Can Public Money (‘Fiat Currencies’) Survive in a World of Private Digital Money?

To What Extent Can Stablecoins Such As Diem Be Beneficial For Our Current Monetary Systems?


Marc Clotet (BSc Economics at University College London)

Image Source: https://www.mindtree.com/blog/central-bank-digital-currency-cbdc-new-form-money-gains-momentum


A Brief Note to the Reader: Before continuing with the reading of this article, I would like to emphasise that there are many ways to read an economic article. Some publications can be that dense that they require some instructions beforehand so as to successfully understand the content. Well, thankfully for the reader, there isn’t any such requirements here but I must say that, since this is a current and hot topic in monetary economics, there is only one rule in the user-friendly manual to read this article seeking for the understanding of each conceptuality and its consequences: ‘Read each line from an open-minded perspective’. I kindly express my opinions and thoughts throughout this writing, meaning that I leave to the reader to interpret and consider the ideas as (s)he pleases. I hope this helps to clarify any doubts (s)he may have on this topic.



‘’C’est toujours l’impatience de gagner qui fait perdre’’ [1]

— Louis XIV (Le Roi soleil)


Humankind has experienced a continuous evolutionary process throughout history. ‘The sun still rises, even if we miss the sunrise’ [2]. No matter where we were yesterday, our tomorrow is a product of evolution, and there is no way to escape from it.


On August 15, 1971 our monetary systems underwent an unparalleled revolution. The Then-President of the United States, Richard Nixon announced that the US would no longer convert dollars to gold, therefore abandoning the gold standard. If we look back through history, many types of money have been used as a means of exchange. During the 7th century BC, the Lydians were known for their coinage activities which originated the first gold and silver coins on earth [3]. Since then, evolution has changed the way we transact with each other with revolutionary new types of money.


I would like to kindly introduce the most recent transformations our society is experiencing in the payments industry, which are argued to be troublesome for our monetary systems. But before doing this, let me introduce the game-changer and winner of the year: COVID-19.



‘COVID-19 is transforming the way we interact with each other, socially and economically’


We will remember 2020 as a ‘disruptive’ year. No one was prepared for this devastating pandemic. Without a doubt, 2020 marked a turning point in our lifestyles which have been forced to be adapted to today’s nearly ‘chaotic’ COVID-19 sanitary crisis, with the major of Western European countries and the UK facing a third wave of infections as of today. One may consider that COVID-19 has not only broken economic havoc and, therefore, constrained national and international markets bringing unprecedented financial consequences, but more importantly, it has begun to show the first splashes of social transformations.


Yes! You read it right! I highly encourage the ordinary citizen to take a deep breath and reflect about a new accelerated behaviour she might have observed while going to buy some groceries during lockdown periods. Now, let me ask to her: ‘’Did you use cash or card?’’

From a macroeconomic perspective, the pandemic has accelerated the electronic payments arena, witnessing an increase by 8.1% to €98.0 billion in 2019 in the EU solely. According to the latest data published by the ECB [4] (see Chart 1 below), non-cash payments in the euro area amount to roughly an amazing €162.7 trillion. Card payments accounted for 48%, credit transfers for 23% and direct debits for 22%. Other interesting conclusions can be drawn from Chart 2, which displays the development of the electronic payments industry along the last eighteen years. As it is observed there, card payments experienced a far-reaching increase since 2000, amounting to more than €45 billion in the EU.



Chart 1: Payments Statistics, EU 2019. Source: ECB




Chart 2. Development of Electronic Payments, EU 2000-2018. Source: ECB


“COVID-19 is transforming the way we interact with each other, socially and economically.” With this unexpected rapid shift to cashless payments looming over our monetary systems, it is of no surprise that ‘Big Tech’ companies do not want to be crowded out from the game. The far-reaching principle in this scenario is who will ‘call the shots’; in other words, who is going to decide what and how.


Ironically, in the long-term, scarce or absence of cooperation between Central Banks worldwide could indeed serve as the spark of the beginning of distrust from the ordinary citizen in their work and, therefore, it would mean the abandonment of the conventional money, what we call ’fiat currencies’.


As one anonymous central banker uttered, ‘everything will be fine as long as we all hold hands and jump off the cliff together’ [5]. With intentions to ‘hold hands’, and with a threatening interest from the financial industry in digital currencies, some Central Banks have endeavoured in a new project considering the feasibility of the implementation of the so-called CBDCs ( Central Banks Digital Currencies) [6]. Some of the central banks which have already committed to this program include the Bank of Canada, the ECB, Bank of Japan, Sveriges Riksbank, Swiss National Bank, Bank of England, Board of Governors Federal Reserve System and the Bank for International Settlements [7], the latter one taking the role as the lighthouse of the world’s money markets.



Where are My ‘Diems? The Rise of Private Money (and the Mitigation of Inequality?)


In June 2019, Facebook astounded policymakers with its highly promising nonprofit cryptocurrency project. The founding partners of The Libra Association (now renamed to The Diem Association [8]) included the multinational financial services companies Mastercard and Visa and 27 other renowned organisations from various sectors such as Spotify, Vodafone, PayPal and Uber.


Rising concerns of privacy issues lurking behind Mark Zuckerberg’s social media platforms led him to testify before Congress in 2019. In the midst of U.S. lawsuits blaming the tech giant for violating the principles of competitive markets and users’ privacy, Libra’s partners are reflecting on their actual contribution in the project. The departure of PayPal later in 2019 left the door opened for more abandonments. The financial services giants Visa and Mastercard, eBay and Stripe have also confirmed that they are no longer participating in this project.


As stated in the main website of The Diem Association, its primary mission is ‘’to build a trusted and innovative financial network that empowers people and businesses around the world’’. Facebook’s plans for its nearly 2.4 billion worldwide users in using ‘diem’ through its own payments network Calibra have already been dispelled in Germany and France which became the first European countries to reject Facebook’s libra cryptocurrency in September 2019, after EU finance ministers questioned libra to bring the monetary stability profaned by its founders [9].


However, many may wonder how this new type of money, or better said, ‘private digital money’, can work and what implications it will have to our current monetary systems. Well, results speak for themselves. Having Facebook such an important amount users on a daily basis (which amount to an incredible 1.82 billion during the third quarter of 2020, a figure which is curiously increasing over time [10]), it’s clear that, once the project were approved by authorities and if it proved to be successful, the world could see the greatest and fastest change from ‘fiat currencies’ or centralised money to ‘private money’. Imagine waking up one day after this pandemic nightmare had finished, having your breakfast and your cup of tea before departing to work and reading on the news that Facebook is launching its own money. What could go wrong?


We have already seen some innovative advances in the field of electronic payments, such as Safaricom’s M-Pesa, which was an absolute success since its introduction in Kenya, allowing to do mobile money transfers regardless if you have a bank account. Following the idea of the M-Pesa, one of Facebook’s main aims with diem is to help the unbanked enabling them to participate in worldwide economic transactions. The only requirement is to have access to an electronic device, so as to store diems in a sort of ‘e-wallet’, which would be Calibra in the case of Facebook.


Nevertheless, by allowing the use of ‘private digital money’ which does not require any intermediaries —i.e. banks or governments —, ‘will Central Banks lose their monetary policy sovereignty?’ This was one of the questions raised during the BIS Annual Conference on 10 December 2020. Markus Brunnermeier, professor of Economics at Princeton, discussed the future of money during that session [11].


Another problem feared from policymakers is the advent of private currencies which could drive out cash. Regulatory aspects of these digital platforms, resembling more to a private bank rather than simply social media apps, are still unclear. ‘Decentralised’ tokenisation is also highly discussed, having the issuers of these stablecoins full control of the system.


Therefore, the challenge is bigger than what it seemed. These trends are dealing with the way we use money and the way we think about money. As Brunnermeier argues, digitalisation is making us moving away from a bank-centric world, where banks were the only issuers and lenders of legal tender money, towards a platform-centric world, where the core of all transactions are located in platforms. Not surprisingly, platforms would dispose of greater control over the issued currencies, being able to monitor and restrict payments as they please.


There are also design issues. Are these platforms going to be subsidised, and hence, altering mark-ups and privacy? More importantly, other monetary aspects may include the amount of fees users are going to be charged for swapping the private digital money to fiat currencies —what is known as out-of-token fees— and who is going to regulate those fees. I would like to emphasise the perilous consequences that can ensue from this last fact, resulting in consumers being locked in such platforms, making it impossible to get out from the system. The number of tokens that would be issued — the supply of money— and the growth rate of money could also be translated into a trap from which you could not escape, since out-of-token fees are high, inflating the value of such tokens and making them more profitable from the owners perspective.



More on Stablecoins, Digital Currencies and Private Money


Increasing stablecoins and digital currencies their worldwide reputation, an important distinction between these concepts should be made, in order to avoid misunderstandings, which are apparently quite common between the general public.


As referred before in this article, bitcoin has become the world’s par excellence cryptocurrency. The origins of the Bitcoin network lie on a Peer-to-Peer Electronic Cash System [12] which was decentralised since its early beginnings — we still don’t know about the founders of Bitcoin, although theories popped up about a mysterious Satoshi Nakamoto — and it gave birth to a rising ‘cryptoassets speculation’.


Blockchain has changed the way humans trust each other in the daily transactions, and more importantly, in business transactions. Trust plays an important role in market economies, where A must trust B, in order to transact with B. The reason why the current financial system exists is because we all have decided to trust companies or governments, so as to let commerce take place. But, what if we just stopped trusting governments or Central Banks?


What made the World Wide Web special was CERN’s public statement on 30 April 1993 [13] stating that the entire Web software were put in the Public Domain. CERN relinquished ‘all intellectual property rights to this code’ and gave green light to ‘anyone to use, duplicate, modify and distribute it’. What would have happened if CERN had licensed its Web services? Centralisation would have become humankind’s principal threat after dead, most probably.


Following the same steps, Bitcoin and its blockchain technology form the first work towards decentralisation. One could see Trust (BTC) as the new currency of the Information Age. Although this is far away to happen, as bitcoin has proved to be more a new type of speculative asset —or cryptoasset — much preferred for institutional investors in times of high uncertainty rather than a new electronic means of payments. This latter fact can be immediately observed recently, having bitcoin surpassed the $40,000 benchmark on 9 January, 2021 and having fiercely diminished to nearly $30,600 in less than two weeks on 22 January, 2021.


Whereas cryptocurrencies are subject to mere speculation, stablecoins are a range of cryptocurrencies whose values are tied to outside assets, which may be the US dollar or gold, so as to avoid price fluctuations. It’s in this proposition where Diem’s core fundamentals rely on. As promised from Facebook, ‘diems’ would be tied to the US dollar, guaranteeing stabilisation in prices.


The intensification of the use of stablecoins, especially those coming from the private sector (as it is the case with ‘diem’) can be translated as the substitution of ‘fiat currencies’ for ‘private money’. Reaching this point, it’s the reader’s turn to ask herself whether she might prefer a ‘private’ masked ‘decentralised’ or a government-issued and, therefore, centralised type of money.



The Way Ahead: Monetary Stability at Its Height


Monetary stabilisation has become an international problem. We live in a world where our daily financial decisions are indirectly determined by the different monetary systems which are in place. Nowadays, money stream is under the control of Central Banks, the issuers of money. By providing monetary policies, they are supposed to bring monetary stability in the marketplace, enabling the ordinary citizen to use ‘elastic currencies’ and, hence, to have confidence in the system.


The unstable unit of money is humankind’s biggest threat. Therefore, Central Banks devise monetary systems to maintain constancy of the index-number of prices, seeking the minimisation of fluctuations in the general price levels as well as in the international currencies exchanges.


In a world full of uncertainty, where money is core in every daily national and international economic transaction, monetary stability is key to ensure the continuity of our monetary systems. Swish and Alipay, two successful digital payment apps are becoming more and more popular and serve as an alternative to cash payments. These apps move deposits among commercial banks by using ‘fiat’, a type of money which is ultimately backed by Central Banks’ mandates.


Diem, notwithstanding, is an organisation with its own money, backed by reserve bank’s money, but lacking Central Banks and governments any kind of power in this game. Diem could turn out to be the largest private central bank on earth controlled by the few but immensely powerful organisations with huge bargaining power that could checkmate other public and private entities, having sooner or later to abandon the game.


Despite failing to charm regulators, diem spooked central bankers, pressuring them to seek for new ‘weapons’ to win the digital money race. Bitcoin raised some concerns in 2009 among some policymakers, making them question the actual feasibility of a world with cryptocurrencies. Back in 2017 Stefan Ingves, governor of the Swedish Central Bank, began working on an e-krona and several Central Banks have recently urged to study the implications of CBDCs, in order to secure themselves a place in the first row in the future digital payments arena.


Diem supposes not only an alarm for its scale, involving 2.4 billion people or, what is the same, three times the population of Europe, but it’s also a threat for countries where households rely on foreign hard currencies as a store of value. The replacement of this currencies for a new ‘private money’ would decrease the demand for ‘fiat’ and, hence, shift the monetary sovereignty from Central Banks to privately owned companies. An important point should be made here. Nowadays, commercial bank act as the intermediaries between Central Banks and the general public — individuals and companies— . Their profits derive from lending and borrowing activities, creating (bank) money by granting loans and accepting deposits. They are in need of (base) money, which is supplied from Central Banks, to repay depositors and clear balances. It is still unknown how such a type of private entities could function, considering that commercial banks and central banks would disappear from the scene, since they would become the new monopoly suppliers of (base money). Hence, new anti-monopoly and anti-corruption policies should be put in place to ensure monetary stability and help reduce the bargaining power of these entities.


The Bahamas’ sand dollar, world’s first CBDC, is an example of the current work Central Bank are releasing in the electronic payments scenario. Nevertheless, although being far to resemble a CBDC, China’s Central Bank also announced its plans aimed at weaponizing its currency, having launched a Digital

Currency Electronic Payment (DC/EP), a digital version of China’s national currency. China’s spectacular growth in electronic payments has been orchestrated by the Chinese e-commerce giant Alibaba, and its payment division Alipay, and Tencent.


We live in a world dominated by uncertainty. I am not sure where we are heading to, what tomorrow will

look like, but I can almost assure that our monetary systems will not be the same. Call it Diem or call it

CBDC. I prefer to call it (monetary) evolution!




References and Endnotes


[1] ‘Impatience for victory guarantees defeat’. This was a famous quote from French King Louis XIV. I occasionally came across this while watching a film during a cold January Friday night at home. Although not being one of my favourite subjects, I must thank the producers from the film ’22 Bullets’, not surprisingly, a French Thriller, which was the source of inspiration to introduce this fascinating writing.


[2] This is from a TV car advert from the Spanish carmaker Cupra. Again, let me thank Cupra’s marketing team for this other bid of inspiration. I must recognise this is one of my favourite car advertisements I have ever watched. I felt the true emotions which make us feel alive in a world being hit harsh by the COVID-19 pandemic. Retrieved January 2021, from https://www.youtube.com/watch?v=9fmJbprDsyI


[3] I devoted an entire article about the history of the first silver and gold coins in Lydia, where I also mention how the wealthy Croesus helped to shape the Iron Are Kingdom’s commerce through the issuance of these coins. You can read the full article following this link https://medium.com/@mclotet200/as-rich-as-croesus-how-the-king-of-lydia-shaped-the-iron-age-kingdom-s-and-today-s-commerce-b825764b55ff


[4] European Central Bank (ECB). September, 2020. Payments statistics: 2019. Retrieved January 2021, from https://www.ecb.europa.eu/press/pr/stats/paysec/html/ecb.pis2019~71119b94d1.en.html.


[5] The actual Central Banker who uttered these words has preferred to remain anonymous. Quotes retrieved from Crypto 101, Episode 357. Crypto Research with Garrick Hilleman of the London School of Economics and blockhain.com. Garrick Hilleman, a visiting fellow at the London School of Economics, is the guest in this episode and explains the current financial system with mentions on cryptocurrencies.


[6] For the keen reader who may find this topic interesting, I highly recommend taking a look to the article from The Economic Tribune, University College London (UCL) published during the November 2020 issue. In this article, I aimed at explaining the core features behind this ‘new money’ and I expect to address further questions about CBDCs in the following months. Please, find this publication here


[7] The BIS published on October 2020 a report considering the current effort from this group of central banks on the introduction of CBDCs as a ‘complementary payments method’. The paper covers the underlying foundational principles as well as main features of CBDCs. For the curios reader, I provide, hereafter, this link might be interesting: https://www.bis.org/publ/othp33_summary.pdf.


[8] Although I may agree this should not be one of the main concerns of the general public, but it is its responsibility and duty to ensure the continuance of the welfare state for future generations to come. The reader will find more information about the Diem Association and its project through this link https://www.diem.com/en-us/


[9] DW. September 2019. France, Germany reject Facebook’s libra cryptocurrency. Retrieved January 2021, from https://www.dw.com/en/france-germany-reject-facebooks-libra-cryptocurrency/a-50424810.


[10] Statista. Number of daily active Facebook users worldwide as of 3rd quarter 2020. Retrieved January 2021, from https://www.statista.com/statistics/346167/facebook-global-dau/


[11] BIS. The future of money. Retrieved January 2021, from https://www.youtube.com/watch?v=B9b3kReQeIU&t=858s


[12] Bitcoin. Retrieved January 2021, from https://www.bitcoin.com/bitcoin.pdf


[13] CERN. Licensing the Web. Retrieved January 2021, from https://home.cern/science/computing/birth-web/licensing-web



Further References


[1] On Facebook’s Libra project https://www.ft.com/content/cfe4ca11-139a-4d4e-8a65-b3be3a0166be, https://www.ft.com/content/aae55c0e-133f-45aa-b329-1e78d7302ce7 and the Financial Times series https://www.ft.com/content/0c5c4012-9100-11e9-b7ea-60e35ef678d2

[2] What policymakers think about Libra

https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp201104~7908460f0d.en.html


[3] China’s and Bahama’s disruptive new method of payments https://www.ft.com/content/fec06de9-ac43-4ab8-81f3-577638bd3c16


[4] CNBC’s Beyond the Valley, episode entitled Digital Currencies from Central Banks could Change Money. as You Know It is also fascinating. On this occasion, Raghuram Rajan, former India central banker and ex-IMF chief economist, has been encouraged to explain his current work on CBDCs.