By Amol Agrawal
A quote from Vladimir Lenin is doing the rounds these days, mostly against the backdrop anything tech-related. “There are decades where nothing happens; and there are weeks where decades happen.” This applies to central bank digital currencies (CBDCs), in the global and Indian contexts. The discussion on CBDC and its issuance has been going on for a while. In 2019, a finance ministry committee had proposed that RBI issue a CBDC. In the FY23 Budget speech, the finance minister had announced that RBI will issue a CBDC this year, but it seemed as if the project will be postponed. All of a sudden, in the space of four weeks, RBI initiated pilot projects for both retail and wholesale CBDCs. The wholesale CBDC is for commercial banks whereas retail CBDC is for the general public. The discussion has moved from how CBDC will be issued to whether CBDC will work or not.
RBI joins a clutch of other central banks that are working on CBDC. As per a Bank for International Settlements report, “Over the last four years, the share of central banks actively engaging in some form of CBDC work grew by about one-third and now stands at 86%”. Further, 60% of these select central banks (up from 42% in 2019) are conducting experiments or proofs-of-concept, while 14% are moving forward to development and pilot arrangements. The Indian central bank is the latest addition to the second category of central banks.
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Lenin’s quote applies to the overall movement towards digital currency. The Austrian school of economics has for long advocated the circulation of private currencies issued by commercial banks over the nationalised currencies issued by central banks. In fact, the history of money is interspersed with both private and public currencies in circulation. Gradually, the public currency issued by the central bank became the standard way in which domestic monetary systems began to be organised.
Despite this transition to central-bank-issued currencies, the followers of the Austrian school have constantly chipped on the need to have private currencies. One of the most famous arguments in favour of private currencies was given by Friedrich Hayek, in his research titled ‘Denationalization of Money’. Hayek summed up in the volume that ‘the causes of waves of unemployment is not capitalism, but governments denying enterprise the right to produce good money’. Hayek analysed how the governments monopolised the currency function by treating money as sovereignity, encouraging the mystique of legal tender and a superstition that government conferred value upon money. This monopoly has allowed governments to engineer inflation and lower value of money recurrently. Like other goods, money can also be better supplied by competition between private issuers than supplied by government.
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While the microeconomics of money suggested competition, the macroeconomics of money tilted increasingly towards monopoly. The monetary system became hierarchical with the central bank supplying the money for both retail and wholesale purposes, which was guaranteed by the central government. The commercial banks provided loan and deposit services, which also led to money creation, but this did not have government guarantees.
Hayek had questioned why an economy shouldn’t have circulation of multiple currencies, and asked economists to discuss this possibility. But, it would have taken more than just economists to even think of this!
The recent develoments in technology created the prospect of issuing multiple currencies. In 2008, someone using the pseudonymn Satoshi Nakamoto proposed a peer-to-peer electronic cash named Bitcoin. Bitcoin not just marks a striking resemblance to the vision of Hayek, but also is a step further as it proposes to make payments ‘without going through a financial institution’. The Bitcoin note was released post the Lehman brother debacle, which led to the global financial crisis. Thus, it is not just about the thought of a world without a central bank, but even one of dis-intermediation of banks from the payment function.
The Bitcoin idea led to three broad developments. First, it led to many private digital currencies or cryptocurrencies. These cryptos never really functioned like money but traded like assets. As these assets did not have any underlying revenue, the writing of their failure was written on the wall. This eventually did happen with multiple failures seen recently.
Second, it pushed central banks into thinking about digital monetary system. Mojmír Hampl, former vice governor of the Czech National Bank, in a 2018 speech, stressed on ‘the positive philosophical influence of Bitcoin on the conservative world of central banking’. He added that, instead of academicians and central banks, it was ‘libertarian IT guys’ who provided the intellectual stimuli for reforming the monetary system.
The third development is connected to both the two above. The failure of the private digital currencies and research in central banks and academia has led to advent of central bank digital currencies. This is obviously ironical. Hayek and the ‘libertarian IT guys’ would have hoped that the private digital currencies would compete and then, hopefully, replace the central-bank-driven monopoly currency. But this is not how the events have played out. We are back to central-bank-issued digital currency, which are being seen as major agents of change. Once again, the microeconomics of currency has given way to macroeconomics of currency.
The writer is Assistant professor of economics, Ahmedabad University
