Liu Jun: The Colour of Money, Even for the Virtual Currencies

2019-12-17 IMI

This article first appeared in Data Economy on December 4, 2019. Liu Jun, Member of IMI Academic Committee, Vice President, China Investment Corporation. What are the major functions of money? The well-established and broadly-received ones include a medium of exchange, a store of value, a unit of account and a standard of deferred payment, while a comprehensive and precise summary would be that it plays the role of a universal equivalent. Obviously, those defining characteristics are mainly for paper money, or fiat currency in other terms, which has evolved from physical goods, precious metals such as gold and silver to printed banknotes in paper, or in plastic in Australia’s case. Money is all about exchange and trade, first nationally then internationally, substantially supporting the dramatic development of cross-border trade and economic activities. Accordingly, the monetary system has come a long way from the barter trade in the pre-industrial age, the gold-standard in the 1940s to the credit currency system adopted since the 1970s, facilitating trade flows and productivity elevation. Money, in its principal form of capital, is of great significance in creating the whole new edifice of capitalism and the market economy. Capital sits in the top of the list of factors that contribute to the total productivity. However, nowadays capitalism is in doubt, globalism is in retreat, and money itself also seems to be in a synchronized resetting mode. The first issue is the international monetary regime, i.e. which sovereign currency is the anchor of trade, investment and exchange reserve. The US dollar has been the undisputable pillar currency since the beginning of the US-centered world order, but it seems to have unwittingly entered into the playoff period, facing challenges from old contestants such as the Euro and the Japanese yen, as well as new competitors, Chinese Renminbi being the most salient and imminent one. If functionality is the only variable, any convertible currency can be added into the international basket and obtain its proportionate share in line with the related economic shares. To the extreme, the super-sovereign currency, Special Drawing Right, created by the International Monetary Fund in 1969, might be the most ideal substitution for any sovereign currencies. However, the reality is that in spite of the markedly high expectations on the Euro from its inception in 1999 and later on the RMB as China develops into the second-largest economy, neither has imposed real threats to the dollar, let alone the stateless currency forms. On the contrary, the dollar has gained more dominance in terms of its proportion in the international money flows. Money is nothing but a medium or vehicle, the value of which is fully determined by the trustworthiness and credibility endorsed by its home state with its comprehensive power. The US dollar seigniorage is surely derived from the statehood of the US, and its highest status is commensurate with the all-round supremacy of the USA. Given the fact that European countries rally their support around the Euro in order to share the monetary hegemony as an alternative international currency, it is understandable that the US is bound to heavily leverage all means, even the security prowess through the NATO, to contain that European ambition. In the cases of both the SDR and the Euro, the nature of money and the monetary system comes to the surface, and national interests are the only theme. The second issue is the digitalization of the traditional money form. The disruptive newcomers are mushrooming, and the most heated territory is peer-to-peer platforms, which initiate various virtual or cryptocurrencies such as Bitcoin, Litecoin and Ethereum etc. The flag raised high by those new monies is the tech-driven decentralization of the current money issuance system, as well as the replacement of such system by other more trustworthy stateless virtual systems, for instance, the self-governing Bitcoin nation underpinned by blockchain technology. The claimed digital monetary democracy might be clearly visualized through the frantic and somewhat anarchic price fluctuations of Bitcoin, but the conviction towards decentralization can never be achieved through the designing and constructing of the de facto virtual centres. The decentralization process is actually recentralized on certain specific technologies, if not one of Bigtech companies itself. This techno-worship simply shifts the monetary authority from physical states to invisible organizations, whereas the center remains firmly intact. In addition, Facebook’s Libra is, in fact, a stable coin fully backed by bank deposits and high-quality central bank treasuries, and China’s Digital Currency Electronic Payment is essentially a mirror image of cash digitally. They both take the middle ground to reflect the significance of the national-interests oriented authority. In respect of any digital currency forms, the interests of the real or virtual nations are intrinsically embedded. To paraphrase the 1986 hit film, it is safe to conclude that the colour of money is national interests and the value of any forms of money can only be backed by the overall strength of the issuing states. Even though the concept of nation or state may be built digitally or virtually, the true colour of money will never fade and the decentralized incumbents will be recentralized, maybe in a disruptive way. There is a pressing need for national and international regulations on virtual currencies and they will come soon.

DOWNLOAD

Liu Jun: The Colour of Money, Even for the Virtual Currencies

related articles

tags