The cryptocurrency enthusiasts are at it again, with a new name and even more ambitious goals than before: now they want a “national digital currency.” Hurry! The Chinese will beat us to it, and we’ll be left behind!
Somehow, no one in the debate acknowledges the obvious fact that we already HAVE a national digital currency. It’s fast, cheap and secure! It has no issue with regulators, and it’s accepted everywhere. Who knew? It’s called … the US dollar. The wild-eyed “national digital currency” groupies prefer to ignore the fact – yes, it’s a fact – that the US dollar is a digital currency. Instead, they’re convinced it can’t possibly be a good thing, because it’s not based on brand-new, cool, “immutable distributed ledger” blockchain-based cryptocurrency technology. Bzzzt! Wrong.
The national digital currency of the USA
The people who talk about “national digital currency” are obsessively focused on cryptocurrencies. They make believe digital currencies are a recent invention, and that only things that have evolved from Bitcoin meet the description. Nonetheless, by any reasonable definition, here in the good old USA we already have a digital currency. It’s called the US dollar. It’s managed by the Federal Reserve Bank. But that’s not digital, you might say – what about that green stuff in my wallet, and those coins jangling in my pocket or purse?
I agree, we have cash. As of Feb 12, 2020 there was $1.75 trillion worth of paper cash in various denominations in circulation. That’s quite a bit. But it’s far from the whole story. For the rest of the story, we turn to the money supply, the total amount of which is one of the chief responsibilities of the Fed to maintain – and grow and shrink, as needed. There are two main measures of the money supply, M1 and M2. See this for the Fed’s definition. Basically, M2 includes checking and savings bank deposits, money market funds, and similar cash-equivalents. As of December 2019, M2 was $15.434 trillion dollars.
What this means is simple: almost 90% of US dollars have no physical existence – they are purely digital. But this isn’t just for the USA; world-wide, only 8% of currency exists as physical cash!
The US dollar took many steps over more than a century to evolve from physical cash to today’s largely digital currency. First, paper currency wasn’t “real” money – it was a promise by a bank to trade the paper for the equivalent in gold. For example, here’s a $5,000 bill from 1882 that’s a promise to exchange for $5,000 in gold coin on demand:
In practice, no one exchanged these large-dollar notes for gold; they were mostly used by banks and the government to move funds between themselves, a practice which stopped in 1934.
Long before the advent of computers, the gold exchange promise was dropped. Here’s a bill as printed in 1928 that simply declares that it’s $5,000:
The last high-denomination bills were printed in 1945. Large inter-bank transfers were done without the exchange of cash; tightly controlled procedures were used to transfer “money” between bank ledgers before the advent of computers. In 1969 the large bills were officially discontinued, and the government started destroying them. In 1975, the government started depositing social security payments into recipient’s accounts electronically. By 1990, all money transfers between commercial and central banks were done electronically.
There is no single date when you can say that the dollar became digital. The process of transformation took place step by step, each leading to the next. The early steps took place long before computers; the principle was established and in universal use among banks and the federal reserve already in 1945! The invention and use of computers simply enabled further automation of the digitization of the US dollar, and enabled fully real-time transfers to take place.
What all this adds up to is that the US dollar is a national digital currency, by any reasonable definition, and has been for years. The vast majority of currency value is fully and completely digital, and all large-dollar transactions are completely digital. We also have cards, which are smaller, lighter and more convenient than smartphones, with the added convenience that they don’t crash or run out of power. In addition, we have the added convenience of physical cash, 100% interchangeable with its digital currency equivalent, as we see with ATM’s every day. Cash is convenient for small transactions and for people who don’t have working, powered and connected small computers on their person. The US dollar is indeed a national digital currency, with the added convenience of cards and cash.
What’s a national digital currency?
The vast majority of people know through everyday experience that the US dollar is a national digital currency. But almost no one talks in those terms. When people use that recently-coined term, they usually means something brand-new, a form of cryptocurrency. For example, a recent WSJ article describes a push towards a “national digital currency.” One of the quoted authors waxes eloquent about its virtues, but never really says what it is.
The only way to understand “national digital currency” is to back up and look at the history of where the concept came from. While no one likes to talk about it, the undisputed origin of the concept is a brilliant, well-implemented and widely used body of software called Bitcoin. The concept and every major feature of Bitcoin was designed to operate with no central authority of any kind in charge. Amazing. How can it be that anyone anywhere could declare themselves to be a Bitcoin “bank” (they call them “miners”) and the system works? See this for an explanation. Bitcoin was also designed to give total anonymity to the people who deposit, send and receive Bitcoin, making it a favorite of international criminals around the world.
Before long, Bitcoin competitors appeared, each claiming to add or correct something important in Bitcoin; for example, Ethereum introducing the so-called “smart contract.” Next, people started talking about “blockchain” and the “distributed immutable ledger,” taking out the concept of currency. Supposedly, these technologies would solve long-standing problems involving data that was in many locations. This led to loads of blockchain start-ups and service companies, with giant corporations infected with bad cases of FOMO funding pilots and proofs-of-concept. Major companies like Microsoft and IBM now offer blockchain-as-a-service in their cloud products.
More recently, we have seen highly publicized efforts to legitimize something like an enhanced Ethereum-like currency, most prominently Facebook’s Libra, which has the backing of a large number of name-brand financial institutions.
All this leads up to the newly “coined” notion of a “national digital currency” – let’s have the US government implement it instead of Facebook and its consortium partners!
This is all-too-typical technology mania. We’ve seen it many times. The true believers ignore evidence, ignore existing practice and fervently believe in the world-transforming new technology. Loads of highly-paid executives and government leaders pay obeisance, effectively paying insurance against the remote possibility that the cult delivers real value. There’s a strong lemming effect: don’t be left behind!
Inconvenient facts
People who advocate for a “national digital currency” like to ignore the one we already have, in favor of some variation of the currency beloved by human smugglers, drug lords and international illegal arms traffickers. Like the people at the Digital Currency Initiative at the much-revered Media Lab at MIT. In a recent WSJ article, the director of the lab immediately conceded that with direct deposit of salary and Venmo to split the cost of dinner with friends, it seems like we already have a digital currency. But this isn’t good enough! After all, there are fees, and big banks are involved and sometimes transactions can take days. Ugh. With a real national digital currency, a federal cryptocurrency, payments would be “faster, cheaper and more secure.”
There are just a couple little problems. Here are some highlights:
Cryptocurrency is slow
Crypto-groupies love to talk about the slowest transactions in the multi-trillion dollar US digital dollar system. While large parts of the US digital dollar system execute huge numbers of transfers in seconds, Bitcoin takes on average ten minutes to execute a single transfer. And that’s only if you pay an above-average fee – if you don’t pay much, you could wait for hours for your transaction to process.
Cryptocurrency can’t scale
Depending on the transaction size, Bitcoin can only process between 3 and 7 transactions per second. If there were always transactions waiting to be processed, 24 by 7, at 5 transactions per second Bitcoin could handle at most 158 million transactions per year. By contrast, over 10 billion transactions are performed at just ATM machines every year in the US alone. There were over 110 billion card transactions in the US in 2016. The growth in transactions from 2015 was over 7 billion; the growth in card transactions was about 50 times greater than the maximum capacity of Bitcoin.
Cryptocurrency is expensive for users
Crypto-groupies love to talk about the high fees for doing certain dollar transactions, ignoring the immense transaction flow of cheap and easy transactions like direct deposit and ACH, which operate at huge volumes. They don’t talk much about the costs of running cryptocurrency. They’re smart to ignore the subject. Today’s Bitcoin transactions are costly, and the second you try to correct the various problems (speed, scalability, security), the costs skyrocket.
Cryptocurrency is expensive to operate
Hardly anyone uses Bitcoin, and the volumes are tiny compared to the dollar. Nonetheless, Bitcoin is incredibly, mind-blowingly expensive to operate. Even at today’s minuscule volumes, Bitcoin computer processing consumes about the same amount of electricity as the whole country of Switzerland!
Cryptocurrency loss is permanent
If you lose your checkbook, your credit or bank card or anything else, you’re OK; you contact the bank and they fix it. By contrast, if you lose your cryptocurrency key (a string of numbers), there is literally no way to recover your money. About 20% of all Bitcoin are believed to be lost, something like $20 billion!! If you lose your key, whoever gets it can take all your Bitcoin, unlike with for example a lost card, where you call the bank, report the lost card, and avoid losing any money.
Cryptocurrency is horribly insecure
The crypto folks love the fact that everyone imagines that “crypto” means “can’t be cracked.” So they avoid the subject. The fact is, crypto banks are robbed and every Bitcoin stolen all too often. Nearly a million bitcoins have been lost in this way, a loss at today’s prices of roughly $10 billion!! Even the core defense of Bitcoin has now been cracked.
No proposed crypto alternative to Bitcoin solves the problems
To the outside, crypto people are all about ignoring the problems and promoting wonderfulness. Among themselves, the relatively sane advocates recognize the problems and try to solve them, with endless variations being rolled out. In doing so, they either make the problems worse or destroy what little value there is in cryptocurrency. One of the leading ideas is to make a private blockchain, which is a pathetic joke. For example, Microsoft and Intel spell out many problems by way of selling their ineffective solution, and the Facebook Libra coalition takes the “solve it by making it worse” approach to new lows.
The strengths of the US dollar digital currency
The whiners will whine about what’s wrong with today’s US dollar. Is it really chock-full of problems, as the crypto-groupies like to say? Let’s do something rare: focus on the positive. First and foremost, let’s remember that the dollar has worked for a couple centuries now, and along the way transformed itself from physical to about 90% digital, all without breaking! In addition, it has benefited from tremendous private-sector innovation. Here are some highlights of the fastest, cheapest and most secure currency ever created:
Physical cash is great. When I’m in the city and someone gets my car for me from the garage, I like to give a tip. It’s easy: I pull out my wallet and hand over bills. Anything fully digital would require electronics and would be a pain.
Cards are great. When I pull into a gas station in New Jersey, where gas is pumped for you, I open the window, say “fill with regular, please” and hand over a card. When it’s done, I get the card and a receipt and drive off. Easier than cash because no change. This is fully digital. Today. And, at my great local gas station, they often clean my windows, so I get to hand the guy a couple bucks as a tip. Painless.
Cardless is great. I call for an Uber from the app. When the car arrives, we each check each other’s identities and away we go. On arrival, I get out. That’s it!
Wiring money for a house closing is great. I call USAA, my bank, who verifies my identity and gets it done in minutes. No going to a branch, certified checks, etc. The phone call is a good thing – it reduces the chance of fraud to near-zero, unlike the fraud-riven crypto world.
P2P apps are great. There are zero-cost, instant transfer apps like Venmo, CashApp and Zelle. These are used by over a hundred million of people, and they work. Today. How could crypto in any form be better? Actually, it would be worse.
What about those awful transactions that supposedly take days? Yup, there are some. It’s called a step-by-step, no errors or crashes permitted transition to real-time. Transactions are already 100% digital, and with ACH (like electronic checks) very low cost. The version of ACH in the UK is already same-day, and ACH in the US is in the middle of a transition to same-day and real-time.
What about international payments? I guess the crypto-groupies are out of touch with what’s going on here in the real world. For personal use, credit cards are already accepted nearly everywhere, with everyone involved getting or paying in their own currency. The big complaint of the crypto people is international business transactions, involving lots of time, transfers and fees. That was true. Which is why a handful of amazing new companies have emerged and are addressing the issue. A couple of them are operating at scale and in production today.
Currency Cloud, for example, has a brilliant solution. A company that has suppliers in many countries gets the suppliers to give Currency Cloud their preferred local bank accounts. Currency Cloud itself maintains local accounts for itself in all the countries it supports. The buyer sends a payment directive to Currency Cloud, who then does a local transfer of the requested amount from its account in the target country to the vendor in that country. As the network grows, each supported country has a larger number of companies both sending and receiving payments, so that a growing number of transfers can be done completely locally – only the net payment imbalance between countries needs to be settled by Currency Cloud between its own accounts, which it optimizes for minimum cost. This is 100% digital, low cost, real-time, and operating at scale. Today.
For smaller business and individuals there are services exploding onto the scene for international payments. For example, Rapyd (disclosure: my VC fund is an investor) enables people without bank accounts to buy, sell and get paid for work in over 100 countries at over 2 million access points, where they either get or give local currency to complete international digital transactions. For example, you could be a driver for Uber and get paid, even though you have no card or bank account.
Conclusion
Get over it, crypto-fanatics and blockchain groupies. Yes, the Bitcoin technology is an impressive achievement, and highly useful to the criminal class. But it makes any real-world currency problem you can think of worse, and completely ignores the patent reality, which is that the wonderful “future” of a national digital currency is something we have today – the US dollar!
