The fight for the soul of (digital) money

It may not have sunk in yet over your morning bowl of cereal, but the whole future of money is up for debate. Who prints it, who controls it, who technically owns it and how it is transacted around the world.

The debate started in 2008 with the creation of bitcoin, the volatile alternative asset that has proved far more durable than the quixotic fad it was first presumed to be.

Bitcoin was born with a libertarian philosophy – to free money from the ‘evils’ of commercial and central bank control. The blockchain technology it is built on allows participants to both create the digital currency and collectively update the ledger that records ownership.

Philosophy aside, it’s clear that central banks now applaud some of the technological breakthroughs of cryptocurrencies. It’s also clear that central banks like the idea of a digital ledger but hate the thought of distributing control over currency creation and ledger updates to the public.

Blockchain is an example of Distributed Ledger Technology (DLT). The Bank for International Settlements (BIS), an international club of central bankers in Basel, has added a new entry to the financial glossary: the ‘Unified Ledger’.

Money revolution

The term was mentioned this weekExternal link by BIS head, Augustín Carstens. The idea of the Unified Ledger is to digitally synchronise a global asset transfer revolution, with central banks retaining their traditional role as money creators.

The blueprint for the “next generation infrastructure” is not bitcoin or blockchain, but Apple and the iPhone. In the Carstens vision, central banks would control the monetary system of the Unified Ledger, with private commercial ventures plugging in to the drive the innovation.

Coded ‘smart contracts’ would automate transactions, paid with Central Bank Digital Currencies (CBDCs), and companies would convert assets (securities, art, real estate) into digital ‘tokens’ that flip seamlessly around the world.

“This reduces the need for manual interventions that delay transactions and reduces dependency on intermediaries, and also allows for simultaneous and near-instant payments and settlement,” says Carstens.

This is what DLT systems like Bitcoin and Ethereum already achieve, but beyond the control of central banks and governments.

The Unified Ledger would inevitably strip out the most fundamental selling point of cryptocurrencies: direct and defendable personal ownership of assets.

Apple can charge people what it likes to put an App on its iPhone and can exclude those it doesn’t like. Social media channels trade ‘free’ communication by selling users’ personal data to the highest bidder.

Who to trust?

And there is a fear that smart contracts could contain hidden clauses in the small print. Smart contracts can programme ownership rights and automate transactions, but they could also be designed to freeze or confiscate assets at the press of a button.

The crypto crowd only has itself to blame for handing BIS the perfect selling point for a centrally-run Unified Ledger. FTX, OneCoin and Terra/Luna are among the high-profile scandals that have cost ordinary people vast sums of money.

One possible compromise could be for freewheeling cryptocurrency projects to come out of the shadows and submit to financial regulation. However, regulators around the world appear to have different ideas of what those rules would look like.

This new central bank smartphone model appears ready to do battle with bitcoin for the soul of digital money – or at least, control of it.

The financial innovation of cryptocurrencies was born, and continues to be driven, outside the structures of traditional financial hierarchies. This innovation has been recognised by these hierarchies as valuable. But can innovation continue to thrive if it is consumed inside the traditional hierarchical system?

On the other side of the coin, can decentralised finance be reasonably trusted to keep out the fraudsters, protect the assets of small investors and maintain some semblance of price stability?