By Keith Hilden
We currently find ourselves in quite the economic quandary. Controlling banking interests are seeking increasingly cashless transaction systems. Various anti-cash legislation actions coupled with a media blitz towards a cashless society acts as supporting material for this shift towards an increasingly digital monetary system. At the same time, a patchwork group of individuals from all walks of life are now using digital currency and payment systems by way of Bitcoin, Paypal, Ripple, and other digital currencies and digital payment systems. While digital currency and payment systems come with their advantages, we see an emerging real concern of account security being compromised in a system of digital currency and payments. Were there to be no alternative of a digital currency and/or payment system, it would become possible to have a risk in the economic ecosystem in such a way that there is no alternative to fallback onto in the event of a systemic pandemic or other digital disruption. For this reason, Israel’s Shin Bet in 2012 assisted cybersecurity efforts for the Israeli central bank. We see how the central banks of the world use fiat currency, and that softens the blow of events such as Brazil’s central bank being targeted by cyber attacks in 2012 and the wave of ATM failures from a slew of so-called glitches in multiple countries, impacting depositors ability to withdraw their own money. These events bring to light the risks that exist in a digital environment with no physical element of currency to fall back on.
The beauty within the current financial system is that there are many alternatives if paper, deposits, and precious metals were to fail. One flows and falls back upon another. The gold standard failed when Nixon reneged on gold-based deals to other nations in the 70s, and were a similar event to happen in the paper market, the problem could be solved in a similar way. Similarly, when the derivative market is under pressure, people take physical delivery or request dollars. When a currency goes volatile and loses its value, a bank run occurs and people pour into stocks or precious metals in order to gain equilibrium again. When gold goes south, people pour into stocks and paper-based currency notes. When stocks fail, people pour into dollars and precious metals, and so on. When ZIRP (zero interest rate policy) is sustained in nations, monetary flows flow out of deposits and flow into monetary instruments such as stocks, derivatives, paper, or precious metals. It really is a beautiful system. Were any sector in the current monetary system to go volatile and disequilibrium were to occur, monetary flows would go into the stable sectors, and as such stabilizing the monetary system. This is the advantage of our multifaceted asset class system and the currencies that facilitate them that we have today.
In 2012, when there was a string of ATM failures, there was the ability to go into cash. The option to diversify existed. At the same time, pressure was put on online banking to improve when Rabobank in addition to RBS, Ulster Bank, and Natwest experienced so-called glitches and left depositors in the cold. This in turn put pressure on these banks and their competitors to improve the digital payment network to prevent “glitches” from impacting depositors. There was a rush to improve services simply because depositors had choices of not only banks, but asset classes in which to park their money in. Competition is the elixir of improvement, and in traditional bank runs it’s no different that choice enabled flexibility in crisis. In Vietnam that same year, when top officers at Asia Commercial Bank operated the bank in ways that Vietnamese authorities considered of severe consequence, depositors lined up outside of gold shops to get into USD or gold in order to protect their principal.
The problem with a fully digital economy is when the heart of the digital economy is attacked via a crippling cyberattack and there is nowhere for these endangered monetary flows to flow to. Therefore, they become stuck in the most unstable monetary flow due to a lack of alternatives amidst a high-risk threat surface, and the result is the monetary system suffers badly. A present day example of this is a monetary transaction during a power outage- people in many countries revert back to currency notes for payment until the blackout has been restored. For a pure digital monetary system to work there must first be an assurance that the system is invincible, and cannot suffer systemic risk and breakdown. While Europe currently may be facing systemic breakdown in its future, the monetary flows in Europe are not stuck; they can flow on to more favorable monetary instruments, thus preserving the systemic foundation. And, if one sector of this economy is hopelessly misbalanced into one monetary instrument, threatening system-wide stability, that instrument can be declared retroactively null and void.
This simple fallback, this freedom for monetary instruments to flow to the most stable of instruments, is what ends up balancing the entire global monetary system. Or in other terms, capital flows to that of least resistance, and a sick, bloated financial instrument is not an instrument monetary flows flow to. And if a flow adjustment does not solve the problem, like a medicine administered to a patient to no result, the last option can be to cut off the tumor that is causing the blockage and the systemic risk; in such, the patient and the global economy alike is saved.
Therefore, the digital economy can be instituted in conjunction with the array of available digital monetary instruments, and the market can decide whether its monetary flows will flow to the digital economy. And in times of risk, the market can shift out of the digital economy and back into paper, precious metals, or another alternative altogether. The digital economy may very well be a serious contender, and can even be a market favorite. But it must have its alternatives in the event of a digital economy systemic risk event. With nowhere to flow to, bloated capital suffers and the whole economic system slows down.
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