Amol Agrawal
Sweden is widely expected to be the first country to launch an e-krona, a digital version of its currency, in 2020. The reason is a rapid decline in usage of physical cash by the Swedish public. Central bankers and currency researchers are looking at this Swedish experiment to understand the impact of digitisation on central banking and monetary economics.
But wait. The agenda of issuing a digital currency has moved beyond digital transactions. It has quickly taken a form of using digital currency for monetary superiority! Currency wars is one of the common topics in macroeconomics where countries try and depreciate their currencies to make exports cheaper. However, what we are going to see in not too distant future is a different kind of war: digital currency war.
Bank of England Governor Mark Carney in a speech at the 2019 Jackson Hole Conference had questioned the hegemony of the US dollar. He said the share of the US in world trade and output has declined, but the share of the dollar in world transactions remains as potent as ever. He had warned of replacing one unipolar dollar with another unipolar currency such as the Chinese renminbi as we live in a multipolar world. He also underscored the need to look at digital options such as Libra currency to counter the dominance of the dollar. (Please see my piece on Jackson Hole conference)
Now, whether it is due to Carney’s remarks or not, we are seeing a surge in these arguments.
Economist Ken Rogoff in a recent article argued that the US should not worry about Libra, but a Chinese digital currency.
The Chinese, like the Swedes, have been planning a digital currency for a while now. We keep getting news that the Chinese are almost ready with their digital currency. They are in a better position to dominate the digital monetary order which they tried in the physical space as well, but could not succeed. Rogoff added that compared to China, the US has more open financial markets and lack of capital control. This makes the dollar more attractive than the renminbi.
Digital currency is a new game and needs to be played accordingly. Even if Sweden becomes the first currency to issue a digital currency, it will unlikely dominate the world currency market as it is a small economy.
However, with China, the game changes. China is not just one of the largest economies in the world but also desires global supremacy. The e-renminbi, if launched quickly, will get first mover advantage and then combine it with economies of networks to make quick inroads into the digital currency market.
Rogoff argued that a digital American currency could be used to trace whether it is being used for money laundering or terrorism purposes. But if China has the first mover advantage, the US can at most ban the currency but cannot prevent the Chinese from spreading its usage in other parts of the world. Obviously, Rogoff is hugely biased here and thinks that the US authorities only allow legal activities and the Chinese support criminal ones, forgetting the long questionable track record of the US in relation to terrorism activity all around the world.
Another place where one surprisingly sees action in the digital currency space is Banque de France (the central bank of France). BdF is not really seen as an innovator. It has divided the idea of digital currency into wholesale and retail markets. The former means using the currency within financial markets and latter is meant to be used by the larger public.
BdF is initially interested in going ahead with the wholesale theme to promote faster settlement of financial claims in the Eurozone. Denis Beau, Deputy Governor of BdF, in a recent speech said Banque de France is “quite open for experiments in that direction, together with the ECB (European Central Bank) and other central banks of the Eurosystem, in particular with regard to a wholesale Central Bank Digital Currency”.
This is really interesting as ECB officials have so far welcomed the technology, but still see physical cash to be of importance. In fact, the ECB is one of those few central banks which cautions European governments against implementing digital payments by banning cash and so on. In a way, the BdF idea will be welcomed by the ECB as the idea is to use digital means for wholesale markets and not retail ones.
From the geopolitical side, launching a digital euro even for wholesale markets would give the region a leg-up. The euro has for long wished to be seen as an equal to the US dollar, but has struggled. A digital euro might just give the whole vision of monetary dominance a new push.
To sum up, these are interesting times, for sure. Remember that central banks first ridiculed bitcoin and now are using the same technology to launch their own digital currency. The experiment has also quickly changed colours from using currency to push digitisation to becoming a way to reshape the world monetary order. This again is not very different from how governments used the ideas of printing notes from private banks to taking control of the activity themselves and then gradually using their currency to shape the world monetary system. It started with the UK pound and then moved on to the US dollar.
India is an odd player here. It wants to be seen as a digital leader, but has banned cryptocurrencies. It also aspires to shape the rupee as a global currency, but clearly will not be able to make inroads in the physical currency world. Should India take a cue from China and work towards an e-rupee? The way some of these countries are shaping their digital currency, the time for India will come much sooner than we can imagine.
Amol Agrawal is faculty at Ahmedabad University. Views expressed are personal.
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