The venture capitalist Fred Wilson makes an important distinction between dollar stablecoins like Tether/USDT, Circles’s USDC, Synthetix’s sUSD on the one hand, and Central Bank Digital Currencies like the proposed US government-issued digital dollar (or China’s e-yuan) on the other. He says
“But there is another more important reason to want stablecoins to win over CBDCs – competition.”
“When you have competition, you get innovation, new features, composability, and a host of other important benefits. When you have a monopoly, like the US Government or any government, pushing out the alternatives and forcing us to use their digital dollar, you lose all the value of competition. And that would be a terrible thing.”
– Stablecoins vs CBDCs, AVC.com
Wilson’s post highlights something fascinating that is already happening:
For the first time in history there is a distinction between the imposition of a fiat currency like the dollar – which only governments can do – and coins based on that fiat currency.
Imagine the Indian government creating the rupee standard, and many companies issuing competing rupees with different properties but the same value – this is already happening with the dollar! [1]
Why would people want a coin/token that represents a currency but that isn’t issued by a government? In a word, Programmability.
Several months ago, I had imagined what new things become possible when you can program processes, checks and balances, and automation into money itself (“China and Programmable Money“). Here is an example of loans:
Each… lender implements its own loan accounting system that’s tied to it. This is why transferring a loan between two lenders, or between two borrowers is cumbersome. With programmable money, either a lender or a third-party could create credit tokens that represent aspects of a loan: interest rate, lock-in, transferability, a claim on other (similarly digitised and programmable) securities, and so on. Buying and selling loans, combining them, trading them could become a lot simpler.
Since then, it’s become clear that China’s digital currency will in fact be programmable to some degree (“China’s new digital yuan test shows it can be programed to confine utility“) – the government is programming specific public use cases into the digital yuan.
… instead of issuing free digital yuan to lucky citizens that they can use wherever the e-CNY payment is supported, the latest test comes with a theme called “low carbon summer transportation” that gives away the e-CNY as allowances to encourage citizens to take more public transportations. As such, the free e-CNY will arrive with a pre-programed utility for paying for subway and bus tickets through Chengdu’s Tianfutong mobile app or for shared bikes on the Meituan mobile app…. But it appears users won’t be able to convert the values of the e-CNY coupons for taking rides into the general purpose e-CNY stored in their digital yuan wallets.
So then. The government is one entity that can program money. Private and public companies could do likewise. Individual people will be able to program money – I could lend money to a friend under specific conditions that are relevant to only them and me. Ultimately there’ll be hundreds of thousands – if not millions – of such programs written for digital money.
Instead of having a single currency token then, say the digital rupee, whose roadmap alone determines what can be built on it, India could have multiple rupee tokens issued by different public and private entities. They are each valued at one token = one rupee. But they are branded differently and they’re optimised for different sorts of use cases. The only thing these entities cannot do is unconstrained issuance. Asset-backed stablecoins should be audited to prove they have enough reserves, and synthetic rupee providers will need to reference the right source, or oracle, for day to day (minute to minute?) rupee value.
This already exists in a clumsy way with prepaid wallets. They are essentially branded tokens that are asset-backed and have closed use-cases. But they are completely vertically siloed. Everything I do with my Amazon Pay balance has to be inside Amazon, and likewise for Paytm. There’s no single wallet where I can view my ‘Rupee’ balance, my Amazon Pay balance and my Mobikwik balance. There is no exchange where I can convert between them. The use cases are severly limited, mostly tied to e-commerce. The overhead to create and issue one’s own prepaid currency is extremely high, so there are just a handful of such branded rupees.
Natively digital programmable money can blow this ecosystem open, like the use cases above and in my blog post on programmable money, making it more valuable for everyone – not least incumbents like Paytm and even Fastag.
It’s unlikely that the Chinese government will look kindly on private issuance of different types of e-yuans. But as the Indian government and central bank look to pilot their own digital currency, they should not only build programmability deeply into it, they should also allow for similar issuance of dozens, hundreds of branded rupees by anyone who wants to [2].
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Footnotes:
(1) It looks like stablecoins will be heavily regulated in the USA rather soon)
(2) The Indian government today also heavily restricts foreign ownership of currency. If such rupee tokens are tradable, it becomes a lot more difficult to restrict their ownership. But whether the government should be more liberal about issues like this, or even the free float of the rupee’s value, is another rabbit-hole with strong pro and cons that’s way out of the scope of this site.