There is a great war being fought today which is not obvious to many of us. It does not involve firing of bullets or missiles and has no direct physical or comprehensible casualties. Instead, only to have the slow decaying effect of impoverishing society and leading to eventual despair and death. In some regions, the effects of this war is magnified by rampant corruption and mismanagement by those in power that robs a vast majority of the populace their fundamental rights to participate in free market.
The race to win currency wars
This is the currency war orchestrated by the most powerful central banks across the world with a singular focus of keeping the status quo on the fiat-currency hegemony. There is one highly coveted trophy on offer and this one gives the winner the title of global reserve currency. What’s at stake puts even the US-China trade war in shame. Establishing a national currency as the global reserve currency gives the power to determine the momentum of the global economy through fiscal policy and control of the monetary supply.
Over the last few years, the emergence of Bitcoin has made the central banks to observe developments in the cryptocurrency space with some degree of suspicion. Initially dismissed and bemused, the growing adoption of Bitcoin raised few alarm bells. However, none of this or other cryptocurrency projects sparked a bitter reaction more than the announcement from Facebook to launch Libra by 2020.
Why fear the Libra?
Facebook and it’s social media is used by over 2 billion people around the world. This naturally sets the foundations for the next monetary powerhouse, one that is controlled by a private company with a wide user base. In fact, the Libra project counts Mastercard, Visa, Paypal and others amongst a host of founding members that will facilitate overnight adoption of the cryptocurrency and challenge the status of any central bank issued fiat-currency. The banking elite that was dismissing Bitcoin as a fad now have to come to terms with a potent adversary that could put a serious dent on their hegemony.
The response was a swift media retaliation by questioning the privacy features and legitimacy of Libra. Facebook’s recent handling of data breaches and it’s continued questionable practices should be cause for concern for anyone but the project still represents a significant innovation over the incumbent.
Take for instance the 2 billions humans who are shut out of basic financial services for reasons related to politics and a myriad of other artificially engineered roadblocks. Excessive human suffering is perpetrated by the banking industry through limitation of access to economic participation and other basic rights that we take granted for in our day to day reality. A cryptocurrency like Libra could potentially level the playing field with mobile device penetration at it’s highest level now and the need for a traditional bank account removed entirely. In addition, the friction involved in terms of fees charged on transactions could also be significantly lowered thus increasing the efficiency of free markets.
Emergence of Central bank digital currencies (CBDC)
As the threat of displacement looms, the banking elite would either need to adapt or succumb to the blockchain revolution. Your intellectual guess on what’s going to take place next would probably be an accurate one. Stablecoins which are essentially cryptocurrencies backed by asset such as fiat-currency was quickly identified as the solution. There are currently several private companies offering stablecoins with the most widely traded one being USD Tether. Instead, stablecoin issued by central banks also referred to as CBDC is designed to squarely place the monetary control within governments (We will get into a separate blog post on the issues with centrally controlled money). The People’s Bank of China was first of the block to signal its intention to release a digital yuan by the end of 2019. A list of other countries currently evaluating the concept is reviewed here. So…, we are of to the races again.
The outgoing Bank of England governor, Mark Carney was very apt in his assessment of the current economic uncertainty and the necessity to replace the US Dollar as the global reserve currency. His preferred option would be a global digital currency backed a by network of central banks instead of another national currency such as the Chinese Renminbi. Even the International Monetary Fund (IMF) is seriously eyeing the concept of a synthetic CBDC which would allow control of monetary policy compared to other alternatives. Only time will tell on what happens next, but we wait with tepid enthusiasm.
A digital currency which merely replaces the fiat-system does little to alter the disproportionate economic realities that people face currently. The incessant interest rates cuts observed in developed economies coupled with billions of dollars printed daily (a sexy term for this is quantitative easing) in the purported context of propping up the economy does little for the man on the street. Entire generation’s wealth could evaporate with such inflationary measures taken by the central banks. Negative interest rates are now becoming a norm with the Bank of Japan and recently the European Central Bank (ECB) applying these last gasp measures.
The unfolding future
Cryptocurrencies which are decentralized and with a fixed monetary supply may be the potential answer but this requires a radical rethinking of the economic philosophy that currently pervades our financial institutions.