Does the future of money belong to Bitcoin, CBDCs or stablecoins?

Money, one of humanity’s greatest and most enduring creations, is once again on the brink of a historic transformation. After evolving over millennia from cowrie shells to clay tablets to precious metals, and then to paper notes and bank balances, money is taking another giant leap forward: It’s going completely digital.

There are three leading contenders for the future of money – a central theme of the Blockchain Research Institute’s upcoming event, W3B and Blockchain World. The first is public cryptocurrencies such as Bitcoin, which were designed from the outset to be a “peer-to-peer electronic cash system” – in other words, digital cash. The other is privately issued digital dollars, backed by dollars or other collateral. These stablecoins today are mostly backed 1:1 to the US dollar, but may be designed to maintain a link to a basket of currencies, such as Facebook’s ill-fated Libra project. The third is central bank digital currencies, also known as CBDC, created by governments and central banks. Each is radically different in composition and potential impact.

“The great majority of people in the Middle Ages never saw any money in their lives,” said James Burnham, a noted 20th-century intellectual and historian, of the feudal economy, which was based on subsistence and barter. Capitalism changed the role of money from a mere medium of exchange (a convenient way of exchanging goods when bartering was not an option), to capital more generally – something that by its very nature could be used to make more money by investing in physical facilities such as factories, lending to entrepreneurs and so on.

As in ancient times, precious metals such as gold served as the basis of money during the early industrial era of capitalism. Money, according to John Locke, was something that people “would by mutual consent take in exchange for the really useful but transitory supports of life.” In other words, gold is useful as a store of value and medium of exchange because it is not “really useful”. Gold’s preeminent role as money began to wane in the late 1800s, starting with the American Civil War, when the federal government issued paper notes backed only by faith in the government itself. It ended a century later when President Richard Nixon finally closed the “gold window” and ended the international convertibility of US dollars into gold. Today, currencies float against each other and are issued by government fiat.

If gold was the foundation of the early industrial age and fiat currency the foundation of our modern globalized economy, then some form of digital money will form the foundation of the digital economy. Once again, we are on the brink of another epochal shift in money. But which one will succeed?

Three contenders

Bitcoin has been a remarkable success story. Worth nearly half a billion dollars, it is used everywhere as a store of value and a medium of exchange, and has been a lifeline for the unbanked who can withstand its volatility and inertia. It is permissionless and censorship resistant, making it a favorite among freedom fighters as well as alt-right groups. It is also energy-intensive and volatile, much like gold and other commodities. It will likely become more important as a store of value, but fall short as a medium of exchange.

CBDCs are touted by governments and central bankers as a better option that can make the economy more inclusive, reduce volatility and improve the responsiveness of central banks to crises. But CBDC boosters have to answer some tough questions. For example, how do we protect privacy rights when the government can see in real time how every penny is spent in an economy? Because of the worrisome impact on civil liberties, CBDCs are likely to find more success in authoritarian regimes like China than in the US or Canada, where I expect they will be met with fierce opposition by some.

This brings us to the final contender to be the money of the future: stablecoins. A synthesis of CBDCs and cryptoassets like Bitcoin, they are digital assets issued by companies backed by fiat currencies held in financial institutions. The leading versions, USDC and USDT, are worth more than $100 billion combined. Facebook’s attempt at a stablecoin, Libra, was originally based on a basket of assets. This was met with fierce opposition by the US government, which slammed it as a potential threat to the dollar system – a warning to any company trying to reinvent money.

There are also synthetic “decentralized” stablecoins, which are backed by assets held in smart contracts (like a piece of software with a bank account). DAI is an example, although somewhat centralized as much of the collateral is in USDC and now US Treasuries. A decentralized stablecoin is the synthesis of privately issued money and public cryptoassets. They are pegged to US dollars, but are permissionless and do not rely on a third party to function. They are hard to close, and free for anyone to use. Although they are small compared to others (the outstanding DAI is worth around $6 billion), they are the limit of money and we should all be aware. Intuitively, one would assume that the decentralized digital economy of Web3 should adopt this type of decentralized money, but at this point, centralized stablecoins like USDC seem to have the product market fit and first-mover advantage.

Alex Tapscott is a co-founder of The Blockchain Research Institute, hosted by W3B and Blockchain World, in Toronto, 8-9 November. Alex is also the CEO of The Ninepoint Digital Asset Group. This article is for informational purposes only and should not be relied upon as investment advice. A version of this article originally appeared in Ninepoint’s weekly note, Digital Asset Digest.

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