digital memories

Digital monetary memories

Financial Times’ Alphaville has an interesting article about the ‘memory’ that our money holds and how technology is turning this abstract idea about money’s memory, into concrete reality. “We have little idea of the journey our money has been on, nor of the tasks performed – previous to own – to acquire it,” the authors had written, before delving deeper into consequences of constructing said memory.

Hyun Shin from the Bank of International Settlements (BIS) had said that we needn’t know the whole history of paper notes and coins that we hold in our hands. “But money is also a social convention – there is a whole record that’s somehow captured in that paper. In theory, you can have a complete ledger, you can have a complete institutional memory.”

So the question that arises is, should we want to create and keep that institutional memory?

This question is especially pertinent as central banks are exploring digital currencies (CBDCs), and China, ahead of the rest, expects to launch a digital yuan by 2022.

The Bank of England has a simplified explanation of central bank money – notes, coins or reserves held by private lenders – and points out that central bank money is only one fifth of the total that circulates through the system. According to Alphaville, the rest is private money created by banks and which are held in check by regulatory frameworks.

The point is that CBDCs have the potential role of checking and balancing the system, stopping creation of shadow money that can destabilise the system.

The article explained, “The current method of bookkeeping also fails to track private money created for loans once it is repaid, meaning the story behind the money vanishes with it.”

A CBDC’s potential role

A central bank digital currency would mean more money created at and supplied from the same source, which would be accounted for on one ledger, and would last for as long as the currency did, only changing hands from one bearer to another.

Overall, it can potentially help keep the monetary system stable, but it comes at the costly price of privacy. Not to mention there is risk of some chains of transactions, being discriminated against for having, for example a history of a disputed transaction.

The bitcoin infrastructure addresses all the challenges that come with rolling out a privacy-intact CBDC. But this privacy comes with very high fees.

CBDCs would not require a blockchain and it is believed that China’s own digital yuan which is currently in trial phase in a handful of cities, is not based on blockchain.

For retail CBDCs at least – used for payments by normal citizens and making up the majority of transactions – one of the few infrastructures/ architectures being explored is a system of digital tokens.