Barry Campbell is president of Campbell Strategies Government Relations and Communications, and a former member of Parliament and parliamentary secretary to the Minister of Finance.
A bit of history is the best guide to what is about to happen to private digital currencies such as bitcoin. No, it’s not the tempting comparison to bursting asset bubbles, but the history of the demise of private paper money.
From the creation of the Dominion of Canada until the mid-1940s, Canadian chartered banks were permitted to issue paper banknotes (hence the name) in various denominations. Dozens of commercial banks did so. These banknotes were backed by the general assets of the issuing bank.
Think Canadian Tire money. But, better than Canadian Tire money, these banknotes were legal tender that could be spent anywhere they were accepted – a function of the perceived strength of the private issuer. Even so, a banknote, no matter how fancy looking, was worthless if the bank behind it failed.
The party ended when the Bank of Canada was established in 1934 and given a monopoly to issue notes “payable to the bearer on demand” and backed by the full faith and credit of Canada. Currency was stabilized in a volatile time when banks were failing. Thereafter this official government currency supplanted private currency.
Over the next decade, private notes were withdrawn from circulation and, from 1950, the Bank of Canada took over the liability for private notes still in circulation. While private banknotes are theoretically still redeemable by the Bank of Canada, good luck to you if you find a wad of paper notes issued by, say, the Maritime Bank of the Dominion of Canada stuffed in the walls of your reno. (It is just as hard to establish the value of a private note issued by a defunct bank a hundred years ago as it is to guess what bitcoin is worth this moment or the next.)
Central banks have been playing a long game in the face of the inexorable growth of private digital currencies. But the world’s central banks have now moved suddenly from “We’re watching and studying” to “We may have to get in the game, and soon.” The reasons are pretty straightforward.
The concern of central banks is not over the speculative nature of bitcoin and the like, or the volatility of the trading in the cryptocurrency asset class. That’s something for securities regulators to worry over.
The concern of central banks is the use of private digital currencies to buy real stuff. That could, over time, crowd out the official currency, which gives central banks their raison d’être: control over monetary policy and the (monopoly) profits they earn from issuing currency (charmingly called by the antiquated term: “seigniorage”).
Perhaps Tesla CEO Elon Musk was serious, and not just ginning the bitcoin market he’d just heavily invested in, when he tweeted that you would soon be able to buy a Tesla with bitcoin. (He later changed his mind). But when others – credit card companies and PayPal, for example – started to muse about accepting the most prominent cryptocurrencies (bitcoin and ethereum) to pay for stuff, central banks began to scheme in earnest.
Another less-appreciated concern is grounded in the notion that private digital currencies might undermine the vital “intermediary” role played by banks in bringing savers and borrowers together. Banks take deposits and those deposits fund loans to borrowers. Just try approaching a digital currency issuer for a house loan. It’s not happening. And a crypto exchange is more akin to a stock exchange than a bank that funds your business.
The other incentive to act, and fast, was the decision by the Bank of China to issue an official digital currency last year. Even the Bahamas has done so in creating the aptly named Sand Dollar.
As I described in an earlier article, there is a sort of official digital currency arms race under way. Central banks in the U.S., Japan, Canada and Europe are determined to see that China does not dominate the world of official digital currencies, which would give it a backdoor avenue to undermine the hegemony of the U.S. greenback.
So expect official digital currencies to be issued by all major central banks in the very near future: to compete with China; to preserve central bank monopoly over the issuance of currency; to maintain central bank control over monetary policy and to preserve the lending role played by banks.
Knocking out the competition from private digital currencies will be easy. China is flat out banning digital currencies for retail purchases in order to favour the official digital yuan. Other central banks will be more subtle. Cryptocurrencies will be relegated to where central bankers believe they belong, to being traded as an asset unto themselves like expensive watches, bullion or silver. Central banks will deny the use of private crypto as legal tender so it can’t compete with official currencies.
The good news is that for a time you will be able to convert your private digital lucre into an official digital currency if you wish. The bad news is you’re not going to like the official conversion rate. Good thing for Mr. Musk that he has probably already dumped his crypto.
Keep your Opinions sharp and informed. Get the Opinion newsletter. Sign up today.