Digital Money, Central Bank Digital Currencies, and International Capital Flows
Thoughts after reading Richard Holden’s Money in the 21st Century
It’s easy to take innovations like Apple Pay, Zelle, Venmo, and digital payments in general for granted; these creations have seamlessly become part of our lives and the way commerce happens across the world. Richard Holden’s book Money in the 21st Century is a thoughtful and creative approach to envisioning what the future of digital money could look like, with some prescriptive ideas for how to get there. He touches on a wide variety of topics including Central Bank Digital Currencies (CBDCs), the U.S. status as a reserve currency, the sustainability of government deficits, and international capital flows, so rather than write a full-length essay on my perspective on these topics, I’ll structure this as a collection of shorter takeaways on these topics after reading his book:
A notable fact from the book: “In the United States in 2021 there were 33,000 reported instances of bank fraud - and many of the victims had part or all of their money returned. By contrast, there were more than 4.6 million instances of larceny theft (theft of cash) in the United States that year.” This is part of Holden’s compelling argument for the universal merits of digital payments over cash.
Sweden has fully transitioned to digital payments and seems to have a Zelle-like app called Swish. Out of Sweden’s 10.35 million people, “there are more than 8 million private users of Swish.”
I know that the impact of mobile money has been profound in the developing world, but the scale of it is still impressive. “In 2021, $1 trillion in mobile money transactions was processed for 1.35 billion accounts in 98 countries.” And, M-Pesa, Kenya’s mobile money system, “led to changes in occupation, with 186,000 women moving from the agriculture sector to business and retail.”
The book discusses Facebook’s attempted private global digital currency, Diem, in depth, and raises the prospect that despite Diem failing, another private digital currency might arise in the future which could compete with the primacy of the U.S. dollar. Holden proposes the U.S. government create a CBDC to prevent the establishment of such a private market competitor. He also argues that a U.S. CBDC needs to be developed soon to continue the U.S. dollar’s role as the global reserve currency, given other countries’ developments of CBDC infrastructure running ahead of America’s.
So far, so good on the CBDC argument - I was persuaded that a U.S. CBDC would be of immense value to the U.S. government. However, where the author lost me a bit was on using Web3 infrastructure for the CBDC. He suggested a (centralized) distributed ledger to handle CBDC transactions and smart contracts, suggesting that we take cryptocurrency’s good ideas and apply them to CBDC infrastructure. I need to do more reading on smart contracts before forming a strong opinion here, but my sense is one of the immensely appealing things about cryptocurrency is the lack of government control over the system. While it’s true that crypto and cash are currently often used for illicit activities, it’s also unfortunately not hard to imagine a future where I’d rather the government didn’t have a complete rendering of my every transaction, asset, and expense.
Building on that, I’d be interested to see an argument for a privacy-preserving CBDC infrastructure that ensured universal access to dollar digital payments but still preserved a role for cash and transactions away from the eye of the government. Preserving the dollar’s reserve status is critical, but so is preserving our domestic financial and economic freedoms.
The book also touches on numerous other topics of interest - one that I found especially interesting was the discussion around global interest rates and capital flows. Raghuram Rajan, the former Chair of the Reserve Bank of India, has spoken at length about his concerns over how powerful economies such as the U.S. and the E.U. setting interest rates affects the developing world. For example, when the U.S. had extraordinarily low interest rates, capital flowed into emerging markets, only to reverse itself when macroeconomic circumstances changed. Rajan has proposed greater international central bank coordination to mitigate the effects of these rate changes. I’m skeptical that the idea is politically sustainable at this time, but would be interested to hear if you all have other ideas around this issue.
You might want to look into David Chaum’s CBDC proposals for the SNB and BIS.