Digital currency means pennies for people, bills for banks and … Moolah for machines.
When the Industrial Revolution caused an explosion in population and trade in Georgian England, the lack of funds for transactions (essentially coins) went from a nuisance to a major national problem. There was money for the rich (banknotes, gold and silver coins) but no money for the masses.
A gold coin couldn’t buy a loaf of bread or beer, so private industry stepped in to mint coinage (i.e., base metals and alloys worth a fraction of their face value), and that coinage circulated to (very successfully) facilitate wage payments and retail spending. The private sector provided the new money for the new economy. At least for a while …
Image from the ‘Illustrated London News’ in 1851. Birmingham’s rise to prosperity during the … [+]
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The factories had no coins to pay their workers, the workers had no coins to buy their essentials, and the economy suffered. While the government did nothing, the private sector responded. The innovators in charge were the ones at the center of the industrialization storm, mostly from central England around Birmingham, and they used the latest technology (the steam-powered press at the time) to create money.
(I recommend George Selgin’s excellent book ”Good money” To this topic.)
These private sector “tokens” (copper coins with a face value above their metal value) were quickly accepted and by 1795 the change problem was almost resolved by trading government-owned coins at a discount to private tokens! A generation later, the official state mint adopted the token currency and began issuing modern coins.
Why am I telling you this? Well, it’s because economic history tends to suggest that the transaction money will eventually have to be provided as a public good, as the margins on the tokens used for transactions are small (and tend towards zero). This is what economists call the “change problem”.
(And there is also a very good book about it: “The big problem of change“By Thomas Sargent and Francois Velde.)
Fast forward to our post-industrial revolution. Both traditional financial service providers (we want to tease them and call them centralized finance, or “CeFi”) and their blockchain-based rebellious cousins in decentralized finance (or “DeFi”) are already using stablecoins in one form or another. This shows a real need for digital dollars, pounds and euros to be traded between blockchain applications, hence the development of Circles USDC and Tethers USDT and many others.
It makes sense to ask again why these should be provided by the central banks. The Bank of England’s view is that the digital currency could be central bank public digital currency (CBDC) or privately provided “stablecoins” and says that a “safe regulatory environment“For stablecoins would form the basis for sustainable innovation. But the big change problem means I’m skeptical about whether a private digital pound could compete with a Bank of England digital pound in the long run or whether a private digital dollar could compete with a Fed digital dollar in the long run.
Would stablecoin users continue to hold them if risk-free central bank money were available as an alternative? Writing in the BIS annual economic report, Research director and economic advisor Hyun Song Shin says “CBDCs are a concept whose time has come” and predicts that they will be adopted through cryptocurrencies (which he calls speculative assets rather than money).
Either … or. And?
The Center for Macroeconomics Panel of experts on the UK economy, in their June 2021 survey, agreed almost unanimously that a CBDC would benefit the UK economy (and half of the panel also believe that such a CBDC would have limited impact on the banking system). Well, things are moving forward and the Bank of England did announced a new type of clearing account known as an “omnibus” account that enables central bank money to be used in interesting new ways. The operator of a payment system can hold funds in one of these collective accounts on behalf of its participants in order to support a large number of high-quality payments.
One of the first users of such an account will be Fnality, formerly known as Utility Settlement Coin (USC). Fnality is now backed by 15 major financial institutions, from Barclays and State Street to UBS and ING, and plans to go live once his application for a collective account has been approved to bring programmable money to the wholesale markets. When Huw van Steenis, who was an advisor to Mark Carney, said “This is something to see, not the Bahamas sand dollar”.
But should CBDC be used exclusively for wholesale transactions, like the Bank of England banknotes were in the industrial revolution, or should it be used by private customers to replace token money from private printing machines? As the Financial Times recently noted, the answer must be the latter. It has always been problematic that the benefit of safe custody of government funds goes to financial institutions rather than the public (except in the form of cash).
I agree. But are wholesale and retail the only two types of digital currency that are needed? I was keen to read a commentary on central bank digital currency that appeared in a Policy paper to design a digital euro of the German credit industry (DK). Now I have to say that it caught my attention to see such a conservative organization discussing a third type of digital currency. In addition to a wholesale CBDC for financial institutions and a retail CBDC for people, they called for an industrial CBDC for machines.
They point to the need for “tokenized commercial bank money” to complement the two already widely discussed forms of CBDC. In particular, they identify a need that arises from the Internet of Things. To enable more complex interactions within this environment, they propose a digital currency that is optimized to enable transactions based on automated “contracts” to increase process efficiency. They see what they call Industry 4.0 as an integral part of our future because it is a critical platform for the productivity gains we need to achieve economic growth and prosperity across society.
Returning to the experience of the Industrial Revolution and the steady transition from the innovative private money of the “Birmingham button makers” to the standardized and purpose-built money of the Royal Mint, I think it is not a difficult prediction that such experiments in retail will be incorporated into the design of the The inevitable digital dollars for retail payments will flow into and influence the design of the inevitable digital tokens for the wholesale market, while the experiences of the great financial crash will flow into and influence the design of the inevitable digital tokens for the wholesale market. But what will influence the design of the industrial site?
In addition to the deliberations underway at the Fed, the Bank of England and the European Central Bank, it is time to see not just what people want or what the banks want, but what the robots want as well.