The Wild West of money: Preserving singleness in a digital age
by Elise Soucie, Director of Policy & Regulation at GDF
Last week the UK financial regulators released a slew of consultations which set out their vision for stablecoin regulation. High in the Bank of England’s priorities was the goal of preserving financial stability as well as the singleness of money as new forms of digital money continue to evolve. A relatively obscure financial topic until recently, the BIS defines the singleness of money as a ‘cornerstone’ of the modern monetary system.
Singleness refers to the unambiguous unit of account that underpins all economic transactions in society. Essentially, it means that 10 pounds is worth 10 pounds regardless of how you pay for something (digital or banknotes) or who your bank is. In our digital age of stablecoins, digital assets, Central Bank Digital Currencies (CBDCs), and cryptocurrencies singleness, both within jurisdictions and on a cross-border basis, could now be at risk. But why does this matter? As a retail consumer or a business owner do we even need to care?
Yes, we certainly do. To put this in perspective, cast your mind back to a different period in history, an ocean away, when Buffalo Bill and his fellow cowboys dominated the American Plains, and a Wild West of Money (The Free Banking Era) caused chaos for businesses, governments, and everyday citizens alike.
In 1837, certain states changed how they offered bank charters which meant that virtually anyone could open a bank. There were some rules, banks had to back their issuance one-to-one with state bonds. However, these were only state bonds, deposited with state treasuries. There wasn’t any national, federal level consistency across America.
The result was that each state had an array of private banknotes which circulated as money. But they did not trade at par from the issuing bank. Consider how frustrating it would be if you had a 10 pound bank note issued by a bank in Newcastle, but that circulated at a 20% discount in Cheshire and was only worth 8 pounds at the M&S there.
There were many issues with this era of American banking including fraud. Yet the biggest issue was not the swindlers, but the economic inefficiency. There was constant haggling and arguing over the value of notes in transactions and trust in the bank notes themselves eroded. Eventually, the delay and trouble of using bank notes for operations in that era devolved so much that where communities had lost the singleness of money they were also eventually deprived of the ease, advantage, and efficiency of money itself.
This was then rectified by the National Bank Act of 1863 which established national banks, issuing national bank notes, backed by US Treasury Bonds. High tax legislation then eventually shut private bank notes out of the market.
Yet, with the potential benefits and advantages of new forms of digital money in the current era, the public and private sector will need to cooperatively work towards new solutions. There are widely discussed advantages to implementing new technologies such as DLT in financial services. New forms of money can improve the efficiency, security, and accessibility of money.
To preserve these benefits, as well as the singleness of money, it is important for there to be convertibility between new forms of money such as CBDCs, tokenised deposits, and stablecoins in order to preserve confidence in money and payments.
Furthermore, singleness must be considered on a cross-border basis as well as within individual jurisdictions. The Financial Stability Board (FSB) discussed in a report earlier this year how differing regulatory classifications and approaches to stablecoins at jurisdictional level could result in market fragmentation. These differing approaches to stablecoins could also impact a CBDC’s effectiveness across borders and could result in regulatory and/or traditional arbitrage.
There are different solutions that could be pursued and ranging from the Regulated Liability Network to smart contracts. For example, Varun Paul, Senior Director for Central Bank Digital Currencies at Fireblocks explains that, “In a healthy and vibrant digital asset ecosystem, it will be natural for different forms of tokenised money to exist alongside one another, providing consumer choice and financial system resilience. They will each have a role to play, just as e-money exists alongside commercial bank money and central bank money today. In a tokenised form, we can use smart contract logic to guarantee the singleness or uniformity of money, so that the consumer can have trust in whichever type of money they are using.”
Conserving singleness shouldn’t prevent new forms of digital money from existing. The public and private sector must work together now, as the infrastructure is evolving, to ensure connectivity across all types of money. We must work to preserve economic efficiencies and avoid our modern era reverting to a digital Wild West.