Current technology enables the traditional functions of currency – medium of exchange, store of value, and unit of account – to no longer need to be strictly separated to be effective. This evolution has the potential to revolutionize the entire global financial system. I explain.
As we have currencies represented in Blockchains, that is, tokenized, the use of a certain token representative of this currency that incurs interest for everyday use is an alternative that appears and changes much of the structure and allocation of resources.
To illustrate: let’s consider an innovative example already established in the world of cryptocurrencies. Lido Finance, currently the largest Ethereum Staking platform, issues a token called stETH for each depositor who puts ETH in Staking through its platform. This token, stETH, can be used freely on the Ethereum platform. Drawing a parallel with the traditional financial market, it would be as if you invested in a fund and, in return, received shares (which we will call fdoBRL). These shares could be freely traded in the market, being used even to pay for your groceries or purchase a car. Would this new token (fdoBRL) be a new currency? What systemic and credit risk would it carry?
Continuing with stETH, it is a token accepted on virtually all DeFi platforms just like ETH, the difference is that through Lido's mechanism, this stETH token has a yield attached to it that comes from the function that ETH Staking provides, that is, securing the network. Here, the risk of Staking can be understood as the risk of the network itself, since if we have a problem with the Ethereum Blockchain, the ETH in Staking will be at the top of the queue to respond for them.
A function that stETH still does not fulfill (emphasis on “still”) is the payment of the usage fees of the Ethereum Blockchain. However, with the abstraction of accounts, this functionality is just a matter of time. In this context, it is likely that soon the vast majority of ETH will be deposited in Staking on platforms like Lido. Thus, the transaction “currency” on the Ethereum network could be tokens similar to stETH, instead of ETH itself. Returning to the traditional financial market, now imagine a fund managed by the National Treasury of Brazil that has a portfolio composed solely and exclusively of its bonds and that you can deposit reais (BRL) and receive in exchange a token representative of the share (TesBRL) that can interact freely in a Blockchain network provided and regulated by the Central Bank of Brazil (Drex, have you heard of it?).
You could pay for a coffee, do grocery shopping, or buy a property with the TesBRL, which would be widely accepted.
Can you visualize it?
In this scenario, everything would be exchanged for TesBRL and no longer BRL, our currency. In economic terms, TesBRL would be a liability of the National Treasury and not of the BCB. And it is from here that doubts and questions pile up.
Would the National Treasury be directly issuing currency? But isn’t that the function of the BCB? How to separate these two entities? Would that still be necessary, or has technology made this division obsolete? How do monetary and fiscal policies fit together? All mixed up?
Another aspect of this discussion is related to the enormous revenue that all Central Banks incur due to having the monopoly on currency issuance. This is known as seigniorage in the economic world. In simple terms, it is the difference between the cost of issuing R$ 50.00 (insignificant) compared to the face value of what has been issued.
Would the Treasury, at some point, be able to issue TesBRL without interest and appropriate all the seigniorage related to it? Just as the BCB does with the BRL?
Questions for economists to answer from a theoretical perspective – currently – and very likely, in practice, in the coming years.
We will see later that, technically, a retail CBDC issued by a Central Bank can have associated interest. However, this is not the direction taken by any of the Central Bank projects I know. The main concern is the potential disruption of the current financial system, which is based on fractional currency and the functions of banks. Direct digital access for the population to the Central Bank is already a widely debated topic. But if the Central Bank started paying interest on this access, the question would arise: why would we need banks? The challenge is that the functions currently performed by banks (such as account management and loans) would have to be assumed by the Central Banks, something that few see as viable at the moment.
But the point I raise here is different. It is not a retail CBDC that pays interest. It is the tokenization of a Treasury bond that will serve as a means of payment, unit of account, and store of value, that is, currency, and this is a possibility from a technical standpoint, but with enormous implications.