August 24, 2020

The Digital State, Part 4

The symbol for the denarius, the reference coin in the Roman Empire

This is the fourth in the series on the paradigm shift to a digital state, this time focusing on new digital forms of government-issued money.

Technology is changing the building blocks of government. In Part 1 we saw that the trend to e-government is leaving no pillar untouched. Part 2 showed how the technology by which people make their political choices is changing, and Part 3 looked at how law-making is being shaped by new digital tools.

The rush to digital government is now evident everywhere. Recently, for example, we learnt about the chaos caused in the UK by a government algorithm that decided which students passed their university entry exams. [1] The point of this negative example is not to be negative, but merely to show that the state is now embracing digital tools big time.

And what can be a bigger than government-issued digital currencies?

E-government and its money

The latest technology has always shaped the physical characteristics of money. We know that there was a time without coins – a pre-metallic monetary period. One form of money then was cowrie shells, which could not be counterfeited. Its monetary area encompassed the Indian ocean coastal regions of Africa, Asia and Oceania. We know that when the shift to metallic money happened, coins started out as little blobs. As the technology got more sophisticated, the coins became rounder and flatter, with symbols stamped on them. We know that the metallic composition of coins was impacted by mining discoveries – also linked to new technology. We know that Marco Polo was hugely impressed when he discovered that the Chinese were using a new technology for money: paper. And we know that Australia introduced the first banknotes made from a rubber-like substance (polymer). So, we know that the composition of money reflected the technology and resources of the era.

Should we now be terribly surprised, therefore, that in our era the state is experimenting with new technology for the issuance, distribution, safe-keeping and exchange of money? No. And should we be surprised that the essence of this new money is something we cannot see or touch: digital stuff? No. And wouldn’t Marco Polo have been impressed? Yes!

So, what’s new about CBDCs?

While computers are not new and electronic payments are not new and central bank digital book entries are not new, there is something new about central bank digital currencies (CBDCs). The new feature is that technology is changing how and where they can be distributed and stored.  

A new digital highway, interspersed with cool digital gadgets, is creating a new monetary transmission mechanism directly from the central bank to those devices. The technology is not holding up its introduction, the missing legal framework is. Where is the law that governs the new digital wallets at the central bank? Where are the laws that govern the settlement of cross-border payments linked to these new wallets?

What we know from history is that where technology leads, society and the law inevitably follow. The new laws will also follow from the local driving forces. One such case is currently happening in Switzerland. The country’s stock exchange is building a trading platform for “digital assets”. The central bank needs to understand what that might mean for the payments system, counterparty risk and systemic stability. One potential outcome could be a “digital Swiss franc”, which would be used to settle payments between wholesale participants on that platform. Nothing has been decided yet. But if that were decided, it could happen as early as 2021.

Central banks all over the world are taking a closer look at what this new digital infrastructure might mean for their mandates. While the motivations and urgency differ from country to country, it appears at this point that the introductions of the first central bank digital currencies will not replace “cash” – they will merely be an additional pool of digital units for a newly defined purpose, distributed and stored via a new infrastructure. It also appears clear at this stage that central banks are not keen on the idea that retail clients should have digital wallets at the central bank.

Blockchain agnostic

Central bank digital currencies do not need blockchain. Recall that bitcoin was born as the anti-central bank fiat currency. Central banks want control over the amount of money they issue; they are not going to give up that control to a public blockchain. Central bank digital money is anti-bitcoin money; it has a central counterparty: the central bank. Some central banks are indeed experimenting with blockchain, and it is not inconceivable that some could even issue a currency on a private or permissioned blockchain, but that means they will still exercise control.

Concluding thoughts: What we can learn from the big Ӿ

The era of central bank digital currencies is dawning just as governments all over the world have issued war-time levels of debt and central banks have increased their balance sheets to previously unimaginable sizes. It is not unreasonable to ask if central bank digital currencies stored on new digital wallets would not make it easier to push more digital units through the system or even remove units via new negative interest rates? The answer to both questions is probably yes.

The algorithm problem in the UK cited above is also meant to illustrate the point that e-government also needs a superior governance framework. This is not just about downloading new software; e-government should also be smart government that serves the people more efficiently.

Similarly, the introduction of central bank digital currencies will need a superior governance framework to prevent bad outcomes. Here we perhaps need to be reminded about bad monetary outcomes in history. It is difficult to separate the role of the issuer of money, be it a mint in ancient Greece or a modern central bank, from the fiscal obligations of its owner, the sovereign.  These are two sides of the coin. Several writers who focused on the finances of the ancient world conclude that the unsustainable public finances of ancient Greece and Rome were ultimately the real cause of the collapse of those empires. [2]

In one of the largest recorded increases in the money supply of the Roman Empire – a tenfold rise in the circulation of mainly silver coinage between 157BC and 50BC – smart administration and structural changes initially held back inflation. The measures included more cash reserves held by the banks and the Roman treasury. But these supportive factors eventually reversed. The Roman coin the denarius (which had its own symbol Ӿ), was gradually debased from a practically pure silver coin to one just washed in silver. Its value plummeted (figure 1).

Figure 1: The price of one pound of gold in denarii, log scale, 50 BC to 350 AD

A close up of text on a white background

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Source [3]

The wealthy were initially able to protect themselves from inflation with a diversified portfolio that included gold, silver and real estate. But when Rome eventually fell to the invaders, and the new capital moved to Ravenna, the rich could not take their land with them.

Rome was not built in a day and its money was not destroyed in a day either. We will need a smart new governance framework for the era of central bank digital currencies.

By Costa Vayenas



[2] Davies, Glyn. 1994. A History of Money: From Ancient Times to the Present Day. University of Wales Press, p. 95-96

[3] Davies, Glyn. 1994. A History of Money: From Ancient Times to the Present Day. University of Wales Press, p. 107.