Government Digital Currencies

The Bank of Thailand just launched the world’s first blockchain-based platform for government savings bonds based upon IBM Cloud technology. In its first two weeks of operation, $1.6 Billon in bonds were sold. This streamlines what previously was a substantially more complex and slow multiparty settlement process that involved redundant validation steps and error-prone manual reconciliation. The bond issuance process time was reduced from 15 days to 2, with lower costs and greater transparency.

The distributed ledger for these transactions provides a unbureaucratic single information source for them that is available in real time. It also captures a record of all the hands that these bonds have been held in, as well as the holding periods. If such a record were complemented by a sufficient amount of contemporary international markets data, it could conceivably be used by such a government as training data for models that indicate the types of buyers it can expect for its bonds during certain economic and market conditions. The Thai currency itself remains unchanged: the physical Baht.

On the e-currency side, I have written before about the portent for governments to issue digital monies (CBDCs) in light of their indebtedness. In short, doing so (while outlawing alternate cryptocurrencies) enables: (1) For all money in the economy to be visible ‘on the grid’ to them, and thus impossible to hide from taxation. (2) The inability for people and businesses to withdraw and hoard their money as physical bills, thus ending bank runs, and (3) Since this form of money is ‘electronically captive’ as-such, this also means that it will remain in banking accounts even when interests rates are near, or below, the ‘zero bound’.

First-mover countries that shift their money to electronic will need to deal with a fundamental issue. In any period when their electronic money coexists with other major, relatively stable physical currencies, they may need to prevent their citizenry from moving their money off-grid by converting it into the physical notes of other countries. It will be interesting to see what types of controls the latter countries may impose on foreign currency trading in the face of this scenario.

Last Friday, the ECB announced that it was moving to ready itself to launch digital money “in case a changing world requires it”. The ECB gave several scenarios likely for it to call for the Euro-switch in its report: https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_euro~4d7268b458.en.pdf . Among them are that this form of money could be deemed more ‘green’ for the planet (scenario 7), that a massive hack of credit cards and other forms of existing digital payment systems could be mitigated by a flight over to ‘e-Euros’, and the fact that physical money poses a risk of COVID transmission (scenario 5). Rumblings are that some officials feel an “ideal” launch time for digital Euros to come into effect will be at the beginning of 2021.

The report contains a third chapter addressing the likely effects of a digital euro, including possibly disruptive ones. This chapter does not highlight the three potentialities it presents to their indebted native governments that I listed in the previous paragraph, naturally. But it does have a section entitled ‘Effects of cross-border use of the euro”, which concludes with this stipulated restriction on the new e-money:

Requirement 13 (R13): Conditional use by non-euro area residents. The design of the digital euro should include specific conditions for access and use by non-euro area
residents, to ensure that it does not contribute to excessively volatile capital flows or exchange rates. Such conditions could take the form, for instance, of limits on or adequate remuneration policies for the holdings of digital euro of non-euro area.

Right. Capital controls that could prevent Europeans from converting out of their e-Euros into the physical currency of another sovereign (hopefully while not constraining international trade). Interesting. Technology is generally beneficial when it is utilized to deliver services with lower cost and greater efficiency, but not as much when it used as a means of control. Recall that until the president agreed to sign it, ‘digital dollars’ was an item that was included in the first COVID relief bill (?) for the United States.

When a central bank issues a CBDC, it becomes not only its regulator, but it’s clients’ account holder as well (their money is ‘on the grid’ with the bank). Alternatively, it can issue the digital currency in a decentralized manner, analogous to how physical cash is distributed. Whether the first-mover central banks choose decentralization or its opposite will be worth taking note of.

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