The proliferation of new forms of money is inevitable and our lives are going to become more challenging as a result.
That’s the view of Simon Gleeson, a specialist in financial regulation and a partner at law firm Clifford Chance. Gleeson is clear about the implications of the current fascination with new digital tokens, a trend that has accelerated since the launch of bitcoin a decade ago.
“Over the next ten years we’re going to have more and more offerings in this general direction,” said Gleeson. “The world is going to become more complicated and more irritating.”
Gleeson, the author of a recent book called “the Legal Concept of Money”, was speaking at an event in London organised by the Centre for the Study of Financial Innovation (CSFI).
Who should keep the score?
Last summer, the general manager of the Bank for International Settlements (BIS), Agustín Carstens, called for an end to the experimentation with new forms of currency.
“My message to young people would be: Stop trying to create money!” Carstens said in an interview with the Basler Zeitung.
But Carstens’ advice may fall on deaf ears. According to Gleeson, it also has little to back it up from a legal perspective.
“The pounds in your bank account are entirely imaginary things”
In fact, almost anything could be considered money, said Gleeson, who distinguished between a claim against a deposit-taking institution, such as a bank, and the actual monetary units themselves.
“Your claim against your bank for your deposit is a legal thing,” he said.
“It may be intangible, meaning you can’t touch it. But the court will still recognise and enforce it.”
“But the pounds in your bank account are entirely imaginary things,” said Gleeson.
“They do not exist at law or anywhere else. They are simply a mechanism for keeping score.”
And, added Gleeson, there is no reason why other accounting systems cannot perform a similar function.
“At the moment, the people who keep that score are banks. But it makes no difference whether they are banks or something else entirely.”
Squeezing the banks
Banks are being squeezed in other ways, most notably by the separation of their payment function from other activities like taking deposits and providing loans.
“Banks do three things: they provide access to payment systems, they recycle credit, and they take liquidity and maturity mismatch risk,” said Gleeson.
“But what happens if you take access to the payment system away, and give it to someone else? What you’re left with is an investment fund,” he said.
This trend is already happening at scale in the Far East, where companies like China-based Tencent have developed multi-purpose messaging, social media and mobile payment apps, causing customers to leave their funds on deposit with the app operator rather than at a bank.
Other technology companies with a significant social media presence, like Facebook, are playing close attention and seeking to expand their own payments activities.
This brings technology companies to the forefront of the monetary system, said Gleeson.
“The direction of travel is clear. Increasingly, large numbers of people are being accommodated through these new record-keeping systems. If we remember that the pounds in your bank account are just points, and the whole payment system is just a score-keeping mechanism, it’s easy to see that anyone can do it.”
Private cybermoney—back to the future
But banks’ competitive position is far from hopeless, said Gleeson. They still have advantages like incumbency and—despite 2008—public perception. And they are now trying very hard to develop private digital currencies themselves.
“Banks are going to do their business in private currency units”
In February, US bank giant JP Morgan announced that it is trialling its own digital currency, nicknamed JPM Coin, intended to speed up the settlement of transactions between institutional clients.
And a London-based firm called Clearmatics, backed by banks and other financial institutions, is developing a so-called Utility Settlement Coin (USC), a new digital cash instrument collateralised by central bank money.
“Before very long, banks are going to be conducting their business in what are effectively private currency units,” said Gleeson.
Money tokens issued by banks—as opposed to the government or central bank—are not new. Banknotes issued by private commercial banks were a significant part of the money supply in both the US and the UK during the nineteenth century.
But there’s another reason for banks’ current enthusiasm about digital currencies, argues Gleeson.
“The reason banks are falling over themselves with excitement about digital currencies is because they offer the opportunity to junk sixty or seventy years of rubbish computing systems,” he said.
CBDC—a terrifyingly bad idea
Central banks are themselves under pressure to exploit the virtual currency trend, reflecting technological change and evolving consumer habits.
Earlier this year the BIS issued a report stating that 70 percent of a large sample of the world’s central banks were researching the introduction of new forms of digital currency.
One reason for the introduction of central bank digital currency (CBDC) might be to help ensure a continuing role for the state in the monetary systems of countries where traditional physical cash (in the form of notes and coins) is going out of circulation.
In Sweden, for example, a country where digital payment is now dominant, the value of cash in circulation has fallen from around 3 percent of GDP in 2010 to just over 1 percent now.
And only around 10 percent of Swedes paid for their most recent purchase in cash, compared to around 40 percent in 2010.
But central banks have proved reticent to experiment with CBDC, partly out of concern that its introduction could destabilise the entire financial system.
“If central bank-issued cryptocurrencies started circulating alongside private currencies, in an economic downturn you could have the most massive run on the issuers of the private currencies. This is one of the reasons CBDC are a terrifyingly bad idea,” he said.
Sort of money, sometimes
For the foreseeable future, we will all have to get used to dealing with lots of new forms of money, near-money, or even money that changes function, depending on how we use it.
Unfortunately, our laws are not well-designed to cope with the current period of experimentation, says Gleeson.
“It’s really, really hard”
“The existing legal system is based on the binary concept that something is either money or it isn’t,” he said.
Already, the jury is out on whether a virtual monetary unit like bitcoin can be considered currency from a legal perspective. Currency enjoys a special legal status compared to other forms of property: whereas stolen property can be claimed by its original owner, stolen currency can’t.
But there are many other uncertainties, says Gleeson.
“There’s a whole raft of legal questions,” he told attendees at the CSFI event.
“How do I take security over it? If I owe you money and you owe me cryptocurrencies, can I set them off? If you owe me cryptocurrencies, what’s my claim—is it a claim for payment of a sum of money? If you look after cryptocurrencies for me, are you in the deposit-taking business?”
In fact, there now seems to be a more fundamental clash between technology and the law when it comes to money.
“How do we shovel into the existing legal system something that is sort of money, sometimes? It’s really, really hard,” Gleeson said.
Sign up here for New Money Review’s monthly content updates