The Finance Committee is currently organizing a roundtable discussion in the House of Representatives on cryptocurrencies. As a journalist who regularly publishes on FTM, I am invited to participate, among others Teunis Brosens of ING and Rutger van Zuidam of Dutchchain. The reason for this roundtable discussion is the worldwide popularity of crypto coins. More and more Dutch people also own crypto coins, of which there are more than 1450 on the market. The total market value of crypto coins fluctuated between 400 and 700 billion dollars last week. "Ten years ago nobody had heard of bitcoin and now it is generally known," writes the Bank of International Settlements (BIS). No one can still ignore the rise of cryptocurrencies - so the Dutch government does not.
What I want to put on the table, among other things, is the idea that the popularity of Bitcoin and other crypto coins could revolutionize the payment system that turns our monetary system upside down. To understand why we first have to answer a number of questions about the money we are using now. Where does our money come from and what are the distinguishing features of crypto coins, cash, and bank balances?
We hardly pay with real money
We have a European System of Central Banks (ESCB) in the eurozone, of which our Nederlandsche Centrale Bank (DNB) is part. These central banks are public institutions whose main task is to ensure the stability of the euro.
Central banks issue physical banknotes (cash) and commercial banks can hold (digital) credit. The residents of the euro countries only have access to the physical banknotes of the central bank. People cannot open an account. If we pay with our debit card or via the internet, we do not pay with money from the central bank, but with money that is spent by commercial banks. In Van kauri to euro, a booklet on the history of money, DNB describes this as follows: 'Today many people bank via the internet, so even without paper. No "real" money is involved in all these payments, so no coins or banknotes. We call this money 'giro' money. '
The term 'real money' must be taken literally in this context: scriptural money is not 'real' money, issued by central banks - as 'legal tender' - but a claim on a private bank: a conventional but not legal tender. For our payment transactions, we therefore largely use claims against private banks instead of real money. So what we call money is not an unambiguous concept.
Monetary objects versus monetary receivables
The definition of money is a complicated issue: there are books about full. In order to have a good discussion about money, I, therefore, want to introduce two new concepts: monetary object and monetary claim / monetary claim. The distinction between monetary objects and monetary claims is essential for the discussion about our monetary system.
Cash is a physical form of a 'monetary object' - an item used for payments. Physical monetary objects are 'movable things' with 'payment power'. That means you can pay with it by transferring the object to someone else. In essence, they are not a claim on the entity that issues them (although the central banks register them as such). A monetary object is not a claim, but the property of the rightsholder.
This may sound somewhat complicated, but it comes down to this: the monetary power of monetary objects does not depend on the gold or debt paper that the central bank has on the balance sheet, but on the public trust in the object itself as a means of payment. Even if the central bank would go bankrupt, these objects can keep their paying power because the public continues to use them as money. The coins and notes continue to circulate as a means of payment in the economy. To give another example that we all have seen in a film: in prison, cigarettes are used as means of payment - in that case, they are also monetary objects. When Marlboro goes bankrupt, the cigarettes in circulation simply continue to serve as a means of payment. The moment the cigarettes are smoked, there will automatically be a need for new monetary objects to paying with.
Bank balances with commercial banks are not monetary items, but monetary claims on the bank. A credit risk is attached to these receivables: if the bank goes bankrupt, your claim is also worth nothing. The monetary claim loses its payment power because nobody accepts a claim on a bankrupt bank as payment for services or products. Compare it to a gift voucher from the V & D, a claim on the products of the department store. Such a gift voucher had 'payment power' until the V & D fell and those vouchers were worthless in one go.
Cash is currently the only monetary item issued by a public institution to which the citizen has access. The moment you pint money from your bank account, you convert a claim on your private bank into a public monetary object. That physical form of cash, however, satisfies increasingly poorly the demands that our modern society places on a means of payment. It is very inconvenient to move cash over large distances and not possible to pay with sounding currency at Amazon or Bol.com. In our global economy, therefore, the use of digital bank balances - monetary claims - has become the norm. Cash has largely disappeared and so the payment infrastructure has been tacitly privatized.
The citizen is even obliged to pay taxes with private money - there is no digital public alternative available: a bizarre situation that underlines the exceptional position of commercial banks within the current monetary design. The power over our money lies for the most part with private parties and not with our democratically elected government. The primary goal of these private banks - making a profit - is not always in line with the public interest that the government serves. In addition, the high dependence on (non-cash) bank balances on our daily payments is a continuing risk to financial stability.
The digital revolution
And then suddenly there was Bitcoin: the first crypto coin and potentially a digital monetary object. Digital monetary objects are easy to move over large distances, but do not have the disadvantages of monetary claims. There is no credit risk because they are registered by name (or account number) and they are not a claim against a counterparty that can go bankrupt. Digital monetary objects can ensure sufficient (digital) liquidity in our economy, but without the credit risk of scriptural money. They, therefore, have the potential to bring about a revolution in the payment system, which - if managed properly - will benefit the stability of our financial system. Digital monetary objects can reduce the social dependence on private banks for payment transactions.
Before Bitcoin, there was also the possibility to issue a digital object that you can use as a payment method. But the blockchain technology behind Bitcoin opens all kinds of new doors for a large-scale transition in digital payment traffic. Blockchain technology makes it possible to issue and administer digital coins through distributed, open source networks. These are transparent networks that are checked on the basis of consensus models. The new possibilities are numerous: this can mean not only the end of credit risk on digital money but also improved security, transparency, privacy and higher efficiency. It offers opportunities for non-political currencies, smart contracts, and cheap international transactions. You can even program coins so that everyone (or certain monitoring agencies) can see what is happening and virtually eliminate bureaucracy, censorship, and corruption. It has become possible to use different coins for specific purposes - depending on the desired characteristics of the coin for that application.
Innovation and experiment versus risk and regulation
This sounds like a far-from-my-bed show for many people. Although the popularity of crypto coins is increasing, there is also a large group among the population who are wary of the unknown means of payment. There are also all sorts of negative stories about crypto coins: it is a bubble and the completely unregulated casino of Initial Coin Offerings (ICOs) with which new crypto coins are issued, is an excellent platform for scams. These stories are largely based on truth: the world of cryptocurrencies is the Wild West of the financial world. Crypto coins now fall outside the usual financial conceptual framework, and therefore also outside supervision. This is because they are not contractual claims. Crypto coins are not even covered by the definition of electronic money or financial product in the sense of the Financial Supervision Act ( Wft).
Currently, most of the 1,450 negotiable crypto coins - including Bitcoin - are only used as a means of payment. They mainly function as very speculative investment objects whose price fluctuates enormously. However, banning crypto coins is not necessary. Speculation in cryptocurrencies has almost no influence on the real economy and (for the time being) does not cause systemic risks - in contrast to the risks that banks take with their investments or lending money. Risk and reward are directly linked to speculation in cryptocurrencies, just like a night at the casino; there are no government guarantees such as those that exist for book money. Last week, 300 billion dollars evaporated in the crypto markets, but the real economy did not notice that. Only the avid crypt speculators sweated carrots. If the prices in the regular financial world were to decrease by 20 percent, the consequences are not nearly as innocent.
Digital (private) coins do not have to be banned, but regulation is desirable. They, therefore, deserve a place within the legislation and financial supervision. If the regulation on ICOs and cryptocurrencies is organized in a proper way, fraudsters can be tackled without the need for innovation to be slowed down unnecessarily. Stimulating innovation and experimentation is of great importance in developing the technology behind cryptocurrencies - which is still in its infancy. Crypto coins have, as mentioned, the potential to bring about a monetary revolution that brings together the best of both worlds: the stability benefits of cash and the ease of use of scriptural money.
Crypto coins issued by the government
In order to steer this revolution in the right direction, further technological development is needed, but above all a debate about the desired structure of our monetary system. The Dutch population is entitled to risk-free public money to save and pay - and that fits in with the usage requirements of this time. That means a digital monetary object, issued by a public institution - and not a monetary claim, issued by private banks.
DNB has barely published about this, but other central banks conducted extensive research. The Swedish Riksbank writes: "An e-currency can be complementary to cash as a government-guaranteed currency without credit risk - available to the general public in digital form ." The Bank of England concludes that the issuing of digital coins by the central bank generates economic growth and financial stability: 'Digital central bank money can increase the gross national product ( GDP ) by as much as 3 percent, by reducing real interest rates, disruptive taxes, and monetary transaction costs. [] It improves the central bank's ability to stabilize the business cycle. '
It is therefore highly desirable that the Dutch government (in a European context) also initiates a process for issuing digital coins by the central bank. Or preferably by a (newly to be set up) democratically controlled government body, which is less interwoven with the current banking system and the financial markets - such as the US Initiative Our Money advocates. DNB is not neutral on this issue, but is, as the central clearing and credit institution of the banks, actively involved in the business operations of commercial banks. It is therefore desirable that appropriate frameworks are created for the delineation of responsibilities and interests.
It is important to realize that commercial banks - also thanks to their strong lobby - have retained their exceptional position within our monetary institution after the 2007-09 credit crisis: we still use monetary receivables for most of our payments. on banks. The risk of new systemic crises is therefore unabatedly high. The value development of cryptocurrencies in that sense can not be seen separately from our current monetary system but is connected with the expectation that they will once become accepted as money. Crypto coins finally compete with banks in the payment system and could reduce the dominant role of deposit money within our monetary system. This can have a positive effect on financial stability and is desirable from the perspective of free competition, a major asset within the European Community.
Monetary policy in a digital monetary system
However, to keep a grip on monetary policy, it is important that the government not only regulates private currencies but also comes with its own digital currency. If the public massively switches to cryptocurrencies, the government and central bank will otherwise be sidelined in influencing the social money supply. Moreover, it offers opportunities for conducting much more direct Quantitative Easing (QE) policy without market disruption: QE for the People (also called helicopter money), which is unthinkable in the current monetary system and practically impracticable.
The dominant role of deposit money within our payment system will most likely disappear - just as the role of cash has changed. Banks will fulfill a different function within our society. This transition will have to be properly supervised in order to guarantee financial stability. Various studies show that the final result will be a more stable and better controllable financial system.
In order to adequately anticipate the lightning-fast developments in the area of crypto coins, some urgency is required for government participation. Acting responsibly is not an option if the government wants to keep control over monetary policy and does not want to become a party on the sidelines of the monetary system. Stopping innovation is rarely the best strategy; a proactive commitment to a credible public alternative to both private crypto coins and scriptural money.
Politics is about to shape the money system of the future and that requires a broad public debate. Today's roundtable discussion is a hopeful step towards this debate. A report will follow on Friday.