Three currency wars, not one

This short blog post describes three different types of currency wars that seem to be happening at the moment.

The phrase “currency wars” is not new – typically is has referred to deliberate devaluation of one’s own currency to increase competitiveness of exports.  If your currency is worth less, then your goods are cheaper to foreigners, so they buy more of them, which is generally good for your country.

Yet with increased discussion and relevance of fintech, wallets, central bank digital currencies, Libra, bitcoin, etc, it seems to me that there is more going on.  I’ve identified three distinct wars (battles? fronts?) being fought:

  1. Currency devaluation to increase competitiveness
  2. Offshore e-money supremacy
  3. Public money vs private money

1. Currency devaluation

This is typically what people mean when they talk about currency wars.

Countries try to keep their currencies from becoming too strong so that their exports remain competitive.  There are a few ways of doing this, including officials talking down the value of the currency, lowering interest rates and talking about keeping them low (sometimes called “forward guidance”), increasing the amount of money in circulation (via quantitative easing or other means), and trading in the market, selling local currency for foreign currency.

This is the stuff Wikipedia talks about in the “Currency war” entry.

2. Offshore e-money supremacy

You may be familiar with “dollarisation” – think of physical hard currency (typically USD) being used outside of the USA.  There are many examples of this, typically in emerging economies such as in Latin America, Africa and some countries in Asia.

Although a regulator may not have sight or strong jurisdiction over use of their currency abroad, it certainly increases that country’s power over the foreign country (Is is soft power?  Hard power?  Something in between?).

Now, with the rise of use of e-money wallets from China (WeChat Pay, Alipay etc), we see a rise of Chinese RMB being used electronically outside of China to facilitate commerce.

As an example, someone in Cambodia buying a coffee and paying from their WeChat wallet to the merchant’s WeChat wallet (in RMB but maybe any of the currencies they support – currently GBP, HKD, USD, JPY, CAD, AUD, EUR, NZD, KRW). This could look like a merchant transaction or just a consumer to consumer (peer-to-peer if you want) transaction.

The point is, commerce is happening using foreign currencies outside the visibility of local authorities, and maybe outside the direct visibility of that currency’s authorities too. And it’s not just coffees – similar methods can be used for larger business transactions too.

Once people are paying in the foreign currency, it’s not a huge leap to be pricing in those foreign currencies too.

What do we call this? Renminbification?  Renminbing?  Yuanning? I want to claim all of these words.

Now, if the private sector has been successful in pushing usage outside the border, imaging what a state-sanctioned central bank digital currency could do.

Electronic currency usage outside the border is a new war, and wallets (e-money) are the new weapons.  Wallets and apps can spread much more quickly than physical cash: they’re more effective weapons.

3. Public money vs Private money

Central banks have a job to do – typically to keep the economy ticking along nicely and maintaining the safety and predictability of the payment systems (electronic and physical). Their tools are related to their influence on their currency – whether this is affecting the value of their currency, the cost of borrowing money, or the amount of money in circulation.

Examples of private money include:

  • electronic money without issuer (including cryptocurrencies such as Bitcoin, Ether, etc)
  • privately issued money (stuff like Libra, issued by private entities)
  • perhaps you can include issuer-less physical money (gold).

(Of course it doesn’t really matter whether this stuff is recorded on a blockchain or not, and whether these are backed by anything or not, or redeemable or not – they’re still all examples of private money.)

Even e-money (digital money issued by a private entity, backed 1:1 with bank deposits or very low risk assets (eg government bonds) denominated in the same currency) can feel less under the central bank’s control than deposits in bank accounts. Examples are your USD in Venmo, your RMB in WeChat Pay, your INR in PayTM, your SGD in PayLah.

If private money is used extensively in a community, then the tools that central banks have to fulfil their duties are less effective.  Everyone wants to do a good job and everyone wants their tools to be effective.

So central banks naturally tend to have an uneasy relationship with money outside of their control. It dilutes their ability to do their job.

Today, I’m less interested in the public vs private money competition in developed and stable economies – the public money is pretty good/stable/useful. Where it will get interesting is in emerging and unstable countries, perhaps those who already prefer to use someone else’s currencies. Is there a role for private currencies in those places? Those were Libra’s target markets. It feels like there is something brewing between public money and private money.

I’ve written a little about this before in “State sponsored money – under pressure?

Conclusion

The world seems to be growing apart, with a marked increase in nationalism, trade wars, and protectionism. Currency wars seem to be another front where nation states are competing for relevance and dominance. But there’s more to it than just competitive devaluation of your own currency.

Note: I’ve written this to start the discussion, it’s probably wrong in many places – I’m not an economist and I don’t have any particular inside track. But I haven’t seen these threads put together yet anywhere in the narrative so I hope it’s helpful. Happy to discuss!


Interesting geeky tidbit: When I wrote The Basics of Bitcoins and Blockchains in 2018, the British Pound, US dollar, Chinese Yuan, and a bunch of other currencies (but not the Zimbabwe Dollar!) were all designated as legal tender in Zimbabwe.

This fun quirk sadly ended in mid-2019 when a statutory instrument was announced: “The effect of the instrument is that from today only RTGS dollars, whether in the form of bond notes or coins or electronic currency, are legal tender in Zimbabwe.  All other currencies ‒ the instrument specifically mentions US dollars, British pounds, South African Rands and Botswana Pula ‒ are no longer legal tender.”

This is all pretty weird.  Firstly, usually it’s your own money that’s legal tender which they’ve fixed. But also the statement itself is weird – RTGS (Real Time Gross Settlement) is typically an electronic system run by a central bank and used only by banks to settle up between themselves. Normal people and businesses don’t have access to RTGS money.  Typically, physical notes and coins are not considered “RTGS” money. I don’t know why they used that phrasing.

How unlike cash will CBDCs be?

In this post I discuss several differences between physical cash, and what I imagine retail Central Bank Digital Currencies (CBDCs) might end up looking like. The main differences between CBDCs and cash are accessibility, anonymity, and interest.

Accessibility means “who can use it?”. Pretty much anyone can use cash.

Anonymity describes how much information about the payer and recipient’s identity is needed to make a transaction. Cash doesn’t require the payer or recipient to provide any identity information.

Interest describes how much the number goes up if you leave it sitting in its natural state without lending it to anyone. Physical cash does not have interest.

Continue reading “How unlike cash will CBDCs be?”

KYC in Stablecoins

Summary: Issuers of today’s fiat-backed stablecoins (such as PAX, USDC and TUSD) need to identify (or KYC) only those users who convert between bank account money and stablecoin, not all holders.

Some people might be surprised that intermediate users of stablecoin may transact without needing to being identified by the issuers. Yet few people know that there are kill-switches built in that can hinder bad actors. This arrangement can be described as permissioned pseudonymity. Stablecoin issuers have permission by their regulators to have pseudonymous users in their network.

Permissioned pseudonymity is positive for innovation while the industry explores the most productive uses for stablecoins.

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Tokens: Shares with Benefits

This short post explores some of the additional value that tokenised assets on blockchains can add, over and above pure financial return.

The assets in question could be shares, or bonds, or other financial securities recorded as tokens on blockchains.  Some assets may not even be not regarded as financial securities, due to what they represent and what is promised to the asset holders – these have been described as “utility tokens”.

Today, people typically buy financial securities purely for their financial return.  A bond, loan, or other fixed income product, will give investors some amount of yield, usually commensurate to the amount of risk the investor is taking by providing their money.

Equity may give you slightly more than just a return: perhaps a vote at an annual shareholder meeting.  However, most people don’t care about these votes.  They just care about the share price going up, and dividends, if any.  The crypto community describes this succinctly as #NumberGoUp.

Yet increasingly, tokens are being used creatively to incentivise and delight token holders.

Continue reading “Tokens: Shares with Benefits”

State Sponsored Money – Under Pressure?

The Bank of International Settlements (BIS) is now throwing their weight behind Central Bank Digital Currencies for household use (“Retail CBDCs”). For clarity, this doesn’t necessarily mean recording fiat currency as tokens on blockchains: regular account-based technology can also be used. But it means that households could store and spend fiat money digitally outside of a bank or other private sector company.

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Tokens – Lowering the Barriers to Innovation

I was getting my daily hit of Matt Levine’s excellent Money Stuff this morning (subscribe here!). In my favourite blockchain blockchain blockchain section he noted:

But a popular pattern in the crypto/token/blockchain world is that someone will come along and be like “finally, through tokenization, we have invented a way to slice _________ into bits and let people trade the bits.” I always find this a bit confusing. Whatever _________ is, it is safe to say that before the invention of tokenization there was already a way to slice it into bits and let people trade the bits. Slicing things into tradeable bits has been a very hot area of finance for a very long time, and people got pretty good at it. Real estate is a popular target for tokenization, for instance, and I am confused because real estate securitization—not so much mortgage-backed securities but real estate investment trusts—is a thing that has existed for a long time.

https://www.bloomberg.com/opinion/articles/2019-01-30/if-you-want-to-invest-in-pot-buy-pot

I agree with this! We’ve had securitisation before blockchains and tokens. You can chop up the title to a painting and sell it to investors in 1% slices already without blockchains or tokens.

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Colin G Platt On Peer-to-Peer

Last week I went out with for a beer and pizza with Colin G Platt of Blockchain Insider fame after we did a podcast interview about my book The Basics of Bitcoins and Blockchains at the 11FS office in Devonshire Square in London. Quite appropriately we settled down at the The Bell, a pub in east London and sometime home of the Ethereum London meetups, and talked about how peer-to-peer cryptocurrency payments are.

Here’s a summary of our conversation. Obviously it is heavily edited and we’re not as witty or eloquent as this in real life (well I’m not anyway).

Continue reading “Colin G Platt On Peer-to-Peer”

Bitcoin’s payments are not peer-to-peer!

This post is adapted from an article first published on R3’s Medium.

In this post I articulate what a peer-to-peer transaction is, why Bitcoin transactions are not peer-to-peer, and why it is important to understand the differences clearly. I describe the benefits of peer-to-peer transactions and discuss that Corda is the closest architecture to take advantage of those benefits.

Continue reading “Bitcoin’s payments are not peer-to-peer!”