Inaugural lecture

Antonio Moreno Ibáñez
Full Professor from Economics Applied

A few years ago, I attended a class, it must be said, somewhat dense on one of the best known taxes in Spain, VAT. At the end of it, the professor, aware that the class had been somewhat rambling, ended up providing a more transcendent relief to his dissertation, and told us: "perhaps this class has seemed a bit boring, but the topic I have talked about is very important, so that you see it with different eyes think that behind every door you open, every car you ride, the house you are in or the window through which you look, there is the VAT".

Well, one could also say something like this about the topic I am going to talk about today, the currency, in particular about its present and its future in the light of the rapid transformations it is undergoing.

Obviously money is a means, not an end. This is true on an economic level, and also on a human level. We know of many cases in which money can negatively affect people, basically due to a lack of virtues and a lack of training -sometimes our relationship with new technologies can also work against us-. That said, man is a being open to work and to undertake, and an adequate monetary system empowers him in this sense, providing him with more opportunities and thus contributing to the integral development of each person.

For this lesson, I will use three episodes that illustrate some dimensions of the present and future of money.

The current monetary system and bitcoin

The first episode dates back to August 15, 1971. On that day, US President Richard Nixon announced the temporary suspension of the conversion of the US dollar into gold. This advertisement was of great significance as it broke de facto the monetary system that had existed since the end of World War II. The 1944 Bretton Woods agreements designed a system of fixed exchange rates between the different participating currencies and the dollar, which would have an irrevocable parity of 35 dollars per ounce of gold. This system was relatively similar to patron saint gold, which had served as a catalyst for great growth in global Economics in the second part of the 19th century. Behind the cash, therefore, was a counterpart in terms of gold, internship quite common in the past of a few monetary systems.

Two years after Nixon's advertisement , the system anchored on gold was definitively broken and another one, called fiat or fiat money, was introduced. This is the current scenario, in which money creation is not backed by a precious metal but, essentially, by two pillars: being designated as a legal tender by governments - in particular for the payment of taxes - and being subject to the conduct of monetary policy by central banks, which are committed by their policies to maintaining the value of the currency. The current system is made up of a number of countries, more economically developed, that have independent monetary policies, such as the area euro, USA, UK, Japan and some others. On the other hand, there are the so-called emerging countries, most of which fix the value of their currency to the dollar or another strong currency, in order to stabilize inflation and protect their foreign trade, on which a large part of their Economics depends.

data In terms of inflation, and in historical perspective, the system of the last 50 years can be considered quite satisfactory for those countries that have carried out sensible monetary practices - for countries such as the United Kingdom the best inflation rates in the last 4 centuries have been obtained, even taking into account the current bout of inflation -. However, alongside its virtues, there have also been recessions, some of them truly global and severe, such as the great financial crisis of 2008. It was precisely in 2008, and not by mere coincidence, that Satoshi Nakamoto published his famous article: "Bitcoin: A Peer-to-Peer Electronic Cash System". Bitcoin was born with a longing for the system of patron saint gold. This can be seen in the gradual release of a limited number of bitcoins, as well as the existence of miners who validate users' transactions in order to make the system work. The bitcoin, which from the beginning was configured as a global currency - outside the control of governments and central banks - was conceived as a digital form of gold, which should guarantee stability in its value.

A good monetary and financial system must have two essential characteristics: stability in the value of the currency and financial stability, both of which are part of the common good of society. With respect to inflation, the volatility of bitcoin's value over the years has been several orders of magnitude higher than that of official currencies. The virtuous circle of the adoption of good currencies is as follows: use as a means of payment, widespread adoption and the creation of a dense network of users that facilitates its dissemination. Bitcoin has not managed to acquire a good reputation as a transactional currency, which has condemned it to being a purely speculative currency. Given the continuous oscillations in its value, it has not functioned as a unit of account -as recognized in 2021 by a famous electric car manufacturer that initially opted to accept bitcoins and later retracted its decision-, nor has it obviously functioned as a store of value. Moreover, in more turbulent periods, such as this year, bitcoin -and the rest of the variable cryptocurrencies-, have not worked as a safe asset and have lost more than half of their evaluation -an unacceptable inflation-, unlike gold, which it was intended to emulate digitally.

What are cryptocurrencies after? Varieties of cryptocurrencies

The second episode dates back to May 2, 2016, that day the Australian computer scientist and entrepreneur Craig Wright told the media a news that would echo around the world: he was the person behind the pseudonym Satoshi Nakamoto, creator of bitcoin. He reconfirmed this news in interviews for the BBC and The Economist. Later, already in 2019, Wright revealed that the creation of bitcoin was a work of a team he led, and acknowledged that other people were also involved. In April 2019 he reported that he had registered the bitcoin copyright with the U.S. Copyright Office. However, that office issued a statement denying this fact. Also, his repeated claims that he was Satoshi Nakamoto have been questioned by many in the bitcoin community, having failed to provide any conclusive test .

Today, some 14 years after the launch of bitcoin, it is not publicly known who invented it. On the other hand, from its design and operation -and from that of many cryptocurrencies that have emerged- we do know what it consists of proposal. In essence, the cryptocurrency universe pursues: (1) the decentralization of money creation to the private sector, and (2) a disintermediation of the financial system through the creation of platforms with transaction recording with public access, such as blockchain: in other words, it seeks to make the financial system work with decentralized platforms instead of financial intermediaries, such as commercial banks. All this would mean nothing less than a paradigm shift in the monetary and financial system.

The rebellious spirit of the crypto world against the central banking and trading system is evident from its origins and most recently today. When Russia invaded Ukraine in February this year, Western governments imposed sanctions, targeting a small group of people connected to the Russian regime. They also froze the Russian Central Bank's reserves in other countries, as well as its current accounts in international commercial banking. The crypto world did not follow international guidelines. One of the largest cryptocurrency exchange platforms commented, "Unilaterally deciding to ban people's access to their cryptocurrencies would go against the reason why cryptocurrencies exist." Another platform was even more explicit: "Bitcoin is the embodiment of libertarian values, which strongly favor individualism and human rights": it cited the law - rather the lack of law - and stated that "we cannot freeze the accounts of our Russian customers without a legal requirement to do so".

The crypto world cannot be reduced to bitcoin. In fact, the current universe of cryptocurrencies consists of more than 10,000, a level of fragmentation nowhere near the official system. These cryptocurrencies usually offer at their launch some specific advantage, such as operating on networks or platforms with specific interests for users. Taking advantage of new decentralized platforms, such as the blockchain, cryptocurrencies with characteristics other than bitcoin, for example with unrestricted supply, soon emerged. The variety that is receiving the most attention are the so-called stable-coins, which are very different from bitcoin. To avoid the volatility inherent in bitcoin and other currencies, stable-coins back their coin creation with other official and stable currencies, such as the dollar (currently 90% of cases), or with programming algorithms. The recent case of the terra and luna collapse has seriously damaged the credibility of the latter, although they could potentially be interesting - for example, being anchored to sound macroeconomic monetary rules.

This is why the concept of a stable-coin with a strong backing has attracted the interest of many economic agents, in addition to having historical antecedents - in the past, for example, when there were no central banks, it was the commercial banks that issued securities that served as currencies with the counterpart of stable assets. The stable-coin idea is also similar to the official currencies with fixed exchange rates, which are widely used in emerging countries. Their issuance is backed by hard currencies or assets -the difference in this case is that stable-coins are issued by private entities-. This is precisely what goal tried to do with its Pound coin in June 2019, which was to be backed by U.S. debt securities. This launch, which was to be carried out in partnership with many financial institutions, aroused the suspicion of governments and central banks. Given the huge issue of users of this social network , the potential for the spread of such a currency was enormous, and they saw it as a serious competitor to their monetary Schools .

The role of institutions, official digital currencies and regulation

The third episode dates back to March 20, 2021. On that day, the President of Turkey decided to dismiss the Governor of his country's Central Bank because of the interest rate hike he had implemented - in a context of inflation close to 20%. He was replaced by a former member of parliament from his party, with policies in line with the President's tastes. A year and a half later, inflation in Turkey had risen from 20% to 80%, and the Turkish lira had devalued by 50% against the dollar and the euro.

The Turkish failure is one of a few we have witnessed in recent years. Countries such as Argentina have also failed to stabilize their inflation during the last decades -also due to exaggerated fiscal policies of expense -, and that is why they are suffering a significant impoverishment. Other countries such as Ecuador and El Salvador had so many problems with this topic that they gave up their monetary sovereignty and declared the dollar as the legal currency. In practically all cases where inflation accelerates uncontrollably, there is a mismanagement of policies, which in many cases has to do with the institutional framework lack of operational independence of the central bank with respect to political power. In these cases, and technically, the alternative of a cryptocurrency from subject stable-coin would seem to be a good solution to their inflation problems. It would be a way to externalize the solution to their problems, as these countries lack strong institutions. But this is precisely the problem, these governments will presumably not want to lose their power or solve the inflationary problem and will focus on other variables, not necessarily good for the general interest.

The emergence of stable-coins is causing central banks to consider the implementation of an official digital currency, the so-called euro or digital dollar. When we use credit or debit cards digitally, we do so against our current accounts, and these assets are issued by commercial banks. What is now being considered for the first time is for the central bank to also issue its own current accounts - or its digital payment instruments - so that users can make payments from there. We are close to the birth of a monetary ecosystem with a new balance of forces between central banks, commercial banks and technology-based financial companies. It remains to be seen the Degree decentralization of the system, and what the role of commercial banks will look like in a world of financial platforms. It does seem that the new official digital currencies will allow a nexus between the different platforms at a global level. Hopefully, this will provide greater fluidity to national and international trade to the benefit of the people.

In any successful innovation process there are usually four stages to reach a stable business model : initial excitement, confusion, organization and successful implementation. I think that we are still in the second stage, of some confusion due to so many novelties, but I also think that we are close to the third stage of organization. This stage will have to be carried out through a necessary regulation, already underway, to make these financial innovations move from illegality to legality, also making illegal where appropriate. It is no easy task to get the regulatory design right, which will surely take a few years to implement -that is why the pilot tests that are being carried out are important, and to learn from the mistakes made and the failures to date-. It will be core topic regulate three dimensions at least. The sustainability of some cryptocurrency platforms -again, very focused on speculation-, as they make an exaggerated use of electricity due to the complexity of operations and the congestion of the platforms. Secondly, striking a balance between the privacy of personal data and being able to monitor fraudulent payments or criminal activities: a novelty of the new systems is that commercial and financial transactions will be registered on the same platforms, providing them with synergies with the potential to make smart contracts more efficient and fair, but designing this common registry is in itself a challenge to guarantee privacy. Finally, and despite the fact that financial decentralization is often seen as something very positive because it will take away a lot of power from governments and banks, it must be taken into account that in such a decentralized and deregulated environment, technological giants could impose their market power, establishing dominant platforms and setting barriers to small and medium-sized business, which would result in excessively high costs for users.

The future

The current digital revolution will transform the monetary system as we know it today. We will not have a monetary system whose fundamental basis will be cryptocurrencies, nor will bitcoin be the new currency of reservation worldwide, that is for sure. We will continue to have a fiduciary system, but with new capabilities, with more versatile and efficient monetary platforms. In this system, governed by the public authorities, there will coexist as transactional currencies, alongside physical money, varieties of digital money, some old ones -such as current accounts in banks-, other new ones -such as euros or digital dollars-, and presumably some stable digital currencies of private creation, properly regulated. In any case, price stability and financial stability will continue to be the two axes in the diary of central banks, and this new framework will present new challenges in these two areas. At the same time, the new digital push is right to provide greater financial inclusion - in many countries a large part of the population cannot access bank accounts, which makes it difficult to development-. Therefore, payment platforms such as M-Pesa - created by the private sector in Kenya - and Pix - created by the central bank in Brazil - are more than welcome news in putting people's real needs at the center.

To this day, the dollar remains the most important currency in the world. It is the currency of reservation worldwide, which gives it an exorbitant privilege, so called. As the most sought-after transactional currency, both the U.S. government and U.S. companies can issue financial securities on better terms than other countries. The new monetary revolution has not yet challenged this dominant position of the dollar. However, the combination of new official digital currencies and decentralized digital platforms has some disruptive potential in this regard. Countries such as China could take advantage of this new ecosystem to push the implementation of its digital currency in many other countries, not only its own, and presumably will try to unseat the dominance of the dollar. Undoubtedly, years of important transformations are approaching, where the conjugation between Economics and politics will continue to be core topic to understand the changes in our world. Both civil society and academia must try to lead the way in putting people at the center of new solutions.