The management of financial risks (interest rates, FX, etc.), maximization of investment returns, management of revenues and expenses, assets and liabilities, raising short- and long-term financing… it all comes down to money. The medium of money through which modern treasurers move is not as elementary as it appears, it cannot be taken for granted.
Treasurers generally operate in only one of the monetary slipstreams – the commercial bank money layer of the fiat currency system. The modern age of fiat currency only dates from Bretton Woods, when Nixon suspended convertibility of USD to gold. In the past we have had many different forms of money – commodity money, representative money, managed money and other flavours. One constant that goes back to Babylonian times is the sovereign’s prerogative to decide what should count as money.
New technology has brought us to the point where there are many possible futures of money, each of which will impact treasurers, as much as changing the nature of the liquid in a goldfish bowl. It is time to question our surroundings and participate in the debate about the future of money.
Criticisms of the fiat currency system predate the emergence of cryptocurrencies, but the publication of the bitcoin whitepaper in 2008 was a watershed moment. In solving the ‘double-spend’ problem of digital currencies, the bitcoin whitepaper showed that there could be a global currency without a sovereign issuer.
2008 also started an era of ‘experimental’ monetary policy as a result of the financial crisis, the origins of which some would trace back to the nature of our modern fiat currency system. Quantitative easing and negative interest rates created the impression that at some point central banks would run out of tools to prop up a debt-fuelled economic model. Inequalities in societal wealth and incomes, denominated in fiat currency, have driven the rise of populist politics across the globe. Some would argue that these outcomes are not bugs of the fiat currency system but inherent features of it.
In 1976 Hayek wrote a treatise called ”The De-nationalization of Money”, in which he argued for the sovereign’s monopoly on money to be overthrown by competing private issuers of ‘stable’ money. In particular, he argued for private money to be based on a basket of commodities, and gave step-by-step instructions for how such a system would be formed and implemented. Gresham’s law says that bad money drives out good – if you have two coins and one of them is ‘clipped’ then that is the one that you spend. Hayek argued to the contrary that ‘good’ stable privately issued currency would drive out ‘bad’ depreciative fiat currency. Little did Hayek know that he would become the darling of the cryptocurrency community over 40 years later as major players looked to the development of ‘stablecoins’ as the next iteration of money.
Stablecoins seek to overcome the volatility that first-generation cryptocurrencies suffered from, which prevented them from being used as money. There are two primary methods to achieve this: one is through algorithmic management of supply on cryptocurrency exchanges, the other is by pegging a token to some defined collateral, e.g. gold, the USD, US treasuries or a basket of currencies. Some of these proposals look like ‘electronic money’ that we have become familiar with and are well regulated – Paypal, PayTM, Alipay, WeChat Pay, etc. Others are more radical and bring Hayek’s vision to life – private stable currencies that will compete with national fiat currency systems.
So far regulators and governments are relatively sanguine about the threat to the monopoly over money that they have enjoyed for thousands of years. Mass market adoption of a stablecoin issued by Big Tech firms may change that calculus quickly. We may need to mint new terminology to discuss these potential futures – ‘cryptonization’ (compare with ‘dollarization’) may be a useful term for the process by which the sovereign’s ability to conduct monetary policy is challenged by a private stablecoin.
Cryptonization, the emergence of stablecoins operating as global digital money in competition with national currencies, may stimulate some central banks to release their own innovations – central bank digital currencies (CBDC). CBDC is equivalent to enabling individuals and corporates to have the ability to open accounts directly with central banks, giving access to a form of money with only sovereign counterparty risk. CBDC may well be interest-bearing, giving central banks a new lever over the economy and banking system. Transfers through CBDC would bypass all existing clearing systems, commercial banks and e-money institutions.
The commercial banking system and fintechs could be caught in the crossfire of a battle between CDBCs and privately issued stablecoins for monetary supremacy. This competition for deposits and payment services from two entirely new fronts could seriously impact the financial stability of the banking system and the process of credit creation.
There is an alternative future of money, based on less evident changes happening in fiat currency systems around the world. Modernization of the ‘fiat currency stack’ – including RTGS, ACH, Faster Payments, Open Banking and other innovations – may deliver ‘Fiat Currency 2.0’ which is fit for purpose in the 21st century; more real time, transparent, traceable, cost effective and responsive to the needs of the digital economy.
In conclusion, treasurers work within the fiat currency system – that is their element. Some have learned the hard way that the crypto and fiat worlds are tricky to synthesize – for example, it is an absolutely terrible idea to try to free trapped cash from FX/capital controlled countries through bitcoin! If the nature of money changes, so will the role of the treasurer – this is true whether the future belongs to CBDC, cryptocurrencies or a fiat currency system that is hyper-connected and always on.