The (digital) currency war

At the heart of any conversation about bitcoin is a much broader discussion – what is money? To answer that question, we have to talk about central banks. There is also a question of whether we are facing the digital currency war. Money as a means to create an empire has existed almost as long as history itself. This is not a treatise on the meaning of money. For that we would probably need Joe Rogan, a joint and a bottle of whisky. I’m rambling already. Julius Caesar is credited with the innovative idea of using coins as more than just currency. By minting his face on coins, Julius Caesar created one of the most effective instruments of government control. Since then, issuing money has been the privilege of the state. Central banks evolved from a world of physical cash. In the days of Caesar, we needed an institution that stored coins and managed payments and balances between parts of the empire. Today, central banks manage these payments and thus entire economies. The central banks still manage coins, but now they move our zeros and ones into a central bank database instead of moving coins into the Royal Treasury and or the Empire. Banking on the Blockchain With the advent of cryptocurrencies and later the application of  blockchain technology and beyond, central banks are now intrigued by the possibility of using blockchain technology to add a new set of instruments to their arsenal of policy instruments. It started with Venezuela, which attempted an Initial Country Offering in 2017 by tokenizing its oil reserves. This occurred despite extensive sanctions that limited the country’s ability to access global financial markets. Such actions continued in the Marshall Islands, which for very different reasons, have difficulties accessing capital markets. Due to their tiny size and the remoteness of the island state, it is difficult to obtain financing. They have explored the possibility of raising capital through a token called SOV. Here is a comparison between the tokens of both countries:

(Source: CoinShares Crypto Trends Report)

According to Facebook’s announcement of Libra, every central bank is suddenly incredibly curious about crypto. According to a recent report by the Bank for International Settlements (BIS), 80% of central banks are currently investigating the issuance of a central bank issued digital currency (CBDC). Stablecoins send a wake-up call There is another practical statistic that we should consider. The rapid growth and spread of stablecoins. Although still small in global terms, it has opened the eyes of many central banks and commercial banks that rely on them for liquidity. Just look at the continued dominance of Tether, a stablecoin linked to the USD. Tether currently has a volume of more than $4 billion and generates at least $100 million in fees per year. Tether is probably the most important asset with this function in the digital currency ecosystem, as it provides a payment mechanism inherent to distributed ledger technology.

(Source: CoinShares Crypto Trends Report)

All banks do it Now all  central banks do it, such as China, Bahrain, Vietnam, Thailand, India and also the United Kingdom. The World Economic Forum’s report on central banks’ digital currencies has in fact published a whole toolkit that examines the various considerations for central banks embarking on this journey. Last week Cambodia announced that it will soon introduce a “quasi” central bank digital currency. If Cambodia decides to take such a route, it would be a great opportunity to find out what issuing a  central bank digital currency really means. A blockchain called Bakong The National Bank of Cambodia (NBC), has established a platform called Bakong. The platform is a private blockchain network built by the Japanese blockchain software development company Soramitsu. Bakong has its own token, a digital wallet and features optimized for wallet to wallet payments. The token is a mixture of USD and Riel, the Cambodian national currency. It can be purchased by users who deposit money into accounts at banks. There are currently 11 banks participating in this platform and I expect that each of these banks will effectively participate in this tokenization scheme as an “authorized participant”, also known as an AT. This term comes from the world of ETFs, where the AT’s are one of the most important parties at the heart of the creation and redemption process and provide a large part of the liquidity in the ETF market. This is done by obtaining the underlying assets necessary to create a fund. Here, these member banks will hold assets, issue tokens to their customers for use in this payment network, take back the tokens and buy back the underlying currencies. Now anyone who has a bank account with one of these 11 banks in the network can send money to each other. Pretty sneaky, isn’t it? If you read the published article, the logic behind Bakong is mainly about improving the fragmented, cash-based payment ecosystem in Cambodia. On the other hand, it is also about promoting more electronic payments, through wallets and the local currency. The main goal is to achieve cashless payments. It is clear that financial innovation will save them. And this is where it could actually make sense for once. The average Cambodian lives on three dollars a day. A low-cost, efficient payment system that enables all kinds of fintech innovations could indeed help to introduce low-cost financial products and services. This is an exciting development that is worth celebrating, although the question arises as to whether a block chain is really necessary. Why bet on a blockchain? After reading about Cambodia’s plans to bet on the Bakong network, I began to ask why. And if we look at the story behind the headline, a much more interesting story emerges. (1) Reducing dollar dependence Cambodia’s economy has always been based on the US dollar. The local currency, the riel, is not widely used. Around 84% of transactions in Cambodia are in dollars – not riel. This means that the Cambodian economy is very vulnerable to US monetary policy. The central bank now has control over the mix of assets that make up the domestic part of the Bakong system. Currently, this only includes USD and Riel. In the future, however, it should also be able to include a broader mix of currencies. NBC could then begin to actively monitor and manage the impact of the monetary policies set by other central banks, particularly the US. (2) Influence on the current account balance The current account balance is an important measure for the economies to measure and monitor. The current account is the sum of the trade balance, income from abroad and remittances abroad. A positive balance indicates that the country is a net lender to other countries, while a negative current account balance indicates that it is a net borrower. Cambodia, as you may have guessed, has a large negative net balance. A large part of the country’s economy depends on textiles and tourism, and the average income is around USD 1,500 per person. Cambodia’s gross domestic product is about USD 23 billion. The country’s net balance is negative at USD 3 billion, which means that Cambodia is a net borrower. The current account balance is affected by a variety of factors – but the most important are trade policies, which affect the balance of imports and exports. The control and management of the exchange rate is simplified by controlling the means of payment and national payment networks. The Bakong system currently focuses on payments within Cambodia. However, the NCB has already announced its intention to open the network outside the country. Thus, the NCB will now have a means of controlling financial flows in and out of the country. It will also have a way of managing the basket of currencies from which these payments are made. The aim is probably to minimise the economic dependence on the dollar and to optimise the competitiveness of its own currency. (3) Collection and control of economic data: Finally, it is important to note that everyone participating in the Bakong system has their digital wallet linked to their bank account. Tokens are exchanged back into the currency and vice versa. In the past, collecting economic data has always been a challenge for cash-driven economies. In this situation, central banks also find it difficult to implement effective policies. Especially when the cash economy is driven mainly by the dollar. With the transition to a digital payment system, a side effect is to minimize the USD shadow economy and to collect data on payment flows and introduce more effective controls. It is also possible to levy taxes on these flows, which in the past took place outside the system. This could also make it possible to restrict daily transactions between wallets, or perhaps even block-certain individuals from using the digital payment system. This does not necessarily require a digital currency or a blockchain. Specifically, India withdrew large banknotes from circulation in 2016 to “curb the black economy and reduce the use of illegal and counterfeit cash”. The ban on high cash transactions was coupled with a digital payment and identity system. Efforts to reduce the value of money should encourage the adoption of these systems. China has already introduced a financial surveillance system without the use of a block chain. The country intends to digitise the renminbi in the coming years. Surveillance capitalism is not just for companies – anyone can play along! Currency wars on a new front So the real issue that we are coming to now is the future of currency wars. You only have to look at the headlines to see that this is already happening. In October 2019, Rosneft, Russia’s largest oil company, announced that it would no longer use dollars for its contracts. The reasons for the change were to reduce dependence on the dollar, but more importantly to reduce the impact of US sanctions on Russian trade with Venezuela. During the recent negotiations between China and the US, there was great fear of the digital renminbi. At a hearing on Facebook’s Libra, the CEO made the following comments:
“China is moving quickly to introduce a similar idea and should be ready in a few months. Libra will be supported primarily by dollars, and I believe it will extend America’s financial leadership, our democratic values and control around the world.” – Mark Zuckerberg
Central bank digital currencies will herald a new era and a new aspect to currency wars. It will be very interesting to see which protocols, networks and product and service providers will ultimately be the providers of choice for governments. We like to believe that start-ups are made of magic and stardust, but we forget that Silicon Valley owes much of its heritage to the needs of the military-industrial complex. And we see a growing number of companies in the Valley focused on solving problems not only for businesses and consumers, but also for the largest and most complex institutions in the world – our governments. After all, Amazon, the trillion-dollar dot-com poster child, is well on its way to becoming one of the largest US defense companies. Does the future lie with Bitcoin? At the end,  this tweet to summarizes my thoughts in a nutshell. If every central bank, every company and every power-hungry entity decides to issue its own digital currency, what would be the neutral choice for international trade? Does the medium really change the message? And above all: Where will the market activities flow to? I’m about two sentences away from mentioning #BitcoinFixesThis here, so let me spare us all the rocket emojis. The current state of digital central bank currencies has many people seeing why Bitcoin is so powerful. It doesn’t belong to any state, government or country. And that is something we can all look forward to. * Originally published in German at

About the Author


The CVJ editorial team consists of crypto experts, active in different areas around the blockchain technology. In cooperation with selected authors, CVJ.CH provides a high-quality resource around the distributed ledger technology. Independent and up-to-date reporting according to journalistic standards as well as educational content around the topic blockchain, rounds off the offer. 

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