Blockchain, populism and digital currency

Claudio Feijóo / Ángel Gómez-de-Ágreda / Sebastián Puig

Helicopter money

To explain the effects of an expansionary monetary policy,[1] Nobel Laureate Milton Friedman wrote a parable in 1969, stating that it would have exactly the same effects as dropping money from a helicopter directly into the hands of individuals. This remains, a thus far impracticable, academic explanation illustrating the effects on the economy of increasing the monetary base. And whenever this policy has had to be implemented, as is currently the case in Europe and the US, it is done in a round-about way, generating benefits for the banking and financial systems, as well as large companies, but having limited effects on the real economy and individuals, including some perverse incentives in terms of national public accounts.

But technology could make what seemed to be a merely illustrative chimera a reality. Suppose that a digital currency was launched and that it replaced enough of all the liquid assets of the money supply — M0 and M1 in financial jargon. If the majority of a country’s or a region’s population owned these digital currency assets and they were accessible from a central system, it would be a piece of cake to offer, whenever politically, economically or socially necessary or convenient, a bonus in the form of a direct increase in their available funds.

Voilà, the (digital) helicopter has dropped something for you.

The first step requires blockchain technology, as explained below. The second implies the need of a public or private agent that is powerful enough to convince citizens — and the banking system — to change the currency denomination of their assets, surrendering huge slices of the privacy and independence that they previously enjoyed. This transformation is already underway, as is again illustrated below. The third step is the simplest: all it takes is someone that is interested in the infinite possibilities of profiting from or manipulating the population through helicopter money, which is the target of this brief analysis.

Welcome Mr. Blockchain

Blockchain refers to a decentralized system of records, which, in essence, shifts the power of notarial certification to the users, thereby doing away with the need for a public official. It devolves, so to speak, power from the central authority to the citizenry. It is also the basis of several decentralized cryptocurrencies, like the famous Bitcoin. However, this is not what some governments and large technology companies are thinking about when they imagine the potential of blockchain. There is something else, in all probability surprisingly close to what President Xi had in mind when he explained, in October 2019, that exploring possible applications of blockchain in people’s daily lives was to become a national priority.

The solution to this conundrum is to reform, or rather revise, technology to serve the primary objective of business — private companies — or social control — authoritarian governments. It is turning a technology — originally designed to constitute an anonymous, decentralized system, verified by collaboration between a multitude of servers participating in the network — into just the opposite: a centralized system requiring mandatory identification (how else can you tell who is making what transaction?), verified on the basis of the principle of authority. Blockchain — like the Internet[2] — has proved to be a far more malleable technology than its (naïve) evangelists ever thought.

Following these guidelines, several (11) Chinese government institutions, banks and emerging technology companies[3] officially launched a Blockchain-Based Service Network (BSN) in 2020. This is one of the first blockchain networks to be supported and maintained by a country’s government. Its aim is to enable all stakeholders to use blockchain-based services or build their own applications without having to develop all the necessary infrastructure, which can be particularly costly and complex; in short, it sets out to generate the mechanisms that, in the hands of others, could displace the current monitoring and control capacity from the centres now in control of the money market. According to its development plan, the network should have a foothold in over two hundred of China’s major cities by 2020,[4] and it aims to become a global standard that can be extended to other countries as well.[5] In fact, China is, according to the World Intellectual Property Organization, already the world leader in blockchain-related patents.[6] This has massive implications for the future world geotechnological and geoeconomic landscape and is one of mainstays of the, increasingly unswerving and ominous, soft power that the Chinese giant is wielding in its patient, yet relentless, pursuit of global hegemony.

The case of the digital yuan

As far as China is concerned, all these implementations are just the beginning, since the final target is to create a digital currency: the digital yuan, a non-physical and automatically traceable currency based on this permissioned and centralized version of the blockchain technology described above. This is a field where the apparently most advanced solutions at present are Facebook’s Libra and this digital currency payment system (DCEP), already undergoing pilot testing in China.

It would operate as follows: users would download a digital wallet to their mobile phones and exchange their physical money for this new digital yuan. Since China is a country where mobile payments are already used on a massive scale for daily transactions, mostly with Alipay or WeChat (apps that also incorporate other exploitable functionalities), this would not make much of a difference. On the other hand, the government would have real-time access to all the information every time a transaction took place anywhere, instead of having to resort to third parties.

Trials of the digital yuan have already begun in several cities in China. For example, 50,000 people have been awarded 200 digital yuan each through a lottery held in Shenzhen in October 2020 in what would be a toy version of the money helicopter to test the technology.[7]

New economy or new demagogy

This would be a dream come true for many. If it worked more or less in Shenzhen, it would then just a matter of scaling up the solution and, in the case of monetary stimuli, offering the money directly to the citizenry, instead of following the convoluted route starting at the central bank, passing through commercial banks, and then on to the companies and households.

The European post-Covid recovery plan is an ideal scenario within which to visualize its effects. Instead of complex negotiations on how best to use this money to have the desired effects on the economy and society and offset past hardship, the money would be paid directly into the user’s account at the respective central bank or fintech company. With access to enough, not only economic, data and sophisticated data processing algorithms, social (or populist) policies could be juggled to adjust amounts according to any number of different criteria such as income level, risk of exclusion and so on. Once in the users´ hands, and depending on their willingness to save, which would, in a way, be a return for the banking/financial sector, it would become direct expenditure, leading to immediate economic reactivation, not to mention other possible effects.

It is, then, merely a question of designing demand-side policies to channel this expenditure towards specific sectors, such as clean energy or sustainable transport. Demand-side policies are potentially more transparent and less distorting than supply-side policies, and they favour the creation of new businesses that do not need to rely on existing industry. Finally, a money vacuum cleaner — the opposite of a helicopter — would be needed to siphon off the excess money and control inflation. Ultimately, and always bearing in mind that economics is a social science, whose effects, in this case, are still unexplored, interest rates might even be dispensed with.

This faultless dream could, however, turn into a nightmare. What is there to stop an ambitious ruler from printing banknotes to offer money to — that is, buy off — citizens? This would be the highest — perhaps ultimate — expression of populism. Would it not be impossible to lose an election — or power if reached by other means — if you can directly pay voters or supporters? Who would bite the hand that feeds them?

And, as already mentioned, this is not confined to the national arena. Look, for a moment, at China: it wants to demonstrate that its political and economic system is better than any other and is based on a particularly cohesive society. Control and reward are a very powerful mix in the hands of power. Such a digital currency implementation makes a country more resilient a priori to external shocks. This use of technology could, therefore, constitute a key competitive advantage on the international stage and be a tempting model for Western countries to follow, in both economic and political terms, with all the ensuing implications for the rule of law and their citizens’ lives.

Furthermore, it would pave the way for the yuan to become a reserve currency, because China could just as well drop money on the Chinese diaspora or residents of any geopolitical area of influence that takes its fancy as it does on its domestic population.[8] Beijing has, for years, been striving to increase the weight of the yuan in the basket of reserve currencies with a view to diluting the central role that the US dollar plays in the world economy and escaping Washington’s domination of the system of monetary transactions.

Indeed, a digital currency system would give China more leeway and less dependence from the US-controlled international financial system. It would suffice for the infrastructure supporting the system, such as servers, communication networks and encryption, to be entirely Chinese in order for it to be immune to sanctions. It is also a system that is relatively easy to duplicate if you have the appropriate technology for greater resilience.

A digital economy with the above characteristics would introduce new cards for the next game, and the potential for control offered by this system is too great a temptation for them not to be played.

The race, not necessarily for the better, is being run.

Notes and Disclaimer

Part of this analysis is contained in the book “Techno-socialism with Chinese characteristics” (C. F. González, in press).

An original version of this note was published in Spanish at https://www.esglobal.org/

The opinions expressed are those of the authors and not those of their institutions. The usual disclaimers apply.

[1] Now known as quantitative easing, which has traditionally consisted in printing money and finding the means of injecting it into the economy of the country or region in question.

[2] Remember John Perry Barlow’s 1994 “A Declaration of the Independence of Cyberspace”: https://www.eff.org/cyberspace-independence

[3] Including the Chinese National Information Center, China UnionPay (the equivalent of MasterCard or Visa), and China Mobile.

[4] The development of this type of infrastructure has to overcome sizeable technological problems, such as the typical delay in the verification of blockchain information in real-time operations.

[5] Although it is unclear how well the idea of the Chinese government having the master key to information on each and every transaction would go down with other countries.

[6] https://forkast.news/china-leads-world-blockchain-patent-filings-real/

[7] For an explanation of this test, see the news item: Shenzhen citizens to receive $1.5 million of Chinese digital currency eCNY in giveaway. (October 9, 2020). Ledger Insights. Available at: https://ledgerinsights.com/chinese-digital-currency-ecny-give-away/

[8] The case of China’s Belt and Road Initiative (BRI) is a perfect example. For a brief explanation, see Blecua, R., & Feijóo, C. (September 4, 2020). The great new game: implications of a strategic partnership agreement between China and Iran. Real Instituto Elcano Royal Institute. Available at http://www.realinstitutoelcano.org/wps/portal/rielcano_es/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_es/zonas_es/ari102-2020-blecua-feijoo-nuevo-gran-juego-implicaciones-de-un-acuerdo-de-asociacion-estrategica-entre-china-iran.