Holding our breath for private digital currencies

"Kino, in his pride and youth and strength, could remain down over two minutes without strain, so that he worked deliberately, selecting the largest shells." John Steinbeck, "The Pearl"

Underwater there is a world that has never been fully explored. Where new discoveries lay beyond the beach, somehow always present, yet somehow out of reach. Until high-tech propels us further, to go once more unto the breech. And while we never know what awaits us there, there is one thing to be aware - at some point we must rise for air.

As breathing is part of our fundamental biological nature, so central bank money is part of our fundamental means of payment. A requisite form of currency for transactions between ourselves and our most predominant and perpetual partner in the pearls of finance - the Government.

And while a sea of private digital currencies aims to convince us that we can dive in and hold our breath forever in some payments version of Atlantis - it will remain out of reach, and out of breath. We will always need to come back up for central bank money regularly. To pay our taxes. To renew our driver's licence. To renew our diver's license.

Private digital currencies will thus never really compete with inimitable central bank money, only with each other - and the winner will be determined by the stopwatch. How long can its users stay underwater? How many varieties of transactions can users make with the private currency without the need to return to central bank money? And what does critical mass look like in an international payments landscape?

In his novella The Pearl, John Steinbeck describes the seabed on which pearls of immense value can be found. "This was the bed that had raised the King of Spain to be a great power in Europe in past years, had helped to pay for his wars, and had decorated the churches for his soul's sake." Yes, but those who discovered this fortune had to rise for air - and convert these precious pearls to sovereign currency.

Keep Colm and Carry On

In May of 1970, Irish banks famously closed their doors due to a labour dispute, and didn't open them again for six months. Six months! A service that many would intuitively think of as essential - personal and business banking - was paused for half a year. And this was long before technology could cushion such a blow, as we are seeing for many services during the COVID-19 pandemic.

The first reaction among the Irish was to take one last breath before diving under. Businesses stockpiled as much central bank money as they could, expecting that the strike would not last long and hard currency would get them through the storm.

But days turned to weeks, and then to months. And then an interesting thing happened. A private currency ("somehow always present...") developed organically, in the form of personal cheques and IOUs . Given the close-knit nature of Irish communities, credit risk was effectively manageable. And pubs and shops - with substantial experiential credit information about their many clients - felt comfortable acting as central elements in this ersatz banking system, informally collecting, clearing and endorsing cheques.

But this system only persisted for as long as it did because of the implicit understanding that at some point, the obligations would be formally cleared and settled. In central bank money. The air we all breathe. Indeed, after six months, formal clearing and settlement began - and it took three months.

Today we go swimming every day in an imposed form of private digital currency (our deposit accounts), and commercial banks come up for air every evening to settle in central bank money. An abridged version of the Irish experience.

Water, water, everywhere

The sea. A mysterious world that we will never stop exploring for its treasures. Or as James Joyce describes it in Ulysses - "The sea, the snotgreen sea, the scrotumtightening sea".

Yes, the sea can certainly be described in many different ways. But it will never be described as central bank money.