Digital Currencies Will Be National
Why Bitcoin, Ethereum, and all the other blockchain-enabled cryptocurrencies will be completely irrelevant by 2030
Today naïve individuals, excitable investors, and anxious fund managers are continuing to stock up on Bitcoin and its competitors in the belief that (a) everything with the word blockchain is magic, and (b) that independent cryptocurrencies are the way of the future despite their appalling inefficiency and profligate energy consumption that amplifies the problem of climate change.
Although regrettably the cryptocurrency bubble will likely burst before someone with a keen sense of humor floats TulipCoin on the market, it is nevertheless equally likely that digital currencies are indeed the way of the future.
Only not in the way nearly everyone presently imagines.
Governments are getting into the digital currency game.
For the hopelessly naïve believers in “government-free money” this move is antithetical to everything they imagine to be true about conventional cryptocurrencies, much as moving off the gold standard was antithetical to those who imagined that value should magically be anchored to a lump of metal that’s not much good for anything. But while tulip-currencies like Bitcoin are effectively useless as a means of exchange (no business owner in their right mind would want to accept the huge risk created by the volatility of cryptocurrencies, whose value depends entirely on hype and illusion), government digital currencies would merely reflect the current value of whatever currency the country happens to use.
The fact that government-created digital currencies won’t enable a huge bubble which ultimately will cost many people their shirts is of course a side benefit. There is a very large difference between inflation (or a catastrophically stupid decision like Brexit) reducing the value of a national currency versus the roller-coaster volatility of cryptocurrencies. This relative stability will make government digital money instantly useful for everyday transactions large and small. Conversely cryptocurrencies are merely a speculative investment and are rarely used for real-world transactions aside from money-laundering and other illegal activities occurring on the dark web.
Government-issued digital currencies will work as follows: instead of depositing one’s wages into a conventional bank, people can deposit them directly into the central bank of their home nation. Then they can draw on these funds whenever they want by means of issuing electronic payments; if they sell things, the buyers likewise instantly transfer funds into the seller’s account. There’s no risk of a bank going under during hard times, and there would be few if any of the usual fees associated with utilizing banking products. And for those who fetishize material items, a digital dollar could be exchanged for a dirty paper dollar at any time. Furthermore, it would remove the need to have often-dubious intermediaries such as PayPal. Payments would no longer have to go through third parties; the central bank would execute directly within its own system.
So far, so good. It’s pretty obvious that as we’re all moving to cash-free transactions it is better to have one trusted can’t-fail player in the center than to try to deal with an ever-expanding plethora of private sector organizations each of which takes a small slice of the payment and each of which introduces ever more complexity behind the scenes.
Unfortunately, there are also downsides. For a start, very few governments outside the Scandinavian and Baltic nations have anything like a decent record implementing, managing, and maintaining complex information systems. Many countries are laughably inept: the USA, France, and the UK spring effortlessly to mind when we think about the OECD and elsewhere the picture is much worse. So we’re likely to see a lot of red faces when government-created digital money systems run into their inevitable problems. Worse yet, in a world of ever-more-sophisticated cybercrime, can we really trust poorly-paid government employees to keep our data safe? As even the USA’s acronym agencies have been thoroughly hacked in recent years, it’s clear that for now the answer is a resounding “no.”
Secondly, if traditional banks are disintermediated, who will provide loans to businesses and individuals? This was for a long time the primary business of banks and although the core has eroded somewhat over the last fifty years it is still an important factor in every nation’s economy. Without banks loaning money at relatively high interest rates and paying savers a lower rate on their deposits, from where will companies borrow funds and from where will home buyers acquire their mortgages? If companies are forced to issue bonds whenever they need additional capital, this will change financial markets considerably, and likely cut off flows of funding to organizations too small to be able to issue even junk bonds. And it’s unclear if governments are really willing and able to step into the role of full-time mortgage lenders.
But these difficulties fade into insignificance when we think about what government-created digital money does to our privacy. We already live in a world in which practically any government employee of any sort can access our personal information. Our bank account records, our phone records, our credit card records can all be seen provided there’s some adequate pretext. Indeed, we can even be tracked wherever we go thanks to a plethora of CCTV cameras and the GPS chip in our smartphones. But today, government employees have to request this information from our banks and phone companies. In a world of digital currency the government will know about every purchase we make, online and off, the moment it happens.
Given the fact that populism reliably sweeps cynical incompetents into office and that those same incompetents prefer to remain in power whenever possible (not least by targeting millions of voters with personalized messages) it is not difficult to imagine unscrupulous people utilizing all the lovely personal information that comes from recording every single one of our transactions automatically. Now that cloud computing makes it child’s play to analyze enormous datasets of billions of records, honing in on vulnerable and easily-persuaded voters who can be “encouraged” to vote “the right way” lest embarrassing data be “accidentally” leaked is just a matter of churning through the data and automatically generating a text message.
Those who believe that all governments are full of people who just want to act for the common good will dismiss such worries as nothing more than anti-government conspiracy theorizing. Sadly, the last 80 years has provided far too many examples of just how far many of those with power will stray from the path of righteousness. It is impossible to believe that once a government has detailed records of every single transaction in a citizen’s life, that data won’t be used to further the careers of unscrupulous individuals. All the supposed “oversight” in the world didn’t stop the NSA from illegally surveilling millions of US citizens, and that’s just one relatively trivial example of recent bad behavior. The UK Conservative Party has benefited mightily from Brexit, which was in no small measure enabled by highly unscrupulous use of personal data garnered from social media and processed by Cambridge Analytica in contravention of the supposed policies that were there to prevent that very thing from happening. The immature young men at GCHQ are not above remotely activating the webcams of ordinary people’s laptops in order to observe those ordinary citizens removing their clothes and sometimes performing salacious acts, imagining that they are unobserved.
As for those poor naïve souls who say charming things like, “if you’ve done nothing wrong, you’ve no reason to worry,” we can merely note that the world is full of people who’ve said precisely that and then had their lives wrecked. After all, if the government says you’ve done something, that’s what most ordinary people will assume to be true, especially when everyone knows that the government knows everything. Which it will, when we’re all using the government’s digital cash to pay for everything in our lives. How can an individual battle an entire government? History is replete with examples of miscarriages of justice resulting from untrue claims made by government functionaries.
We ought to weigh the pros and cons of government-issued digital currencies very carefully. But it’s unlikely we will do so, because we rarely if ever weigh anything carefully before enthusiastically jumping on the next trend, especially when our friends and neighbors are all jumping so enthusiastically themselves.
And so government-issued digital currencies are coming, and they will radically transform our relationship with government.