With Central Bank Digital Currencies, States Are Reasserting Power Over Money

James Cooper is a professor of law at California Western School of Law in San Diego. A former contractor for the U.S. and adviser to governments and indigenous peoples concerning disruptive technologies for the legal sector, he has advised blockchain companies in Asia.  

In the heyday of cryptomania, when everyone was investing in any idea that had the word “blockchain” attached to it, there was much speculation about the end of the state. Distributed ledger technology would not only bring about the demise of intermediaries like big technology platforms and overfed financial institutions, but it would also challenge the primacy of the sovereign state itself. Decentralization would mean that the democratic process could be more horizontal, more responsive, more direct and more efficient.  

Blockchain technologies and the cryptocurrencies built thereon were also set to challenge the monopoly that states have maintained on currency. Traditionally, the creation, printing and control of legal tender has been an activity strictly reserved for states. The development of state-sanctioned, sovereign-backed cryptocurrencies, however, have meant that the state is not out yet. Not by a long shot.  

A handful of countries have entered the brave new world of sovereign digital currencies. The biggest and most ambitious central bank digital currency project is China’s Digital Currency/Electronic Payment (DC/EP). On Oct. 24, 2019, a day now called “China Blockchain Day,” President Xi Jinping announced his country’s blockchain strategy and the rollout of its new state-sanctioned cryptocurrency project. While many major financial leaders feared being the first movers, China studied blockchain for years while outlawing cryptocurrencies. Again and again, China banned Initial Coin Offerings and cryptocurrency exchanges. The country’s law enforcement authorities even deterred Chinese hotels from hosting crypto-oriented conferences.  

When Facebook’s Mark Zuckerberg warned Congress it had better support the social media company get its Libra digital currency to market lest China get a head start, the bureaucrats in China moved into high gear. Within months, they launched the DC/EP plan with initial testing in Suzhou and Shenzhen. The system’s strength is its interoperability and the fact one does not have to be online to use it. That it is linked to the Chinese national currency – the yuan or renminbi – does not hurt either. By layering insurance, health care, finance, energy and consumer purchasing into one unified public blockchain, there will be economies of scale and more efficient distribution of private and public goods. And not just in China but around the world with the 71 partners in its ambitious Belt and Road Initiative.    

Long before the DC/EP came the Marshallese sovereign (SOV), the national digital currency promoted by the Republic of the Marshall Islands. The SOV will be introduced through a sale over an extended period of time through a Timed Release Monetary Issuance. The Marshall Islands must improve the nation’s anti-money laundering (AML) and know your client (KYC) rules so that the SOV does not run afoul of United States Treasury and International Monetary Fund regulations.

An even shadier central bank digital currency project – the Venezuelan Petro – was released last year in the midst of the one million percent inflation afflicting the South American hydrocarbon giant nation’s economy. But with United States sanctions against Venezuela and the fact that the digital assets are backed by oil reserves that have already been pledged for Chinese and Russian loans, this project is a failure.  

On the other end of the “let’s try out a sovereign-backed digital currency” spectrum is the normally conservative Sweden, which announced two weeks ago the Sveriges Riksbank’s pilot of an e-krona project. This trial is an attempt by the Swedish Central Bank to study the manner in which Swedes – known for their aversion to using cash – would utilize a national digital currency.  

As other developed, industrialized countries follow suit, the state will continue to play a critical role in our lives. It is no secret that the primary role that the state has maintained for centuries has been whittled away through privatization, deregulation and the outsourcing of other inherently governmental activities like education, healthcare, telecommunications, waste management and feeding and arming our troops.

This hollowing-out process is by no means complete. The state is making a comeback with the advent of sovereign backed digital currencies. After all, nothing is more centralizing than a state’s control over decentralized technologies like blockchain and cryptocurrency.