In his 2015 book, “Digital Gold: Bitcoin and the inside story of the misfits and millionaires trying to reinvent money”, author Nathaniel Popper, narrates the experience of Wences Casares, founder of the bitcoin-focused digital bank, Xapo, in his native country, Argentina.
A friend of Wences’ sister wanted to buy a high-end $1.5 million apartment in Buenos Aires. Because of the weak peso, the seller wanted the payment in dollars and in cash.
For the prospective buyer, the money was not the problem. The challenge was that the customer had his hard currency in an American bank account.
To transfer the money to Argentina from the United States and withdraw it in cash “would eat about 10 percent of the money in bank and exchange fees – some $150,000 – and would involve several days of waiting (Popper, 2015).”
How did they get around the problem?
The sister’s friend bought $1.5 million worth of bitcoins instead; which he could easily do on a phone app. He then took his phone with him to the seller and transferred the bitcoins to him with Wences’ sister as a witness.
“Afterward, Wences’s sister sent him a picture of the two old men holding up their smartphones and smiling (Popper, 2015).”
In another example, Popper (2015) narrates how in early March 2013, Wences demonstrated the utility of bitcoin for cross-border digital payments to a global elite at the exclusive annual Allen & Co. retreat, held at the Ritz-Carlton resort outside Tucson, Arizona, that year.
“To prove how easy this all was, Wences asked Blodget [another guest at the retreat] to take out his phone and helped him create an empty bitcoin wallet. Once it was up, and Wences had Blodget’s new bitcoin address, Wences used the wallet on his own phone to send Blodget $250,000, or some 6,400 bitcoins (Popper, 2015).”
“The money was then passed to the phones of other people around the table once they had set up wallets. Anyone could have run off with Wences’s $250,000, but that wasn’t a risk with this particular crowd (Popper, 2015).”
“Instead, as the money went round, Wences saw the guests’ laughter and wide-eyed amazement at what they were watching (Popper, 2015).”
Technology makes things easy. Technology is important. Technology is worth fighting for.
In light of the foregoing, what do you think banks and other stakeholders in the global payments system (“gatekeepers” and “village people”) would be forced to do?
They could try to block cryptocurrencies, as some African central banks have done. A more sustainable solution, however, would be to embrace and regulate the new innovation. In any case, the bans and restrictions have proved ineffective thus far.
Change is inevitable. Nigeria recently announced plans to issue a digital currency. Ghana and South Africa are also working on their respective central bank digital currencies (CBDCs).
But what are CBDCs? And why the sudden interest by hitherto conservative African central banks in issuing CBDCs?
In regard to the first question, CBDCs are simply digital fiat currencies. And for the second question, you have probably guessed the answer. And you are right: cryptocurrencies.
To understand CBDCs, let us use the email versus letter post analogy. Even as you could scan a letter to send via email, it would still not change the fact that the origin (or “provenance”) of the letter is physical.
And even as you could now use “optical character recognition” (OCR) technology to convert scanned documents into digital text, it would still not change the fact that the provenance of the converted text is not digital.
An email, however, is digital from the start. It is not a digital copy of a physical document. It is the document itself. Two different origins are two different systems.
Same thing with CBDCs. As digitalized or cashless fiat currencies and systems already are, they are still not fully digital.
Every single unit of a digital currency is distinct, has a digital provenance, and its use can be traced from person (or entity) to person (or entity) throughout its existence; which if blockchain-based, is forever; theoretically, at least.
Thus, as highly digitalized as fiat currencies currently are, they are not “digital” to the extent that cryptocurrencies are. To compete, fiat currencies have to be similarly advanced.
Besides, it has become imperative for central banks to recover some market share from tokens that are linked to their fiat currencies called stablecoins. This is the primary reason some central banks are currently racing to create digital versions of their fiat currencies.
