DIGITAL CURRENCY: Cashless Conclusion

By Vmenkov (Own work) [CC BY-SA 3.0 ( or GFDL (], via Wikimedia Commons

I’ve spent the year in these Patron Posts largely looking at the big action ahead — where are central bankers taking money. I’ve avoided conspiracy theories and looked only at the words of central bankers, themselves, as they speak quite openly now and reveal clearly where banks are heading and what is holding them back.

Much of the discussion shared has been about the will of central bankers all over the would to move to CBDC’s. (Central Bank Digital Currencies.) They even have their jargon abbreviation for it now it is so common in their thinking.

Since it is the end of the year, I want to put a wrap on that with the words of a couple of central bankers and their colleagues that all tell the same story we’ve been hearing about where we are most certainly headed monetarily. It appears to me all roads lead to the same destination/conclusion.

Go digital to end the global US dollar

The Bank of England’s outgoing governor, Mark Carney, this year advocated replacing the dollar with a digital currency like Facebook’s Libra.

Mark Carney, who in his lunchtime address laid out a shocking, radical proposal – perhaps the most stunning thing to ever be unveiled at Jackson Hole – urging to replace the US Dollar with a “Libra-like” reserve currency in a dramatic revamp of the global monetary, financial and economic order.

Carney’s proposal comes just a few months before he’s due to step down from his position leading the Bank of England. We note that, because it is a well known fact that central bankers tend to speak the truth once they have quit their position of power and influence. Yet it is quite shocking for Carnery to do so while still in office.

Zero Hedge

Carny didn’t just recommend central banks create or adopt digital currencies, but especially that they make certain such a currency ends the hegemony of the dollar and that it doesn’t get replaced with something that gives another nation hegemony.

“In the longer term, we need to change the game,” Carney said. “When change comes, it shouldn’t be to swap one currency hegemon for another.”

While hegemony is about power, there is also an issue of trust emerging in the desire to move away from the dollar. Leaders and bankers around the world are no longer willing to vest as much trust in the US central bank or the US administration to adequately manage the global currency as they have been in the past:

Maurice Obstfeld, a former chief economist of the IMF now at the University of California, Berkeley, said that when other countries could predict US behaviour, they were more willing to cede control of the global monetary system to Washington. But that approach is coming under increasing scrutiny. “When the US was viewed as a responsible leader of the world economy, there was less concern,” he said.

Sebnem Kalemli-Ozcan from the University of Maryland said US monetary policy pushed investment in and out of developing economies in ways that their own central banks could not control.

Mr Carney made the radical suggestion that a private or state-run digital currency could serve as a global counterbalance to the dollar. But he and others acknowledged that there was no realistic mechanism to decouple the global economy from the US dollar in the short term.

Financial Times

Central banks must adapt to financial technology (FinTech)

In “Winds of Change: The Case for New Digital Currency,” Christine Lagarde, the new head of the European Central Bank (and former head of the International Monetary Fund) writes,

Let me begin with the big issue on the table today—the changing nature of money.

When commerce was local, centered around the town square, money in the form of tokens—metal coins—was sufficient. And it was efficient….

But as commerce moved to ships … and covered increasingly greater distances, carrying coins became expensive, risky, and cumbersome….

Innovation produced bills of exchange—pieces of paper allowing merchants with a bank account in their home city to draw money from a bank at their destination. The Arabs called these Sakks, the origin of our word “check” today. These checks, and the banks that went along with them, spread around the world….

Why is this brief tour of history relevant? Because the fintech revolution questions the two forms of money we just discussed—coins and commercial bank deposits. And it questions the role of the state in providing money. We are at a historic turning point. You—young and bold entrepreneurs gathered here today—are not just inventing services; you are potentially reinventing history. And we are all in the process of adapting….

A new wind is blowing, that of digitalization. In this new world, we meet anywhere, any time. The town square is back—virtually, on our smartphones…. We float through a world of information, where data is the “new gold”—despite growing concerns over privacy, and cyber-security. A world in which millennials are reinventing how our economy works, phone in hand.

And this is key: money itself is changing. We expect it to become more convenient and user-friendly, perhaps even less serious-looking. We expect it to be integrated with social media, readily available for online and person-to-person use, including micro-payments. And of course, we expect it to be cheap and safe, protected against criminals and prying eyes.

What role will remain for cash in this digital world? Already signs in store windows read “cash not accepted.” Not just in Scandinavia, the poster child of a cashless world. In various other countries too, demand for cash is decreasing—as shown in recent IMF work. And in ten, twenty, thirty years, who will still be exchanging pieces of paper?… Even cryptocurrencies such as Bitcoin, Ethereum, and Ripple are vying for a spot in the cashless world, constantly reinventing themselves in the hope of offering more stable value, and quicker, cheaper settlement.

Providers of e-money argue that they are less risky than banks, because they do not lend money. Instead, they hold client funds in custodian accounts, and simply settle payments within their networks. For their part, cryptocurrencies seek to anchor trust in technology. So long as they are transparent—and if you are tech savvy—you might trust their services.

Still, I am not entirely convinced. Proper regulation of these entities will remain a pillar of trust. Should we go further? Beyond regulation, should the state remain an active player in the market for money? Should it fill the void left by the retreat of cash?


Who cannot hear that central banks clearly see digital currency as the competitor to their own roles and as being a certainty in the future? The retreat of cash is now a foregone conclusion in their arguments. Who cannot hear central banks crying out to maintain the relevance of their roles in this epochal transformation into a world of cashless societies?

What is the right answer to balance the purported need for digital currency with the need for stability and security? Of course, you know where Lagarde is leading with those concerns:

A case for Central Bank Digital Currencies

Should we go further? Beyond regulation, should the state remain an active player in the market for money? Should it fill the void left by the retreat of cash? Let me be more specific: should central banks issue a new digital form of money?

This is not science fiction. Various central banks around the world are seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF.

This [new digital] currency could satisfy public policy goals, such as (i) financial inclusion, and (ii) security and consumer protection; and to provide what the private sector cannot: (iii) privacy in payments.

Predictably Lagarde believes the only answer to the inevitability of digital currency now that so many companies are working on digital currencies of their own, is one under central bank and government control, which means under the public-private partnership of governments giving continued currency charters to their nation’s largest banks.

What I found interesting to note was how she admits and then dances and writhes around one of our biggest concerns about banks owning and controlling national currencies:

The second benefit of digital currency relates to security and consumer protection. This is really a David versus Goliath argument. In the old days, coins and paper notes may have checked the dominant positions of the large, global payment firms—banks, clearinghouses, and network operators. Simply by offering a low cost and widely available alternative.

Without cash, too much power could fall into the hands of a small number of outsized private payment providers. Payments, after all, naturally lean toward monopolies—the more people you serve, the cheaper and more useful the service.

Yes, that is the concern with central banks, especially those like the Federal Reserve that are owned by private banks. We are concerned that too much power has fallen into their hands. Cash is the only thing that gives us some freedom from those government-chartered monopolies. In Lagarde’s view, however, this is a problem with privately owned companies creating their own digital currencies:

For a start, private firms may under-invest in security to the extent they do not measure the full cost to society of a payment failure. Resilience may also suffer—with only a few links in the payment chain, the system may stop working if one of these links breaks. Think about a cyber-attack, a glitch, bankruptcy, or a firm’s withdrawal from the local market.

Haven’t we already seen all of that in the major banks that are shareholders in the Federal Reserve System? Banks all over the US have under-invested in security and had the private information of millions of customers stolen. My own credit union has suffered that problem. So, why would we trust big banks, which are private firms, to do any better through the Fed?

The third benefit of digital currency I would like to highlight lies in the privacy domain. Cash, of course, allows for anonymous payments. We reach for cash to protect our privacy for legitimate reasons: to avoid exposure to hacking and customer profiling, for instance.

Yeah, and also government profiling and intrusion. Are we going to entrust our privacy to be run by a cartel of old-world bankers, empowered by governments that want — no demand — access to the security of iPhones and access to all information about clients in Swiss banks and tax information sent from all US banks to the government? Actual cash affords us that anonymity if we choose to use it. Digital cash controlled by banks and/or governments never will.

Oh, but they will have to have FISA warrants to get the information? Really? That’s gone well, hasn’t it?

Consider a simple example. Imagine that people purchasing beer and frozen pizza have higher mortgage defaults than citizens purchasing organic broccoli and spring water. What can you do if you have a craving for beer and pizza but do not want your credit score to drop? Today, you pull out cash. And tomorrow? Would a privately-owned payment system push you to the broccoli aisle?

That will always be the downside to digital currency. No matter what business runs it, they will exploit your information for marketing purposes. No matter what government runs it, they will salivate over having your information “for security” purposes. The only choice that stays safe in terms of anonymity is cash, be it fiat or metal.

So, give up cash, and you’ve lost all of that … to someone. And Lagarde admits governments are not going to be any better:

Would central banks jump to the rescue and offer a fully anonymous digital currency? Certainly not. Doing so would be a bonanza for criminals.

There you go. This is what I mean by “dancing and writhing.” She’s leading you down the road of believing you need CBs and their governments in control of digital currency to be secure, but then acknowledges that they will not provide anonymity either for security reasons (crime control).

She doesn’t have an answer to that, and I don’t think any central bankers do:

My main point will be that we should face these risks creatively. How might we attenuate them by designing digital currency in new and innovative ways? Technology offers a very wide canvas to do so.

The best she comes up with is …

Central banks might design digital currency so that users’ identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law. So when I purchase my pizza and beer, the supermarket, its bank, and marketers would not know who I am. The state might not either, at least by default.

So, yes, it has to rest on the FISA warrant solution or some extension of it to digitally recorded information from transactions. And the best Lagarde can say is “the state might not” have access to all your information. She knows the US state already has access to all of her phone calls and emails, which are all recorded, but they can supposedly only be viewed under a FISA warrant (a protection that might not even apply to those who, like Lagarde, are not citizens of the US).

Anti-money laundering and terrorist financing controls would nevertheless run in the background. If a suspicion arose it would be possible to lift the veil of anonymity and investigate.

So, there will be a computer with algorithms set to flag your activity for anything that looks suspicious. FISA warrants will be required for a human being to view that activity.

As soon as you move away from cash — especially under government auspices but also under most private digital currencies — all of your security from corporate or government spying is vested in something like a FISA warrant as a layer between you and the digital information.

We have all learned how secure that system is. If even someone who is president of the United States cannot be assured of tight security in the FISA process, what hope is there for any other individual? And, if even the president of the United States cannot pin down who is responsible for abusing that system with the help of millions of dollars and supposed full control over all government agencies in order to investigate, what hope do little ol’ you or little ol’ me have of protection or security?

This system will be quite a beast.

We could, of course, just stay with good ol-fashioned cash and give up the convenience of digital, but we won’t.

Then Lagarde comes down to the central concern of central bankers, just as you can imagine:

If digital currencies are sufficiently similar to commercial bank deposits—because they are very safe, can be held without limit, allow for payments of any amount, perhaps even offer interest—then why hold a bank account at all?

That’s what they really want to make sure never happens. Competition is rising, and that is forcing CBs to find a way to compete in order to protect the proprietary interest their banks have.

In the words of other central bankers

The fact is central bankers don’t have an answer to these big questions that are swirling around in everyone’s mind any more than anyone else. They don’t have a currency they have been waiting in the wings with until you are ready to accept it. You can see that in the comments I’ve shared in previous Patron Posts and particularly see it in Christine Lagarde’s gyrations here. She sits high at the top and is clearly still searching for answers and not giving any.

Logically, they can’t have their own digital currency read to go, tidy as such a long-time conspiracy is, because the technology (FinTech) is just being developed. Central banks don’t have access to any better coders and thinkers than all the best high-tech companies out there. So, they are waiting for others to experiment, waiting for others to reveal where the problems lie and then will come up with their own or take over one that rises to the top, using the powers of their government backers and arguments like those above. They are struggling right now to find the right position that will not suffocate innovation but that will keep money under their control:

If digital currency became too popular, it might ironically stifle innovation. Where is your role if the central bank offers a full-service solution, from digital wallet, to token, to back-end settlement services?

What if, instead, central banks entered a partnership with the private sector—banks and other financial institutions—and said: you interface with the customer, you store their wealth, you offer interest, advice, loans. But when it comes time to transact, we take over.

More fundamentally, the case is about change—being open to change, embracing change, shaping change. Technology will change, and so must we. Lest we remain the last leaf on a dead branch, the others having decided to fly with the wind.

With Lagarde’s concerns as context and their need to let the big FinTech players figure out the technology, here are the words of a few other central bankers:

Huw van Steenis, a former senior adviser to Bank of England Governor Mark Carney, is Chair of Sustainable Finance at UBS and a member of the World Economic Forum’s Global Future Council on the Monetary and Financial System. He writes,

How radically will digital currencies change our methods of exchange and the way that we think about money? With innovation in digital payments barreling ahead, these questions are now commanding the attention of the World Economic Forum and other international institutions….

The question for policymakers is not whether to try to shape the digital-money revolution, but how….

Digital money is already a key battleground in finance, with technology firms, payment processing companies, and banks all vying to become the gateway into the burgeoning platform-based economy. The prizes that await the winners could be huge….

As I argued in a report for the Bank of England (BOE) earlier this year, improving these processes could yield significant returns and social benefits….

Some central banks have begun to explore the option of issuing their own digital tokens. Others are studying the thorny legal and regulatory challenges posed by digital money, so that they can safeguard monetary and financial stability. For her part, Lael Brainard, a governor on the US Federal Reserve Board, recently suggested that the risks of cryptocurrencies outweigh the benefits. By contrast, the People’s Bank of China is forging ahead – though not toward the decentralized or “permissionless” blockchain model envisioned by crypto enthusiasts.

Project Syndicate

The main roles he counsels central banks and their governments to take in the development of digital currencies?

  • Creating the infrastructure to enable alternative payment methods to interconnect.
  • Ushering in the next generation of regulation.
  • Champion better digital identification, essential to improving financial inclusion, curbing cyber fraud, and reducing costs.
  • Supporting stronger messaging standards to improve cross-border payments, reduce costs, and prevent fraud.
  • Last but not least, creating a roadmap for the decline of cash.

You can see this is not a conspiracy that was all worked out back in the seventies. It is something CBs and their governments are struggling to get a grip on as digital takes over in the private sector and as people demand it for convenience.

The China road

You may want to hold on to the anonymity of cash and the ability cash gives you to avoid a certain amount of government control, but central banks and their pocket politicians are going this direction, regardless. Competition among themselves, not just from FinTech companies, is pushing the change.

China is just about ready to launch their own CBDC:

Over and over we hear the same concerns about cash and digital currencies that are not government controlled creating personal privacy problems, national security problems, national fiscal stability problems, and especially crime problems. So, who can possibly believe governments will not decide to control this currency or that they will not use their familiar partners — central banks — to do that?

Who can doubt we are moving that direction quickly now?

Leave a Reply

Your email address will not be published. Required fields are marked *