Tag Archives: money 3.0

Central Bank Digital Currency is not Cryptocurrency as Envisioned

Recently the International Monetary Fund produced a research report on Central Bank Digital Currencies, titled “Casting Light on Central Bank Digital Currency”, and available here:


Even the title is interesting in its omission of the terms cryptocurrency and blockchain.

The basic concept they were evaluating was that of central bank controlled digital currency issued for the benefit of retail users (individuals and non-banking businesses). These would exist alongside existing fiat currencies and be intended for domestic use primarily. Their value would have to be tethered to the related fiat.

The study reached several initial conclusions:

  * CBDC could be the next milestone in the evolution of money.

  * It is a digital form of fiat money, issued by the central bank.

  * The ability to meet policy goals is one major issue.

  * The demand for CBDC depends on the attractiveness of alternatives (cash, e-money).

  * The case for adoption could vary from country to country.

  * Appropriate design and policies should help mitigate risks.

  * Cross-border usage would raise a host of questions.

A number of central banks around the world are studying CBDCs. This table from the IMF report indicates their publicly stated rationales, which include diminishing use of cash as other payment channels e.g. mobile become popular, efficiency gains for payment and settlement, and greater access for the unbanked or lightly banked to financial services.


But the key point is that CBDCs are quite antithetical to Bitcoin and mined cryptocurrencies in general (we exclude in this comparison airdrops, premined, and other largely centralized, but private, forms of cryptocurrency). CBDCs are closest to the tethered cryptos, but maintained by the fiat issuing authority itself.



Created by miners running hashing protocols Created by central bank
Predefined monetary policy Variable monetary policy set by central bank committee
Transnational usage Domestic usage primarily
Open triple entry ledger Central bank permissioned ledger
Validation by private computer nodes Validation by central bank

There is very little in common between Bitcoin and mined cryptocurrencies in general, and hypothetical CBDCs. Most existing fiat is already digital; a small portion is cash.

The main new alternative, besides existing fiat cash, for CBDCs are private payment channels (private e-money) such as PayPal and M-Pesa in Africa. These are similar to stored value cards with prepaid fiat balances, but with mobile interfaces. Here the account balances are managed by private companies, usually with a known partner, and a user needs to trust the company holding the balance.

Both new private money channels and CBDCs threaten to disintermediate balances held in bank checking and savings accounts. So do cryptocurrencies, of course.

These balances are used as reserves for banks to issue loans, so if they were moved to a cryptocurrency or a central bank ledger they are no longer available for lending (fractional reserve banking).

A fundamental difference is that cryptocurrencies are assets whereas fiat money is debt-based, created when banks issue loans. CBDCs in their basic form are not available as reserves for bank lending.

CBDCs would in essence just be a different form of fiat, tethered to fiat, and with the same accounting unit and value.

Cryptocurrency represents a challenge to the banking system and to central banks. It seems that the IMF may be encouraging central banks to sacrifice the interests of banks in order to maintain, and even increase, their own power.

The CBDC framework, like cryptocurrency, would move deposits away from the banks. Unlike cryptocurrency, which holds balances on an open ledger, accessed by private keys, CBDC balances would be held for individuals and businesses at the central bank. This means the central banks would be able to restrict access to funds owned by individuals. One can assume they would do this during crises or under court order.

Central banks could even apply interest to CBDC deposits, possibly even with negative interest rates during times of slackened growth.

Fractional reserve banking and the economy as a whole are based on the provision of credit by commercial banks, backed only by a small percentage of reserve balances held with the central bank. If deposits move in large amounts to CBDCs or cryptocurrencies, both of which are assets in the name of the depositor, the system of credit provision in the economy will have to be significantly transformed.

Or a system that allows banks to participate and hold reserves based in CBDC would have to be developed.

CBDCs of the simplest type discussed in this IMF paper seem like a way to protect the prerogatives and increase the power of central banks, and co-opt cryptocurrency. The losers would be traditional banks because their lending power would be decreased. 

Information Economy 2.0

Bitcoin is a Trillion $ Economy

We often hear that we live in an Information Economy. We have an information-based economy, but we don’t have a pure form of “money as information”. Instead we have a hybrid of digital money and paper money with encoded information such as denomination and serial numbers and engraving details.

Money (Money 2.0, ‘paper’ fiat money) today is mostly information, but the modern monetary system was designed long before the Information Economy. Even so, money is mostly held in digital form, on the ledgers of banks, and as monetary reserves at central banks. Physical currency in circulation is a small fraction of the money supply. So today it is a hybrid. One can argue it is not fully suited to our rapidly evolving information economy.

Steven Mnuchin, Louise Linton, Leonard Olijar

Steven Mnuchin, Treasury Secretary, and Wife Posing as Bond Villains, while Enjoying Dollar Bills at the Bureau of Engraving, While Dreaming of Tax Cuts for Multimillionaires

Bitcoin and cryptocurrencies collectively are Money 3.0, a form of money that is entirely digital, entirely information. Even if you have a physical bitcoin wallet or paper wallet, the money does not reside in the wallet, only the keys! The keys release bitcoin money held on the blockchain.

Trying to separate the blockchain from bitcoin or cryptocurrency is like trying to separate the economy from information in the information economy. The blockchain holds the ledger information, the cryptocurrency powers the economy. The term ‘blockchain’ does not appear even once in Satoshi Nakamoto’s seminal paper for bitcoin and cryptocurrency.  See this OrionX.net podcast discussing Nakamoto’s vision and the Nakamoto consensus algorithm: https://youtu.be/ZLS5P7SYcyI

Today, market participants mostly look at the market cap of bitcoin and other cryptocurrencies, as if they were some sort of equity shares. But actually, they are currencies, or perhaps digital gold, and what is somewhat strangely called ‘market cap’ is actually the money supply for that currency. It is simply the price of bitcoin, times the aggregate number of bitcoins in circulation. Here, in circulation means securely committed to the blockchain through a cryptographic hashing algorithm.

The size of the economy for bitcoin is related not only to the money supply, but also how rapidly that turns over. In macroeconomics this is called monetary velocity. In fact GDP = M2*V where the GDP is equal to the M2 money supply and V is the velocity of that money. It reflects how fast money moves through the system per year.

In the US the GDP is about $19.5 Trillion, the M2 money supply is about $13.7 Trillion and the velocity is about V = 1.42. That is, on average, the money supply turns over 1.42 times per year. In fact the Federal Reserve has been worried that the velocity is too low. It has been dropping steadily, which is a symptom of stagnation.


Velocity of M2 Money: Federal Reserve of St. Louis

For bitcoin the velocity is much higher. It turns over about 9 times a year, V = 9. Today the money supply or market cap for bitcoin is about $121 billion. With a velocity of 9, that translates to a bitcoin economy that is over $1 trillion. It amounts to around 5% of US GDP and more than the GDP of the United Kingdom. Bitcoin is not usually described in such terms, but this is a measure of the vibrancy of the economy for the cryptocurrency.

Many cryptocurrencies have even higher velocities. Bitcoin Cash, which has only been in existence a few months, has a velocity of 26 and a total economy of over $500 billion, similar to the GDP of Sweden. The world economy of cryptocurrencies exceeds $2 trillion. This is more than the GDP of Italy.

Bitcoin and other cryptocurrencies are enabling the Information Economy 2.0, where whole new forms of efficient exchange of value can be implemented with fewer or even no middlemen and at lower cost.