To Digitize or Not to Digitize a Currency? That’s the Question.
I have to admit, this should be the last article expected to come from a supporter of digitization and all the good it brings — especially for the unbanked and those on the fringes of digitized economies. However, I could not help myself, it’s like watching a runaway train and you can’t look away. I see the news of Central Bank Digitized Currencies (CBDCs) as one game changer that seems to cause yawns from many who should be more concerned about it. Who it changes the game for is another thing altogether.
It‘s an Arms Race, Stupid
Look, ever since China announced the launch and test of its digital yuan, governments around the world ramped up efforts towards a new global arms race developing their own digitized currencies. Everyone is bent on demonstrating their leadership in technological innovation, without stopping to reconsider how it may shape out in the end. Let us analyze some possible effects on two large players in this field; China and the U.S.
China’s adoption of their digital yuan doesn’t change much in their approach or operation. It is well known that China would love the yuan to displace or at least get equal consideration as the US dollar for the world’s reserve currency. The benefits of being a leading reserve currency are pretty clear from the power USA enjoys in economic trade and liberal printing of dollars in “quantitative easing” while maintaining an eye-popping deficit. That would not be possible if it wasn’t for the special status the dollar has as the premier reserve currency. If you don’t believe me, ask Zimbabwe or Venezuela when they tried the same stunt. It didn’t end well for them now, did it?
Oh, is That a Reserve Currency Dear?
Okay, picture China wielding a similar power as that of the dollar to print money and grow its infrastructure and military and the rest of the world just needs to tow the line or their economies falter? That is the power it seeks with a reserve currency. And one would argue that, in a back-handed way, or grand-master move, together with belt and road, digitizing the US dollar in “innovation competition” with the digital yuan may weaken the dollar enough to do just that.
On one hand, let’s ponder a digital yuan. With the current setup in China, even the most remote rural area is served by some form of electronic payment such as WeChat Pay. From various reports, we can assume that their government already has insight and access to review these transactions if they so wish. Now with a digital yuan, any foreign government that takes a yuan loan and spends the digital yuan, the Chinese government will be able to follow the money to where a local factory worker paid by a salary from the loan buys a bagel on the street side. This is expected and will be nothing new.
Then, on the flip side, envision the same scenario playing out with the US dollar. Many countries and their citizens around the world use the dollar, especially for international trade. It has served this role as world’s leading reserve currency ever since it took over from the pound sterling about a century ago. Heck, many illegal activities usually go on in dollars. If you have any doubts, name me a single international news report of a drug kingpin bust where they show stacks of yuan bills. Of course, it is because criminals know very well that whatever happens, they will always find someone willing to accept dollars as a form of exchange.
This is also the very reason governments around the world need to keep reserves of the dollar as well; not for themselves alone, but their citizens too. In any country, at any given time, they or a citizen will want to do international trade and that means, they usually need to do that in dollars. This forces the country to keep those dollars on the ready when needed, thus ensuring that there are dollar reserves nearly everywhere you go.
How Fast Can You Say “Cryptocurrency”?
Meanwhile, as the digitization of previously fiat currencies rolls out, a citizen in Switzerland and a drug lord in an undisclosed location are advised that, henceforth every transaction they do in dollars will have to be digitized and tracked by the US government. Trust me, they would drop the dollar faster than you can say “cryptocurrency”.
Sure, given the disorganization, fraud and processing limitations rife in open source cryptocurrencies, it is easy to dismiss them as an alternative to CBDCs. Further, being the largest players with armies and laws to enforce their will, governments will indeed be able to push product-market fit for their CBDCs.
With their freedoms and privacy gone, folks may start to seek alternatives to keep a semblance of anonymity in their transactions, more so for those who would not like the snooping of big government, especially if that government is not even their own. This is where cryptocurrencies may have a window of opportunity to grow past the CBDCs themselves. In fact, I may bravely forecast that CBDC rollout will be the much needed reason to adopt cryptocurrencies and the cure for the pesky market growth problem to finally stop the question of why the cryptocurrencies exist in the first place.
Every Dog Has It’s Day
And maybe, after reviewing the game board and having no dog in the CBDC race, smaller countries, such as El Salvador and Tanzania, have decided to skip ahead and simply adopt or consider adopting cryptocurrencies such as Bitcoin as their legal tender. That makes the power of a digital dollar much lower in such a country as its citizens can trade internationally without the need to store dollars in reserve which track their every transaction.
Eventually, as the opposing trend of adoption of crypto goes head-to-head with that of the roll-out of CBDCs, we are going to see an upheaval in global financial setup due to reversals or gains in strength and influence of some countries in the coming generations. This would mostly become evident when some governments, imposing their will on others with a threat of financial cut-offs or freely printing fiat, deficit-be-damned, gradually lose their power and suddenly, previously insignificant countries, especially those with abundant technological, natural or human resources, become economic strongholds.
For fintech innovations such as our OlyCash, how all these machinations affect what we do and plan, especially towards overcoming friction in the financial system remains to be seen. For one thing, it will surely make many innovations useless or at the very least impotent. Trying to see ahead with our OLY cryptocurrency may help but no one can predict how all this shakes out. Therefore, in the coming years, as governments pick a side on the crypto-versus-CBDC fronts and the contest reaches its peak, it is the best prepared businesses, which skated to where the puck was going, that would be able to take advantage of the situation and stay standing.
So, as autocrats strategize and plot to adapt to the changing economic landscape being forced onto them by digitization, the question in many of their minds will be “To digitize or not to digitize our currency?”
