In the past few months, there has been dramatic new technology, market and regulatory developments in the cryptocurrency sector, with state actors and major global technology pushing digital currency initiatives forward.
The new initiatives are forcing global leaders everywhere to begin to question the role of digital money in the next decade. There are also questions if ultimately proxy for shift in the broader political and economic landscape is going to re-shape the future of international monetary system.
The deep, fundamental digitalization of the economic system is now well underway due to blockchain infrastructure moves from the fringe and early adopters and actually into the spotlight of major nation-state actors. The synthetic, crypto-powered central bank money tokens, as well as the introduction of smart contracts can represent and tokenize other financial assets in the real world and also contracts are on the rise around the world.
The mentioned rapid changes are leading regulators everywhere to struggle with an economic system which is beginning to mirror the open, global and connected internet of information as well as communications.
At these shifts’ foundation, there is the rapid development of public blockchain infrastructures, such as ethereum, which allows participants in the market to issue cryptocurrency tokens representing fiat currencies and other financial assets. The “base layer” of trusted computing, record-keeping and processing of transactions can be compared to the base layer of the TCP/IP/ andHTTP. These are protocols that allowed the vast global internet to come into everyday use.
Currently, there are a number of approaches competing to building a new financial system on this infrastructure.
Crypto-native ecosystem players represent the first one, and it also includes Circle and Coinbase, who are building stablecoins backed by fiat such as USD Coin (USDC) on top of the public blockchains. These developments are enabling a broad base of developers and also companies to build higher-level financial constructs such as decentralized lending and credit markets, payment services and trade finance tools.
They are regulated by existing payment banking rules in the US and EU and there is a rapid growth of the private market-based approaches, and they also help to form a pillar of the open finance movement.
The China’s forthcoming Digital Currency Electronic Payment (DCEP) infrastructure, represents the second approach. It aims to build an entirely controlled, centralized and permissioned infrastructure for a digital currency version of the Chinese RMB.
Although the Chinese economic and political model is likely appropriate, the approach flies in the face of the open internet ethos and will not likely receive much of an enthusiastic response from the broader internet development community.
The third approach which is anchored in the proposed Libra Association and Libra Reserve Currency is attempting to build an “over the top” synthetic global digital currency. Similar to the efforts of China, the proposal of Facebook creates a centralized, permissioned infrastructure for this payment system. This will radically limit how open and accessible the infrastructure becomes for developers and companies which want to build on top of it.
The Competing Worldviews
In all of these three approaches, we can conclude on a fundamental worldview.
With the first approach we need to decide we want a financial system that is open and one that is built on the public internet allowing value to move freely and easily anywhere in the world with privacy protection that is strong; One that enables companies and people build financial arrangements on code, which are enforced by public blockchain infrastructure and enables commerce and transaction arrangements everywhere between people.
If the Chinese approach is embraced by the world, we need to decide whether we want a world that has tightly controlled access to innovation in the financial system. One that has tight controls on where capital moves and who can access the system. That kind of system can enhance efficiency and global reach for the Chinese RMB. However, it may mirror the tightly controlled internet which exists in China today. Will it be able to offer equal terms to the people and companies which seek to transact with China?
The worldview which has been put forward by Facebook and Libra suggests a new global financial system which is controlled and run by large private companies in the world. Instead of building on existing sovereign money, the Facebook construct seeks to create a new global currency which is able to stand above the state. The question to be answered is whether we want a global financial system that is controlled by a few private companies, where permission to participate and innovate is mediated on a closed infrastructure.
The largest companies in the world, especially, the ones which are responsible for major global trade currencies, must now grapple with the innovation of public cryptocurrencies which have the reach of the global internet. The decisions and choices that they face are made by relevant policymakers and will have a dramatic impact on what our future global economic system look like.
Meanwhile, although the governments study and debate these topics, bit by bit and block by block, technical innovators globally are using cryptocurrency to rebuild the global economic system in front of our eyes.