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Money: an existential question

With innovations on the rise, safeguarding the global monetary system is paramount.

Facebook's brand of stablecoins, launched under a group known as the Libra Association, was criticised by a recent G7 report which said the currency could have significant adverse effects on the transmission of monetary policy.

WHAT is money?

For centuries, philosophers and economists have spilled much ink musing about the value and meaning of money. Blood has also, naturally, been spilt over money.

It is plainly represented in tangible form by dollars and coins issued by trusted, centralised institutions that stand behind the worthiness of that currency. It stores, and symbolises purchasing power that circulates through a market economy, reflecting that transformation from age-old barter trade to using credit to complete buying and selling decisions.

But technology has radically forced regulators to return to that very point of the creation of currency, first seen in 600 BC, in modern-day Turkey.

As Agustin Carstens, general manager of the Bank of International Settlements, wrote in June: "While we have seen bursts of innovation to the monetary system before, this time feels different. Innovation is rampant and entrepreneurs are trying to improve not only the way we pay but also money itself."

Today's evolution of money has now left us to consider digital forms of value that are not technically guaranteed by a single authority.

It of course began with the introduction in 2008 of the decentralised cryptocurrency Bitcoins, with other brands of cryptocurrencies following soon after.

"How well do cryptocurrencies fulfil the roles of money," asked Mark Carney, Bank of England's governor in a speech last year on the future of money. "The short answer is, they are failing."

Regulators have come down hard on cryptocurrencies as they do not fulfil money's basic premise: to serve as a unit of account, a means of payment and a store of value.

Indeed, as Mr Carney at the time noted in 2018, the average volatility of the top 10 cryptocurrencies by market capitalisation was more than 25 times that of the US equities market in 2017.

"This extreme volatility reflects in part that cryptocurrencies have neither intrinsic value nor any external backing," he said.

Now, a new breed of cryptocurrencies has emerged in response to the challenge behind their price volatility: stablecoins. These are cryptocurrencies that are pegged to a basket of fiat currencies, securities, or commodities, so as to reduce the price volatility of these cryptocurrencies.

Facebook's brand of stablecoins, launched under a group known as the Libra Association, may be pegged to currencies such as the Singapore dollar, the greenback and the euro, the social-media giant had said over the last few months. More are likely to emerge, said Monetary Authority of Singapore (MAS) managing director Ravi Menon.

"We keep an open mind towards these stablecoins, but we want to engage in a much deeper discussion about how the risks can be managed," he told BT.

Regulators here are also concerned by the destabilising risks posed by these new inventions.

"I think the more existential questions that stablecoins pose relate to financial stability and monetary policy, rather than regulation and supervision," he said.

"If these stablecoins gain in prominence, then the currencies to which they are pegged will inevitably be affected, because the demand and supply of these coins will translate into demand and supply for these underlying fiat currencies."

Such questions are a bigger issue for markets such as Singapore that manage monetary policy on the basis of the exchange rate, but will likewise be a concern for most emerging economies, said Mr Menon, pointing to the destabilising risks on capital flows.

A G7 report also pointed to similar risks. Sounding an alert, the October report said that "no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks outlined above are adequately addressed, through appropriate designs and by adhering to regulation that is clear and proportionate to the risks".

"Global stablecoins could have significant adverse effects, both domestically and internationally, on the transmission of monetary policy, as well as financial stability, in addition to cross-jurisdictional efforts to combat money laundering and terrorist financing," the report said.

"They could also have implications for the international monetary system more generally, including currency substitution, and could therefore pose challenges to monetary sovereignty."

Digital currencies

The G7 report also explored a related topic then, which is the issuance of digital currencies. There are three main risks: a resulting instability in commercial bank deposit funding; fast and large-scale flight towards a central bank; and a greater role for the central bank in allocating economic resources that could give rise to political risks and prove inefficient for an economy.

"Although the majority of central banks are actively researching central bank digital currencies, very few are likely to be issued in the short or medium term. Even for those central banks at the forefront, the jury is still out."

As Mr Carstens wrote in June, the bigger issue has to do with the division of labour between commercial and central banks.

"The central bank is a public institution charged with ensuring that inflation is under control, the economy runs smoothly and the financial system is sound. Commercial banks are private businesses that thrive by attracting and serving customers. Making profits is a key motivation," he wrote.

"There are historical instances of one-tier systems where the central bank did everything. In the socialist economies before the fall of the Berlin Wall, the central bank was also the commercial bank. But we cannot hold up that system as an example of better customer service. Less dramatically, publicly owned banks in many economies are hardly paragons of efficient allocation of funds or of good service."

Over in Singapore, regulators likewise do not see a compelling reason for central banks to issue digital currencies. Mr Menon told BT that it remains unclear what problem digital currencies would solve, noting that embracing more electronic payments of fiat currencies would instead generate real economic benefits from reducing the cost of cash transactions, and in bringing greater convenience.

The existential question surrounding money and its future has thus forced regulators to "weigh up, then weigh in" the true value of innovation in this regard, said Mr Carstens.

"The raison d'être of central banks is to safeguard the stability of the monetary system... we have to make sure that innovations set the right course for the economy, for businesses, for citizens, for society as a whole."

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