As China charts an exit from the Coronavirus crisis it has announced a digital Yuan, the implications of which are yet to be seen. As stated by Yanis Varoufakis, a central drive for Bitcoin and other digital currencies has been an attempt to escape the politicisation of money through central banks — but money cannot be depoliticised. Knowing this, how should we approach the sovereign digital Yuan?
We can appreciate the technical aspects of digital currency by understanding the principles of asymmetric encryption. Asymmetric encryption is a form of encryption in which there are two keys. Information (in this case a currency) encrypted by one key can only be decrypted by the other key. If one key is public and the other is private this allows two things, information to be encrypted in a way that only the private key holder can decrypt (i.e. confidential transfer) and information to be encrypted in a way that it can be verified as being carried out by the holder of the private key (i.e. authentication of source).
The most well known digital currencies are currently those that utilise a blockchain — essentially a communal recording of transaction history and issuance that removes the need for a central authority, though this could change very soon with the emergence of digital forms of fiat money, so-called central bank digital currency (CBDC). Central bank digital currency may sound like an interesting concept stripped of it’s interesting properties to some; after all, much practical use of fiat currency may be digitised now anyway. However, there is a meaningful difference in hierarchy between a system whereby digital records of assets are stored and managed by various financial institutions and a system whereby digital assets are verifiably held by individuals in a manner analogous to cash, and this has practical implications.
The economic benefits of CBDC are clear, including lower transaction costs and quick monetary intervention. For the individual, the advantage of CBDC is that a compatible device (namely a smartphone) is the only requirement for the utility otherwise only afforded to those with access to banking. These advantages may also have compounding implications relating to international adoption. Concerns about privacy abound but as a digital currency can be designed so that it is held and transferred on an individual basis it is not necessarily different to physical cash in this regard. Others will lament the death of a dream of decentralisation, but as pointed out by Michael Yung, once a centralised system is in place, it is possible to decentralise it in the future (an interesting contrast to the apocalyptic theory of change required for blockchain-based digital currencies).
Many countries and central banks now appear to be interested in or pursuing CBDC, the first is likely to be the digital Yuan which is in a testing stage and this may drive innovation by others.
I will leave it to other writings to contextualise the implications of CBDC for DiEM25 and its aims. However, it is clear that the existence of technology that significantly lowers barriers to creating state currencies could have a profound impact on a politically fraught world in need of great change.
If you are interested in DiEM25’s approach to digital currency, you can read about its proposal for a Public Digital Payments Platform and how it aligns with a Universal Basic Dividend in the European New Deal.
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