Programmable Sovereign Digital Currency (CBDC) an economic accelerator

The issuance of Programmable Sovereign Digital Currency could help us overcome the negative effects that COVID is having on the economy.

It is difficult to establish precisely when the monetisation of society took place historically, although it seems that by around 2,200 BC payments were already being made using some form of money. This money was conceived as commodity money in such a way that it had an intrinsic value (cattle, seeds, … and later gold, silver…) that facilitated the exchange of goods and services.

In the mid-18th century, the use of money issued on the backing of a commodity (fiat money) became widespread, consisting of elements representing the good used as an underlying asset (gold certificates). These certificates had no intrinsic value, although they were backed by the underlying commodity, and could be exchanged for a fixed amount of the underlying commodity, with the added advantage of portability and the ability to send and transfer large sums of money from one place to another. The world system was based on fiat money until 1971, when the United States decided to abandon the Bretton Woods agreements of 1944 and the dollar, the international reference currency, ceased to be convertible into gold.

Since the abandonment of the gold standard, economies have relied on so-called “fiat money”, in which, although it has many similarities to fiat money, the bearer has no right to repayment of any goods. Thus “fiat money” is any legal tender designated as such and issued by a central authority, with no other backing than the trust placed in this central authority.

Central banks have for many years been the providers of monetary liquidity to the financial system. Money has a threefold function:

• Medium of exchange: money is used as an instrument of exchange in trade, thus avoiding the disadvantages of the traditional barter system.
• Unit of Account: money operates as a standard numerical unit for measuring the value and cost of goods, services, credit rights and debts.
• Deposit of Value: money holds a certain value (not necessarily unchanging) over time, so that it can be stored (or hoarded) for use by its holder at a future point in time.

Money is a social institution that moulds itself to the needs of society at any given time and has adapted to the times. Thus, since the genesis block of Bitcoin was mined on 3 January 2009, a new paradigm has emerged in the evolution of money in its configuration and functionality, to such an extent that states have seen their issuing capacity threatened by the disruptive proposals of large corporations to use their own means of payment using a basket of different currencies to achieve a stabilisation of its value (e.g. the pound). This pulse on the issuer has prompted the conceptualisation by all sovereign states of a new money, the Programmable Sovereign Digital Currency or Central Bank Digital Currency, which fulfils its function of serving monetary policy and financial stability objectives while coexisting with and complementing existing forms of money and promoting innovation and efficiency in capital market processes and costs. China has already launched it in a test phase. Europe and many other states are already working on it, and it will not be long before we see and accept it as a means of payment, unit of account and store of value in our daily lives.

Programmable Sovereign Digital Currency is a digital form of Central Bank-issued money different from the traditional book-entry balance as a reserve, which must meet a number of requirements: convertibility at par, easy to use, socially accepted and available, even in offline transactions, low or no cost to users, resistant to cyber-attacks, instantaneous notation, resistant to operational failures and service disruptions, available 24/7/365, allowing high volumes of transactions per second, potentially scalable to large volumes, interoperable between systems, and sufficiently flexible and adaptable to change.

If CBDC use expands, bank deposits in financial institutions will decline, thereby limiting their creditworthiness and solvency. In fact, they will shift to a more conservative lending behaviour as their customer information would become obsolete in a short time and could undermine their customer rating methods, compromising their creditworthiness. If CBDC is issued directly without the intermediation of financial institutions, they would lose the ability to create money via lending, the profitability of their shareholders would deteriorate considerably. If CBDC is connected directly between the central bank and citizens, central bank reserves will decrease and digital bank deposits will increase, thereby increasing the velocity of money circulation and accelerating the transition of the post-pandemic COVID economy to a rapid V-recovery instead of a K-segregation of the population.

The expansionary monetary policy known as “Quantitative Easing” used in the 2008 crisis, by not reaching deeply into the private sector, which is reprehensible, did not compensate for the exacerbated debt increase it achieved. We have a second opportunity that should not be missed: the use of Blockchain technology associated with monetary and financial stability policies. Blockchain enables traceability, transparency, time-stamping, decentralisation, distribution and real-time execution of transactions through smart contracts that can bring about a paradigm shift in the management of public debt and the management of state resources.

If the exchange of CBDC between banks is allowed, if short-term loans between banks are allowed, the residential market and consumption will increase considerably and we will be able to reverse the biological crisis in which we are immersed.

The state has a duty to manage public resources in a transparent and truthful way. Achieving a “helicopter money” effect (a monthly amount of money for everyone) in the very short term is well worth the efforts and sacrifices we are making and will have to make in the future to repay the debt we have contracted. It is worth trying and reversing the pernicious effects of the pandemic caused by COVID-19. We need to act immediately.

We bought another train ticket this month and we can’t take it because it has not arrived. It’s already taking too long. Let’s see if we’ve missed it!