Stablecoins are the next ‘big thing’.They are also the next big idea by governments about how to control fiat currencies.
A ‘stablecoin’ is a form of digital currency that, according to a paper published by the European Central Bank (ECB) “relies on a stabilisation mechanism to minimise fluctuations of its price expressed in a given currency (or basket thereof)”. Essentially, it is a digital currency – a cryptocurrency – that promotes itself as being more secure than other digital currencies because it is ‘backed’ by some asset deemed to be reliable.
The stablecoin rush has been stimulated by several overlapping recent events: the announcement by Facebook of its digital currency Libra (which appears to have stalled, partly as a result of government-inspired regulatory disapproval); the steady decline in the use of cash; and public anxiety concerning cash being a possible way of transmitting Covid-19. And printing banknotes or churning out coins is an expensive business – the US Federal Reserve’s budget for currency production this year is more than $877 million. Hence governments around the world are showing interest in producing their own versions of stablecoins, called Central Bank Digital Currencies or CBDCs for short.
The key driving factor behind governments’ interest in CBDCs is the rapid mushrooming of private digital currencies, facilitated by the increasing power of computing and the development of blockchain technology. The rapid spread of these individual digital currencies threatens to remove government supervision and control over taxation, central government spending – over money.
China is set to trial its own CBDC, a ‘digitalised renminbi’ or ‘e-RMB’, in some regions. China’s central bank (the People’s Bank of China or PBOC) started research in 2014 into what a CBDC might be like, how it would function, and how it would sit alongside cash and within a payments’ system. Becoming the first country to move to a CBDC is one way of demonstrating just how advanced it is.
Others are following where China has led. The Banque de France has completed a test for digital euros. The ECB is accelerating digital currency research. Lael Brainard, a governor of the US Federal Reserve, said in early February this year that the Fed is considering potentially issuing its own digital currency.
The Bank of England (BoE) published a ‘discussion paper’ in March this year, the foreword of which (signed by Mark Carney, former BoE Governor) opened with one questionable statement – “for over 325 years the Bank of England has provided safe money” – and concluded with another – “the Bank has not yet made a decision on whether to introduce CBDC” (aka ‘central bank digital currency’). The BoE is keen to point out that its CBDC “would be something fundamentally different to ‘cryptocurrencies'” and it also seeks to distinguish its CBDC idea from stablecoins because a stablecoin, it says “may be unable to provide stability of value”.
The assertion that the BoE provides safe money is somewhat surprising. What does “safe” mean here, in the context of governments regularly aiming to achieve 2% inflation per annum? That 2% target annually erodes the purchasing power of paper money. It could be worse – various central banks of other nations target inflation at two, three or even four times that of the BoE. It is also doubtful that the BoE has gone to so much trouble in planning how a CBDC would function without intending to introduce it, particularly if other nations are going to do their own versions.
Controlling its currency is one of the few big things a government can do these days. It used to be airlines – once upon a time possessing a national airline used to be a symbol of national economic strength. Why has the state always sought to control money?
One obvious reason is that control over money enables governments to put policies into practice. Governments levy taxes and seek to exert control over the purchasing power of fiat currencies so they can spend money on areas they wish to; these areas are either good or bad, according to your opinion.
Governments can find fresh amounts of money when they need to and can inject fresh sums into the supply of money by borrowing (easy when interest rates are as low as today), raising more in taxation, or by simply printing more notes. In 2008 the US Federal Reserve rapidly doubled the money supply in the US, and added $4 trillion in credits to banks, to try to stifle the 2008 financial crisis.
CBDCs are on their way everywhere. Once one government has them, others will feel the need or be compelled to develop them. Governments will dress up their CBDCs in a variety of clothes, whether it be (as the ECB argues) to “guarantee that all users have, in principle, access to a cheap and easy means of payment” or, as the BoE says, to “ensure that the public has continued access to a risk-free form of money”. Calling CBDCs ‘stable’ is a neat trick, connoting security, safety, strength and all that good stuff.
But when your government introduces your particular CBDC you should probe beneath its surface and ask ‘what’s changed?’ The answer will be only the clothes in which your new digi-money is dressed. Backing for that digi-currency will be the same as before – the word of the government. Which will still target inflation of two or three or several percent. The purchasing power of your money will continue to decline over time, although perhaps you will notice it even less than now.
There is a steady momentum towards the creation of CBDCs, yet they will not provide a solution to the eternal question – how to create money that is stable? For Glint, there is only one answer to that – gold, which has been used as a store of value and means of exchange – as money in other words – for centuries. You already know this, that’s why you’re reading the Glint Newsletter; you already know that you can use gold as money, it’s why you’re smart enough to have your own Glint account, allowing you to buy, save and spend real gold. Mind you, being ‘in the know’, you should really tell your friends when your country’s CBDC comes along, with Glint, you can still have your independence – no government can control the gold supply, or its use as money, so Glint actually helps you to protect your savings by giving you instant access to real, physical gold, that you own and can spend just as you would regular fiat money using your prepaid debit Mastercard®, but with the added built in reliability of gold.
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