by Alasdair Macleod, GoldMoney:
There has been much comment over the likelihood that central bank digital currencies will be introduced. I conclude they are unnecessary — a red herring. But it does allow us to discuss their possible relevance to a new Asian super-currency.
Earlier this month, the Bank of England in partnership with the UK Treasury produced a white paper on the subject, which waters down the objectives identified by the Bank for International Settlements considerably. The British proposal is a bad idea because it is pointless and I explain why.
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In this article, I describe how a new gold-backed currency can do away with the US dollar for trade settlements and commodity purchases entirely between participating nations in the Russia China axis. Some informed commentary on the topic suggests that a blockchain will be involved, and Sberbank, the Russian state-owned lender has already issued a gold-linked fund designed to be available to the public by being compatible with ethereum. Perhaps it is front-running developments…
The ugly side in our title is found in the BIS’s dystopian proposals, which sees CBDCs as an opportunity to allow central banks to double down on their attempts to manage economic outcomes while restricting personal freedom.
Messing about with fiat currency alternatives such as CBDCs could end up revealing the formers’ fragility. CBDCs will take years to implement in any major currency anyway, during which fiat currencies led by the dollar are likely to fail anyway.
Introduction
It is not clear what encouraged central banks to think about introducing their own digital currencies, other than possibly a feeling that if they didn’t do something, then private sector money could threaten their monopoly.
Initially, bitcoin was touted as sound money with a hard stop of 21,000,000 coins and proof of ownership recorded on a blockchain. Bitcoin’s strength was to be the opposite of fiat currency weakness, whose expansion is the primary means by which a central bank stimulates an economy. But if central banks think that bitcoin could overturn fiat currencies, they merely exposed their own ignorance about the nature of money and credit.
Bitcoin is not legal money. As opposed to credit where there is a counterparty risk, the only lawful money is gold (and silver for small amounts), usually in coin, acting as an anchor for a gold substitute in the form of credit. Therefore, if bitcoin is to be regarded as money by its users, they must accept that they do not enjoy the protection of the law. In day-to-day transactions this might not matter to the parties involved. After all, they are free to exchange goods or services for anything — in the past family doctors have even been paid by their patients in cigars and whiskey.
Money and credit have a legal status which differs from other forms of property. Some things can only be acquired through legal tender, and bitcoin is not legal tender. But there is a further distinction which kills bitcoin and any copycat cryptocurrency stone dead: when ownership of legal money and credit transfers, it transfers absolutely, but this is not true for bitcoin.
Consider the situation if someone steals your wallet containing banknotes. There is no doubt that the thief has committed a crime. But if he spends the stolen banknotes in a shop, and the shopkeeper was not a party to the theft, then the banknotes become the shopkeeper’s property, and you have no claim against the shopkeeper. This is equally true if you had coins stolen, or the thief transferred credit from your bank account. This happens all the time today, and you may have wondered why your bank cannot recall the funds.
A bank can recall funds if an error has occurred, and the error can be established in reconciliation differences between banks, such as a misposting. If the bank has made a mistake in the management of your deposit account, you may have a claim against the bank, but once funds have left your account the bank usually cannot reclaim them so the bank must bear the loss. But if the bank received valid instructions to transfer funds from your account, then on the transfer there can be no reclaim, even if your account was hacked. The basis was established in Roman law, which differentiated between money and credit in the normal course of banking, and a bank’s legal obligations to items, including money, held in custody. The former being mutuum, in modern accounting being a bank’s balance sheet liability or obligation in favour of the customer. And the latter is a depositum (not to be confused with the term bank deposit), whereby the property in the money remains with the customer.
The difference between mutuum and depositum is not strictly limited to money and credit but extends to some other asset classes which can be transferred. For example, debts can be freely bought and sold, without the debtor’s agreement. After all, this happens when a bank’s customer transfers a bank’s obligation to him to another party by writing a cheque or tapping a debit card on a payment machine.
An interesting case occurred when Richard Cantillon, having acted as a banker, was sued by customers to whom he had loaned funds to acquire shares in John Law’s Mississippi venture. On taking in the shares as collateral, he immediately sold them. Technically, he remained liable for the return of the shares’ value.
But Cantillon collected twice: the first time from the sale of the shares into the market which subsequently collapsed, and the second time when he sued the debtors for repayment of their loans. The Court of Chancery in London decided he was legally entitled to sue because the shares were in bearer form and not numbered, and therefore were not identified specifically as the debtors’ property. In other words, they were classed as mutuum.
But bitcoin does not have the legal status that permitted Cantillon to claim that Mississippi shares were in effect mutuum and taken in onto his balance sheet, and not identifiable as a depositum. With its blockchain, Bitcoin is specifically identified property, just the same as ownership of a painting, or any tangible asset. Its downfall as a currency is that the blockchain identifies it as having been someone else’s property in the past. This may not matter to a current owner. But if the authorities have evidence that your bitcoin was previously stolen, used in money laundering, or purchased with the proceeds of crime, they can trace the bitcoin to you and seize them legally without compensation. Any protestation that they need the wallet key to regain possession counts for nothing: legally they may not be your property and if you refuse to allow access, you will be guilty of obstructing the law.
