Who should we trust to create and run the digital currency or currencies that will define the world’s financial and economic landscapes for decades to come? Bernard Hickey takes a closer look at who might create the ‘one virtual money ring’ to rule us all: the world’s digital means of exchange and store of value of choice.

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Money is an ethereal thing these days. It’s more of a shared notion and an act of trust or faith than a tangible “thing”. For most transactions by volume and almost all by value, money feels like a bunch of ones and zeros passing in the night.

A transaction now is more of a nightly netting off exercise between banks than an actual transfer of “something”. We know how much we have in our accounts because we’re regularly checking on our banking apps, sometimes hourly, but we wouldn’t know where to go to “get it back” or turn it into something else useful that could carry out the same purpose as our New Zealand dollars.

Even turning those ones and zeros into physical cash seems a remote and quaint thing done from days-gone-by. Covid-19, contactless debit and credit cards, and originally Eftpos, have turned money into an electronic scoring system, rather than a collection of piles of cash or coins. The idea of Scrooge McDuck rolling around in his piles of gold seems both antiquated and totally modern, but only in a sense that the richest 1% now seem to have so much they couldn’t store it all in a room, let alone spend or invest it in something real.

The explosion in the value of fine art in the last decade hints at the problems in the world of monetary values and how to store enormous sums in a small space. Less than five years ago, Saudi Arabia’s Mohammed bin Salman bought Leonardo da Vinci’s Salvator Mundi for US$450.3m. Walter White’s drums of cash buried in the desert explains just as much about how our money system works as a stable and trusted means of exchange and store of value. Or doesn’t.

What even is money?

Currencies have long since lost their tether to anything real or inherently useful. They were once tied to gold or silver, or at least another currency or commodity. Savers could expect to get back their dollar or pound’s worth of gold if they visited a bank to “get their money”. If they all turned up at once to collect their gold, this would create a bank panic. There were regularly bank panics and collapses in the late 1800s and early 1900s. Bank panics in New York in 1884, 1890, 1899, 1901, and 1908 eventually led to the creation of the US Federal Reserve in 1913, which was given the power to be a lender of last resort to banks, and to control the money supply via short term interest rates and bank capital requirements.

Not for a long time have we been able to swap our “money” for something real. The New Zealand pound was tied to the British pound from 1840 to 1967, and then to the US dollar until 1985, when the “Kiwi” dollar floated. The British pound was tied to gold until 1914, when Britain came off gold to finance the first world war, and then briefly went back on to gold from 1925 to 1931 (also Churchill’s fault).

America detached from gold partially in 1934 under FDR, and then completely in 1971 when Nixon suspended the US dollar’s convertibility with gold and effectively launched the era of “fiat” money. Between 1944 and 1971, the world’s currencies were effectively harnessed to the US dollar and through America’s currency to gold, in a post-war settlement under the initial guidance of British economist John Maynard Keynes (who, by the way, is the credited originator of the words “When the facts change, I change my mind. What do you do, Sir?”). The IMF and World Bank were the arbiters of the Bretton Woods system and could stop a country from revaluing or devaluing its currency by more than 10% at a time. They were the only bodies that scared Robert Muldoon.

Since 1971, the world’s currencies have fluctuated and been informally connected or valued to all sorts of things, including oil and other commodities, but have essentially been adrift and untethered to a hard incontrovertible asset. That made sense in an era when most transactions happened within borders or took days to settle. Deals were done with cheques, money orders and cash. It made the vagueness and etherealness of a currency bearable.

The Schrodinger’s Cat currency feeling

Not any more. Now we buy things with a wave of a card or the “one click” of e-commerce. We feel like we could transact hundreds of times a second, if only someone could design an app for that and it wasn’t too expensive. The friction in the fiat currency world has slithered away towards a nothingness that makes the notion of money even more unsettling.

What is money now? Is it just a bunch of ones and zeros that could be erased or created with the swipe of a mouse and a click on a spreadsheet or one of those “Do you really want to delete that fortune” buttons? Could it be removed or created by a bureaucrat? Or an actual robot? Is there a call centre to go on hold for to ask if your money is still there? Who could I complain to if something went wrong? How would “they” (whoever they is) know that I am who I say I am and that I “own” the money? Is it a currency? Or just a belief with a terms and conditions page that no one has ever read, even if everyone has ticked the box.

An un-nerving ‘creation’ of US$20 trillion ‘out of thin air’

This unsettling feeling of currency waftiness was only worsened when the world’s traders and asset managers watched how the world’s biggest central banks created US$20 trillion on their spreadsheets in the last 20 years to buy government bonds and other assets to revive economies and financial systems in crisis. That pace of money creation, or quantitative easing (QE) as it’s often described, accelerated to US$10 trillion in the last year alone to juice the global economy so it didn’t succumb to Covid-19.

Amazingly, the prices of goods, services and labour have not risen nearly as fast as the global money supply, in large part because that cash was parked in bank accounts and other safe low-risk assets such as government bonds by often wealthy, already-rich and ageing real-life Scrooge McDucks. The money supply’s speed of circulation has collapsed since the beginning of this century as inequality rose, as the risk aversion of asset owners rose in line with their age, and as businesses were able to grow without having to invest much real money in people, machines and buildings. All they had to do was employ a few coders, feed them noodles and be able to take over a sector in a way that created tens of billions of value with just a few people. Instagram’s destruction of Kodak within a couple of years is now the model. Less than a dozen people invented a tool for smart phones that condemned thousands of Kodak jobs to the scrapheap, with very little capital investment.

So the faith is slipping away…

All of the money printing, the waftiness of money and the drive to transact much more online and with less traceability has run head first over the last decade into a gaggle of libertarian programmers and entrepreneurs who want to free “money” from the shackles of money-printing central banks, cyber-spying governments and profit-hungry banks. The story of the invention of Bitcoin by “Satoshi Nakamoto” has become a kind of Robin-Hood-like legend that has won a legion of fanpeople all over the world, including many who now trade versions of Bitcoin and other cryptocurrencies on Robinhood (the platform) to stick it to ‘The Man”.

This movement is part revolt and part lolly scramble to get some of the “free” money being pushed out to the owners of assets being bought by central banks, and then filtering on down to the owner of riskier assets in the outer nether regions of the financial markets.

Over the last year the market value of the world’s cryptocurrencies, of which Bitcoin is the largest, has sprinted from US$275b to as high as US$2.5 trillion last month, before slumping this week to around US$1.7 trillion. That’s partly because of a hunt by investors for a tangible store of value that they know can’t be devalued by the swipe of a central banker’s mouse, and partly because of enthusiasm about a range of businesses and systems being built on top of such currencies and the distributed ledger systems or blockchains underneath them.

Will Satoshis rule the world?

So could the world’s consumers, investors and businesses change to using a cryptocurrency instead of a fiat currency controlled by a central bank, and mostly created by private banks (another fascinating story for another day)?

In short, not yet, and maybe not ever. Cryptocurrencies are usually based on distributed ledger system that requires “miners” to use their computers to perform calculations to record ownership and transactions in a unchallengable, bulletproof and distributed way. That mining is a very real thing, consuming electricity to run and cool the processors doing the calculating. Much of the mining is done in China with power generated by coal-fired power stations. The Cambridge Centre for Alternative Finance estimates Bitcoin currently consumes around 110 terawatt hours per year, which is about 0.55% of global electricity production, or about three times as much as New Zealand produces every year.

The huge number and distributed nature of the calculations means it currently takes about 10-20 minutes for the confirmation of a blockchain transaction when volumes are “normal”, but as much as six to 10 hours at high-volume or congested times. That makes cryptocurrencies an unlikely replacement for the fiat money systems used to buy cups of coffees and Da Vincis alike. They’re also way too volatile. The New Zealand dollar will typically vary in a range of about 15% either side of its average in a year, while Bitcoin’s volatility has been 85% around its average over the last year.

So what about stablecoins?

The other type of non-fiat and non-central-bank digital currency is the stablecoin, which is typically a digital currency fixed to a real currency in the same way the US dollar and pound used to be fixed to gold or silver. They can also, crypto-backed, commodity-backed, and algorithmic (don’t ask; I couldn’t tell you how those algorithms work…)

There are a bunch of those now, including the likes of Tether, True USD and USD Coin. There’s even tribute or meme cryptocurrencies such as Dogecoin, which was developed as a joke by software developer Billy Markus in 2013. He called himself Shibetoshi Nakamoto.

The most serious type of stablecoins are likely to come from one of the tech giants, such as Facebook, Amazon, Google, Apple or Microsoft. Facebook tried to launch its own “Libra” stablecoin in 2019, but backed off after an upwelling of regulatory threats from central banks who suddenly realised their effective monopolies over digital currencies were under threat. The Libra project is being relaunched with a consortium of investors, including Facebook as a minority investor, as Diem.

Amazon is reputed to be set to trial its own stablecoin in Mexico. Google and Apple are regularly reported to be looking at cryptocurrency options. They are the real fear of central banks because they collectively have over US$1 trillion in their own cash to base their own stablecoins on.

‘Quick, we gotta have one’

Facebook’s aborted Libra launch galvanised central banks into action as they realised they needed to have their own digital currencies to offer to consumers and investors, but backed with the power of the state and regulators for protection. The early trial by the People’s Bank of China last year of a digital currency for over half a million triallists has also spooked the central banks of western democracies into something of a frenzy. China’s WePay and Alipay have set the standards for digital payments, and have even unnerved the Chinese government, who worry the owners of these nominally private firms could become more powerful than the state. That’s why Alipay’s founder Jack Ma has recently been pushed aside, as have some of WePay’s owners.

The European Central Bank (headed by President Christine Lagarde), the US Federal Reserve (headed by Chairman Jerome Powell) and the Bank of Japan are all scrambling to build their own digital currencies, with trials set to be launched within months. The Reserve Banks of Australia and New Zealand are watching the action closely. They’re unlikely to move first and the platform is burning less fiercely here because our banking systems are more accessible to poor customers and have created electronic standards and networks that mean transactions within New Zealand are easy and relatively cheap.

The opportunity for ‘Jacinda Coin’

However, New Zealand’s relatively small size and its position back in the pack of central bank digital currency development could prove useful if the contest comes down to a beauty parade around trust, transparency and privacy.

New Zealand’s reputation in the central banking and currency world for reliability, transparency and solidity could give it an advantage. Brand NZ Inc is hot right now in the wake of our Covid-19 showing of accidentally-on-purpose competence and compassion (although don’t ask too many abandoned migrant workers to join the focus groups).

For now, the action is on the fringes as various financial services operations, including Powerfinance here, use blockchain and types of stablecoins (Powerdollar) to offer bank-like services to other businesses. The likes of Venmo and PayPal are nibbling away in payments.

But at some point, one of the central banks or global tech networks will crack it. And once one of these e-currencies goes global at low cost, the game will be on in earnest. There are plenty of problems to solve and profit pools to drain with the creation of a reliable, efficient and stable digital currency. The monstrous cost and difficulty of cross-border money transactions makes that more likely.

The battle will begin soon and we’ll all have to decide who we trust the most to look after our money and transactions. Will it be US Federal Reserve Chairman Jerome Powell? He has the world’s most powerful military and largest economy behind him, but a reputation for Walmart-sized money printing and fear America’s security industrial complex could weaponise the privacy settings of any e-US$.

The European Central Bank’s offering may prove more popular, given the EU’s reputation for fostering democracy and privacy, not to mention its very large economy. But it also has a reputation as a “whatever it takes” money printer.

Xi Jinping, the general secretary of the Central Committee of the Communist Party of China, would love the world to adopt the e-renminbi to trade and save, although he also faces a battle to convince the world’s consumers and savers that they’re not being watched or ghosted by China’s cyber-attacking industrial complex.

Or do we trust Facebook’s Mark Zuckerberg and Amazon’s Jeff Bezos to do the right thing in privacy terms? Their reputations for allowing mass murder to be live-streamed and regulating workers’ toilet breaks is not encouraging. The final choice of cryptocurrencies such as Bitcoin or Vitalik Buterin’s Ethereum are not quite there as mass market consumer currencies, but they and their ciphers are working hard.

For now, we can watch from the sidelines in Australia and New Zealand, but the time to make a choice will come. We’ll probably find out one morning with a friendly notification from one of the apps on our phone, possibly from a friend-get-friend referrer giving us whatever the “money” is called.

How much trust and faith and confidence will we have?

One thing we can be sure of. Nigeria’s digital currency will have a branding mountain to climb.

Follow When the Facts Change, Bernard Hickey’s essential weekly guide to the intersection of economics, politics and business on Apple Podcasts, Spotify or your favourite podcast provider.