks of the banking sector and the financial economy. Put bluntly: our money is held hostage to the banks' balance sheets. This will no longer be the case with CBDC, for example a digital euro in public circulation, just as it isn't the case with traditional cash, the classic form of sovereign money. The safety and security of CBDC, which becomes 'unvanishable', so to speak, regardless of what may happen to banks and financial markets, even in times of crisis, is per se a considerable stabilising factor.
However, this only applies to CBDC, not to private cryptos. For the majority of today's cryptos, their secure existence in crises can be disputed, as they are not themselves first-level legal-tender base money. As far as they are backed by other monetary surrogates and securities, their solvency may be jeopardised. An exception to this is Bitcoin, in that its amount cannot be increased arbitrarily and approaches a final limit by way of its mining (computing) process. Currently there are 19 million Bitcoin, and the final quantity is said to be around 21 million, but not to be reached until around the year 2140. Apparently, an exorbitant increase in value is assumed here, so that even the smallest amounts of additional Bitcoin are still worth the ever-increasing computing effort.
In terms of transfer efficiency, today's private cryptos are slow and expensive. They cannot keep up with the RTGS systems of central banks.[2] The euro payment system TIPS (Target Instant Payment Settlement) achieves 6,000 to 10,000 book money transfers per second. Visa or Mastercard still manage around 2,000. Bitcoin, by contrast, only achieves very slow 4–7 transactions per second. Ethereum at 15 barely manages more. This is due to the laborious verification process on the blockchains of these cryptos. It also entails an immense amount of computing and electricity consumption, which means environmental burden and possibly also high transfer costs depending on the situation.
The advantages of CBDC that private cryptos do not have, in addition to its stock safety and transfer efficiency, include the following:
<> The substitution of bankmoney with central-bank money in the public circuit means an expansion of the quantity lever of central-bank money, and thus increased effectiveness of interest rate policy as well as re-enabling of monetary quantity policy.
<> This in turn enables better control of money creation (which today effectively lies with the banks) and more effective readjustment of the money supply, resulting in a more steady and stable development of money and finance.
<> Not least, this comes with in increased seigniorage to the benefit of the public purse, possibly used for a tax cut or handed out as a citizens' dividend.
To avoid misunderstanding, chartalism as outlined here does not categorically exclude private cryptos, at least not stablecoins as a third-level money surrogate pegged 1:1 to a national currency, they are to it. Compared to conventional bank transfers (with an inbuilt crediting delay), stablecoins are a cheap, real-time means of payment. In this respect, their use is currently increasing, including across borders, especially involving countries with less developed and expensive banking infrastructure. However, stablecoins, like other cryptos, are also another playground for illicit-purpose payments, such as in drug trafficking, money laundering, blackmail, or simply black labour.
There is nothing to idealise about stablecoins, as little as about the past development of bankmoney up to its current dominance and systemic instability. If stablecoins were to compete with bankmoney and replace it to a significant extent, nothing would be better in terms of monetary policy, just more complicated; including the denomination of most stablecoins in US dollar.
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Things become truly problematic with private cryptocurrencies, in that these in fact claim to be base money in their own right, such as the aforementioned Bitcoin or Ethereum. They enter into direct substitutive competition with national currencies – at least potentially, assuming such private currencies were to be used as a means of payment on a very large scale, both within and across national borders.
So far, this is futurist vision, not foreseeable reality. But there is a precedent for it, which is Facebook's 2019/20 plan for a private cryptocurrency called Libra, backed by a consortium of international financial and technology corporations. The plan met with strong resistance, not only from the banking sector, whose book money would be displaced, but also from politicians, central banks and governments in the interest of national monetary sovereignty, especially in the US concerning the hegemony of the US dollar.
Now, five years on, this may have changed with the combination of Big Tech, Big Money and Big Gov, personified in the near-billionaire Musk and D. Trump in his second US presidency. Musk and Trump have launched their own meme cryptos – Doge coin and Trump coin. Trump wants to make the US the 'crypto capital of the planet'. To this end, Trump has issued an executive order prohibiting the further development of a digital dollar by the US Federal Reserve and the US Treasury.
This is turning the monetary history of the US upside down. The US has had a barely interrupted tradition of government-issued coins and paper money, since the early 18th century in the form of colonial bills. Continental dollars helped to win the War of Independence, even though the British heavily devalued these dollars with inflationary counterfeit money. US presidents from Lincoln in 1862 until well into the 20th century issued US Treasury dollar notes, known as greenbacks, for a long time used in parallel with Federal Reserve notes since 1913, and still valid legal tender today.
Now this president, who wants to 'make America great again', has prohibited this nationnal tradition to be continued into the digital age with CBDC, that is, a US Fed-issued digital dollar. At the same time, Trump claims to be strengthening the global hegemony of the US dollar. This is inherently inconsistent, even for someone who is out to capture the state for private profit and power, and to this end demands the US Federal Reserve to hold cryptocurrencies as part of its currency reserves. It is to be hoped that such fundamentally wrong changes of direction will be stopped and reversed. If a large consortium of Big Tech and Big Finance were to launch another cryptocurrency today, without the involvement of the US government but with its acquiescence, then things could possibly get dicey for US monetary sovereignty, the base money of the Federal Reserve, as well as for today's dominant role of banks and bankmoney.
Economists like to preach the blessings of competition; rightly so, but only on condition of effective checks and balances. Because in the real-world economy, actors prefer whenever possible to get rid of the competition in order to achieve a shielded position or a position of market supremacy. Today, private monopolies are prevented by the authorities if possible. But massive concentration processes with the formation of oligopolies occur incessantly. In particular money, finance and national currencies are subject to strong interference and power struggles.
The ultra-libertarian anti-statism of those who preach the denationalisation of money and currencies fails to recognise that alongside legal and statutory authority and command, money is the most important social medium of control and exercise of power. But for some inexplicable reason, libertarian Neoaustrians seem to think that power politics and manipulative machinations are a characteristic of politics, government and central banks; as if commercial banks, financial markets and the real economy were exempt from such behaviour. There is something absurd about such lopsidedness. In the hypothetical case of mass proliferation of private cryptocurrencies, the occurrence of power struggles, machinations and concentration processes is practically inevitable. Massive concentration processes have already taken place in Bitcoin mining in recent years. And of course there are the larger and the smaller cryptos from the outset, with correspondingly different market positions and financial strength.
Even so, it is unlikely that private cryptocurrencies will seriously challenge national currencies any time soon. For now, the acceptance of private cryptos depends on their being re-convertible into national currency via exchange platforms. Without this 'reinsurance', many investors will shy away from using cryptos as a means of payment or as a financial investment. Secondly, established forces in both national and international banking, finance and politics will continue to resist private cryptocurrencies. And thirdly, and not least, there are the functional problems of private cryptos themselves.
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The currently existing hundreds, even thousands of cryptos is historically reminiscent of the situation with too many different coins in the European early modern period through to the end of the Thirty Years' War; coins from everywhere, full-value good coins and debased bad coins, with unstable parities. Soon thereafter, a similar situation arose with the flood of private banknotes and princely treasury bills from the late 17th century until well into the 19th century. For money users it was almost impossible to know how much valuable cover – gold and silver at the time – was really behind the paper money, and how far one could trust the princes and private banks who issued the paper money. This led to problems of acceptance, was a hindrance to trade, and came with unnecessary transaction costs. What was the solution to the problem? The efficient answer was the central-bank note monopoly on the basis of a standard national currency unit; initially for state-licensed private central banks, later increasingly as nationalised central banks. Since then, efficient payment transactions could normally be taken for granted, albeit within the technical possibilities of the time.
There are good reasons for the state monopoly on the use of force by the police and military instead of private mercenary armies, civilian militias and thugs from criminal milieus. It also makes sense to have one single state legal system instead of having the national law, foreign laws, Christian canon law and Sharia law side by side 'competing' against each other. Something like this exists in failed states under conditions of civil war. It is equally dysfunctional to have multiple currencies within one state instead of a single currency area, unless it is about a failing state with a broken national currency. The use of parallel currencies is then a case of currency flight within one's own country.
With the many cryptos of today, said historical problems seem to be repeating themselves, especially when there is no currency or capital cover behind the digital tokens. Even then, their exchange rate depends above all on the not necessarily reliable condition of a large and stable number of users. In a way, the fascination with private cryptos today is similar to that with modern works of art – you cannot be sure whether the pieces are really worth the money or whether they can go.
In any case, there is nothing to idealise about the competition between many different cryptocurrencies. Most private cryptos founder on the problems of acceptance and transactional usability. Apart from that, in the hypothetical case of massive growth of private cryptos, the crypto market will undergo a corresponding concentration process. The larger and stronger ones will squeeze out the smaller and weaker ones. The result would be private crypto oligopolies, acting worldwide across national borders, with a market capitalisation larger than the GDP of most of the world's 195 countries.[3]
The radical libertarian anti-statism of the private crypto world does not serve a world of human rights and civil liberties, but rather an undemocratic world of big-tech financial oligarchs and authoritarian autocrats, a world at the discretion of the ultra-rich and super-powerful.
Footnotes
[1] Central Bank Digital Currency Tracker - Atlantic Council.
[2] RTGS = immediate Real-Time Gross Settlement, without prior clearing.
[3] The World's Tech Giants, Compared to the Size of Economies (visualcapitalist.com)