Austrian National Bank: “The Future of Money? - Digital Currencies?”

Online Presentation by Dr Stefan Schmitz, Head of the Macroprudential Supervision Unit , Austrian National Bank

                     

Dr Schmitz set the scene by explaining the essential properties of money as a representation of value and means of exchange. He elaborated on the importance of confidence in money and how it can be used to measure and control economic performance. Building on Carl Menger (founder of the Austrian School of Economics) he argued that all functions of money are derived from its function as a generally accepted medium of exchange (see Carl Menger and the Evolution of Payments: from Barter to Electronic Money). He clarified that digital tokens such as Bitcoin are not currencies but means of payment. To be successful as payment innovations, Schmitz showed that digital payment instruments would have to be redeemable in the unit of account at a credible 1:1 rate. Hence, only stable coins are likely to succeed. However, they lack a credible business model, when they are backed by central bank money. The latter does not yield a sufficient return to off-set the costs of running a payment system, such as know-your-customer programs and AML (Anti Money Laundering) and ATF (Anti-Terrorist Financing) programs. Current stable coins do not only invest in central bank money, but in a wide range of less liquid and risky assets, such as non-financial corporate paper. Hence, they pose as banks without banking licenses. Their current business model is regulatory arbitrage. Schmitz concludes that they will be regulated as banks soon.

The discussion then progressed into the subject area of digital currencies. Here the general view was that proprietary cryptocurrencies, like Bitcoin, were likely to be problematic due to factors such as volatility, high energy consumption, and ease of access.  Official cryptocurrencies based on existing recognized currencies were more likely to become a practical reality in the future.

From the start, Dr Schmitz made it clear that interjections with questions and opinions were welcome during the event. Then the means of monitoring and controlling financial exchange and the need to ensure the effectiveness of a currency were discussed.  At the same time, however, our guest speaker highlighted various failings of our present monetary systems, particularly concerning the practices of many banks and especially in relation to international currency conversion

 

Another related subject area was that of the cashless society, towards which some countries, such as Sweden, seem to be trending.  The conclusion of this discussion was that cash is here to stay for the foreseeable future.