Flying Cash

Around the year 800, the Tang dynasty in China ran into a small problem. They were running out of cash.

Cash at the time being copper coins.

Coins were used a lot by merchants for trade around the country. To tackle the shortage, they tried to limit the amount merchants used by making them barter commodities as a medium of exchange instead, but that hampered trade.

So they started issuing certificates that merchants could redeem for metal coins at the capital.

These certificates had some advantages. You didn’t need to carry a heavy load of coins everywhere you went, it was safer, and they could have different amounts of money on them.

But merchants stopped bothering going to the capital to redeem them and started to use them as an exchange system, a sort of money instead.

The certificates became known as ‘flying cash’, mainly because they had the habit of flying away when it was windy.

Flying cash was the precursor of paper currency, which was later introduced with the Song dynasty and would eventually replace the world’s ‘cash’ at the time (gold, silver, and copper coins).

Now our ‘cash’ is changing again, we’re witnessing a revolution in money.

Central banks are looking very closely at Central Bank Digital Currencies (CBDCs).

China so far is well ahead of the game, looking at launching its digital yuan during the 2020 Winter Olympic Games in Beijing.

CBDCs have plenty of advantages for governments.

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As opposed to digital currencies like Bitcoin [BTC], central bank digital currencies are centralised and backed by the government.

Payments are quick and there are less fees because they don’t need intermediaries. They don’t need to run on the Society for Worldwide Interbank Financial Telecommunications or SWIFT for short.

So in a time when tensions are increasing between the US and China, you can see how this can be appealing.

In fact, it was something even Huang Qifan, Vice President of China Center for International Economic Exchanges said at the 2019 Bund Summit:

First of all, SWIFT and CHIPS are gradually becoming the financial instruments for the United States to exercise global hegemony and carry out long-arm jurisdiction. Historically, the United States has launched several financial wars with the help of the SWIFT and CHIPS systems.

Second, SWIFT is an outdated, inefficient, and costly payment system. Since its establishment 46 years ago, SWIFT has been slow to update and its efficiency has been relatively low. International wire transfers usually take 3-5 business days to arrive. Large remittances usually require paper documents, making it difficult to effectively handle large-scale transactions. At the same time, SWIFT usually charges a fee of one ten-thousandth of the settlement amount, and has obtained huge profits by virtue of the monopoly platform.

Therefore, under the current trend of digitalization, there is no future for SWIFT and CHIPS systems that rely on slow technology updates and difficult security. Driven by big data platform and blockchain technology, building a new clearing settlement network has become the consensus of many countries. Blockchain technology has five characteristics: decentralization, information not tampering, collective maintenance, reliable database, and openness and transparency. It has the natural advantages of transparency, security and credibility in clearing settlement.

Quick payments and less fees are also an advantage for a top-trader country like China, and a digital yuan could allow for this.

CBDCs also allow for more control of the economy, things like negative interest rates or even giving currencies an expiration date.

So it’s no coincidence that China has also tried to eliminate competition by banning cryptos and crypto mining, but also cracking down on digital payment services like WeChat and Alipay.

Now, central banks around the world are looking at CBDCs but they’re also concerned on competition.

One of the latest warnings on digital currencies like bitcoin has come from the International Monetary Fund recently, as the market value for crypto assets hit US$2 trillion:

As crypto assets take hold, regulators need to step up.

Crypto assets offer a new world of opportunities: Quick and easy payments. Innovative financial services. Inclusive access to previously “unbanked” parts of the world. All are made possible by the crypto ecosystem.

Or so the paper begins.

But along with the opportunities there are always risks.

They then go on to detail a long list: No governance, risk, hacking, theft of funds, fraud, money laundering, terrorism, etc.

Which is true, cryptos are risky.

But reading on, their key concern is something they call cryptoisation:

Looking ahead, widespread and rapid adoption can pose significant challenges by reinforcing dollarization forces in the economy—or in this case cryptoization—where residents start using crypto assets instead of the local currency. Cryptoization can reduce the ability of central banks to effectively implement monetary policy.

As cryptos are becoming more mainstream, money has started to sift away from the financial system and into digital currencies because they offer an alternative.


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Selva Freigedo,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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