As part of the CNBC 25 special report, a group of experts concluded that the US dollar is already the world’s digital currency, and that it is likely to still be the world’s digital currency in the future.1 Are the points they raise in support of such a conclusion strong enough to warrant consideration?
The report, authored by Ted Kemp, begins with a bold prediction, some data about the percentage of US dollars that are $100 bills, and what percentage of $100 bills are held outside of the United States.
“In 25 years the U.S. dollar will probably still be the world's reserve currency, and bitcoin may not be around at all.”
“Roughly 77 percent of the total $1.2 trillion in circulation in 2013 was denominated in $100 bills, according to Federal Reserve data. And most of those hundreds—about two-thirds of them, according to one Fed economist—are held outside the United States.”
These are interesting tidbits about the US dollar, though I’m left wondering how they are really useful in comparisons against entirely new, decentralized transactional networks such as Bitcoin or in predicting the status of the US dollar far into the future.
Some additional points about the ubiquity of the US dollar are made, and then the point is made that the United States is the most trustworthy entity on the planet when it comes to honoring its debt.
“In the end, money is anchored in trust, Colas noted, and no entity on Earth can match the U.S. track record for being good for its debt. The European central bank doesn't have a history nearly as long as the U.S. Federal Reserve, the euro zone entered a crisis in 2009 from which it still hasn't fully recovered, and the Chinese yuan is hobbled by tight—and completely nontransparent—government control.”
These are fairly loose points, and nothing is mentioned of the problems that the US economy has seen in recent years, but at least the issue of US default was not brought up, since we know the United States government has defaulted on debt in the past and come close several other times.2 But overall, the title of most trustworthy debtor is well enough deserved.
The report then moves on to specific strengths of the US dollar, such as strong anti-counterfeiting measures, anonymity, ease of use, and the fact that there are existing payment networks.
“The United States also tries harder than most nations to prevent counterfeiting, Colas said, pointing to $120 million the U.S. spent to redesign the new $100 bill last year.”
The amount of money that a particular government spends to design and implement anti-counterfeiting technologies can be useful when comparing it to other legacy, national currency systems, but it is a useless metric when comparing a national currency to a cryptocurrency. Cryptocurrencies have very strong anti-counterfeiting protections built into their core designs. These protections come at a significantly lower initial cost than the costs associated with anti-counterfeiting technologies for physical tokens (e.g., coins and paper bills), and upgrading the level of protection over time is a low cost, straight forward process. Simply put, decentralized cryptocurrencies have no need to spend $120 million dollars on anti-counterfeiting strategies for a single type of bill. They come with anti-counterfeiting protections built in across the entire system thanks to the strength of the underlying cryptography and network effects.
“The $100 bill is the world's bitcoin,” Colas said. “It's anonymous. It's easy to use. It's actually easier than bitcoin, because you don't need a computer or even power.”
Cash can easily be anonymous, and it’s definitely easy to use, but it’s difficult to conduct transactions outside of arms reach with a $100 bill. A fact not mentioned in the report, but a very important fact indeed, since it forces you to go through trusted third parties. Being able to carry out a global transaction while not being forced to allow third parties control over the transaction is one of the main advantages of cryptocurrencies.
“From a purely technological perspective, the ability to pay anyone instantly in any currency exists already, with minimal or even no transaction costs. Banks are resistant to such a no-fee money marketplace, because they now profit by acting as intermediaries for transactions. In the coming years, however, "insurgents" will make those transactions easier and cheaper, Schlossberg said.”
“Facebook, for example, could facilitate user-to-user payments for less money than a bank charges, Schlossberg said.”
“Schlossberg also pointed to Xoom, which lets consumers make payments internationally, and Square, which makes it possible to take payments through handheld devices, as other firms on the forefront of digitized transactions.”
A company can certainly offer a low or no fee payment network to its customers, but the costs associated with running the network would still be there (e.g., fraud prevention and resolution, regulatory compliance, and licensure costs), and the company would have to make it up through advertising, data mining, increased user acquisition, upselling, or other business practices. In most free or subsidized services, the customer is at least partially the product.
Additionally, a centralized payment network has little attachment to any specific currency. A provider can use any unit of account, either external or internal, depending on the specific goals they want to address. Important differentiators are usage and user familiarity, as you want to make sure users actually use the service. Likewise, the units used to load value into the system are mainly differentiated by usage and cost of acceptance. The US dollar has a very high level of usage and user familiarity, but it is relatively expensive to accept and it is questionable as to how much that cost can be reduced.
A Bitcoin Without Decentralization?
One fairly common claim is that the “good”3 parts of Bitcoin can be stripped from the concept of decentralization and used by traditional companies as a drop-in improvement to their existing infrastructure. The devil is in the details, and I have yet to see a possible implementation proposed when this claim is made. The problem is that Bitcoin without decentralization provides little to no advantage over software systems that are already in place. All of Bitcoin’s advantages stem from decentralization and nothing else.
The concept of electronic transactions, or digital money, has been around in one form or another for decades. One real-world example is PayPal, a service whose core function is unchanged after fifteen years. Utilizing computing technology did help to reduce transaction costs, but those reductions have already played out. Processing an electronic transaction today has a very low direct cost. A centralized transaction network has to cover the fraud prevention and resolution, regulatory compliance, licensure, and other costs attached to operating the network, and that’s where the main costs originate. The bulk of payment costs have little to do with actually sending a payment.
The core innovation in Bitcoin is not electronic transactions, Bitcoin is a system that enables distributed, secure electronic transactions. Bitcoin does not get its advantages from being electronic, it gets them from decentralization. When used correctly, Bitcoin frees its users from agency dilemma and counterparty risk. Through decentralization, Bitcoin provides a foundation for additional services to build on while being confident that no single entity can control or direct the network. Centralize the Bitcoin architecture and it loses all of its advantages, becoming a simple database system.
“The bank isn't holding a lot of money in there. The money in your account is data, [...] It's a set of zeros and ones.”
As data, it should cost all involved parties almost nothing to transfer and have no impediments placed on its movement, but that is hardly the norm in banking or payments.
“The best thing about bitcoin, Vecchio said, is that it's basically free to use. Of course, so is cash.”
Cash is not free to use when the transaction is at a distance, of a high value, or outside of the issuing country. As any online shopper knows, attempting to use cash for online purchases is a very involved and fee-laden affair, with multiple points of friction. As anyone making large transactions knows, the costs associated with carrying out the transaction increase as the value goes up (i.e., a multi-million dollar transaction is relatively expensive to handle and very expensive to handle in actual cash). As any international traveler knows, trying to transact in even US dollars is often not possible in many countries and involves the hassles and fees associated with currency conversion.
The main point of this CNBC 25 special report, and the opinions of the experts sourced for it, seems to be that things will change, but only while remaining the same. That isn’t a point that I would be comfortable betting on long term, but I don’t self-identify with the label of expert either.
The US dollar might still be the world’s reserve currency in a quarter century (although the end of its reign has to come at some point), but if it’s going to be the world’s digital currency, it had better pull some tricks out of its sleeve soon.
Edited on December 11, 2016 to correct a few typographical errors.
Ted Kemp, CNBC. “The US dollar to reign supreme for decades to come”. April 24, 2014. ↩
Carmen M. Reinhart, NBER. “This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises”. March, 2010. ↩
The good parts of Bitcoin are all thanks to decentralization. ↩