With Sinclair Davidson and Jason Potts
It is unusual for the World Economic Forum’s Davos conference, held every year at the end of January, to be genuinely significant. But it seems this one was. Davos 2020 made clear that we are now living through a monetary reform era comparable to the great monetary events of the twentieth century.
The end of the gold standard, the creation of the Bretton Woods system in 1944, and that system’s collapse in the 1970s all brought about massive, structural economic changes. Our new age – the age of digital money competition – is likely to be just as disruptive.
At Davos the World Economic Forum announced a global
consortium for the cross-border governance of digital currencies (including the
class of cryptocurrencies stabilised against fiat money known as ‘stablecoins’)
and a toolkit for the world’s central banks to establish their own digital
central bank currencies.
The details of these Davos initiatives are less important
than what they symbolise. Central banks have been experimenting with fully
digital currencies for at least half a decade, ever since Bitcoin received its
first big waves of press. But their experiments are suddenly urgent, for both
commercial and geopolitical reasons.
On the one side, the Facebook-led Libra digital currency
project offers a vision of corporate-sponsored non-state private money. On the
other side, China is fast-tracking the development of a fully digital yuan,
with a barely disguised goal to challenge the American dollar’s domination
through technological innovation. Both projects create enormous problems for
the rest of the world’s central banks – let alone finance regulators and foreign
Libra has been faced with a concerted hostile attack from
central banks and regulators – an attack that begun literally the day it was
announced in June last year. Many of the Libra consortium have been pressured
into withdrawing from the project.
Mastercard, Stripe and Visa withdrew after they received a
letter from US Senators in October declaring that if they stayed in Libra they
could “expect a high level of scrutiny from regulators not only on
Libra-related payment activities, but on all payment activities”. The Bank of
France chief declared last week that “Currency cannot be private, money is a
public good of sovereignty”, and the French finance minister has warned
that Libra is not welcome in Europe.
This mafia-like behaviour from American and European
regulators is short-sighted – astonishingly so. Whether Libra ends up being a
successful global corporate currency or not, it represents a powerful and
competitive counterbalance to the Chinese digital yuan.
Details have been dribbling out about the digital yuan since
it was revealed in August last year. Its key feature is that it is fully
centralised. The People’s Bank of China will have complete visibility over over
financial flows, including the ability to control transactions tied to an
individual consumer’s identity. This offers China the digital infrastructure
for a type of financial repression that is without historical parallel.
And adoption is basically assured. The Chinese government
can coerce financial institutions to adopt the digital yuan, if necessary, and can
exploit the remarkably strong hold that digital payments like WeChat Pay and
AliPay have on Chinese commerce.
Let us hope there are some serious strategists thinking
about what happens if this digital currency becomes part of China’s foreign
policy toolkit – what the consequences of yuan-isation will be for those
countries torn between the Chinese and American spheres of influence.
This is the context in which the many of the world’s central
bankers came to Davos to spruik their own digital currencies. More than 50
central banks surveyed by the Bank of International Settlements are working on
some form of digital currency, and half a dozen have moved to the pilot project
stage. Our Reserve Bank told a Senate committee in January that it too has been
secretly working on an all-digital Australian dollar.
And of course in the background to this monetary competition
between the corporate sector and the government sector is the slowly growing adoption
of fully decentralised cryptocurrencies – the decade-old technology that first
sparked these waves of monetary innovation.
The global monetary system of 2020s will be a regulatory and
financial contest between these three forms of all-digital money: central bank
digital currencies, corporate digital currencies, and cryptocurrencies. The
contest has profound significance for the ability for governments to control
capital flows across international borders, for financial privacy, for tax collection,
and obviously monetary policy.
China has the authoritarian power to force adoption of its central
bank digital currency. Countries like Australia do not. So it is not obvious
which form of money will eventually dominate.
National governments have had nearly absolute control over
national currencies for at least a hundred years, in some cases much longer.
The end of the Bretton Woods system in the 1970s incited a
generation of economic reform, as domestic policymakers discovered that Bretton
Woods had been propping up all sorts of regulatory controls, trade barriers and
even labour restrictions.
We’re about to discover what centuries of state monopoly over money has propped up.