The ongoing digital revolution in monetary circulation is of landmark significance. The emergence of new type of money is extremely rare and marks a fresh stage in the development not only of the monetary system, but economy as a whole.
So, the transition from metal money to paper banknotes that began half a millennium ago by the emergence and development of banks opened a possibility of infinite capital accumulation, as well as international financial transactions. Without this tool capitalism would not have developed, the industrial revolution would not have been possible, no industrial society formed, no urbanization occurred or achieving the scientific-technical progress (STP) that constantly expands our possibilities.

The advent of computers, equipping the finance sphere with computing and telecommunications have led to squeezing out of paper money by its non-cash equivalent, that is, recording numbers in bank accounts. But, in fact, the nature of these operations has not changed – these were the same records in bank accounts like those on paper, but written down by automated computer algorithms rather than a pen.

The principal difference of digital money is not their paperless (electronic) form, but the absence of banks as issuers. By their nature they are not banknotes, their emission is carried out via computer algorithms, protected from copying by means of cryptography. If cashless money related to circulation of banknotes essentially means nothing more than the right to claim money from bank account owners, digital money has unambiguous identification and tied to its owner. The circulation is supported not by banks, but the computer network through the multiple fixation of all transactions in a distributed registry (blockchain). Passing through many transactions, each digital currency retains its uniqueness and is always identified by the computer to determine its origin.
Being electronic, each unit of digital money has a unique number that makes it look like a banknote. Banknotes are not linked to a person, they can be stolen or forged, while any digital money operation is recorded by the computer. With properly written algorithm, they cannot be tampered or stolen.
Thus, digital money not only combines the advantages of current non-cash and cash money, but it also has fundamentally new properties that make it a new type of money. Firstly, it is issued not by banks, but computer algorithms, its future circulation and preservation does not depend on the issuer. Secondly, each digital currency unit has a unique number and is not depersonalized during circulation. Thirdly, all transactions with each digital currency are recorded and stored on the network.
Currently all known digital money, starting with bitcoin, is issued (or mined) by individuals. Some market participants think it to be an advantage of being free from the government regulation. Others consider it a tool for inflating financial bubbles and money laundering. Monetary authorities in most countries treat it with suspicion, refuse to accept it as money and, as a rule, do not allow its use as a means of payment and settlements. But this situation will not last long. More and more states have been taking part in emission of the national digital money.

The history of monetary circulation shows that a new type of money was originally issued by entrepreneurs and only then monopolized by the state. The modern monetary system was based on the governmental monopolization of the paper money emission, originally held by private banks in the form of banknotes, which meant a bank’s obligation to pay money to the bearer. Gold and silver coins were considered as money back then. Respectively the states after nationalizing the issue of paper money and establishing the state banks, firstly guaranteed their its exchange for gold, and set the corresponding amount of gold reserves in the national banks. However, this tradition was short-lived.
As the aggregate monetary volume got disconnected from gold and foreign exchange reserves of the Central Bank, the national money turned into fiat – backed by nothing except the state obligation to support their purchasing power. And this is the nature of all national currencies today.
The value of fiat money for the development of modern economy can be compared to the discovery of the philosopher’s stone, sought after by medieval alchemists. The Middle Ages differed from the period of modern economic growth that began with the first industrial revolution in the late 18th century in a way that the era lacked scientific and technical progress and credit system, which provides funding for technological investments and production advances. Money could be borrowed only from moneylenders at 50%, and sometimes as high as 100%. It is obvious that such credits could not be used to expand production with profit margins rarely exceeding 15%, or to finance development when the average profitability for many centuries oscillated around 3-7%[1]. The invention of the state credit system made it possible to create an unlimited source for the production expansion and development funding. This allowed for creation of a large-scale and high-tech industry that opened doors to boundless scientific and technical progress.
Fundamentally, the credit system is a universal tool to spur economic growth. The loan interest can be compared to that of a tax burden. To reduce it, and thus open opportunities to boost production, advanced economies regulate money issue to finance business activity in growing economic spheres.
The main factor limiting the emission of fiat money is the threat of inflation. Neutralizing this threat requires interconnecting the cash flow in the production and banking system. Otherwise, fiat money can create the environment for financial bubbles and currency speculations with macroeconomic consequences.
Successfully developing countries have low inflation provided by constant increase in efficiency and production volumes of goods due to retention of cash flow in the loop: credit issue – investment growth – expansion and product efficiency – increasing volume with decreasing production costs and price – earnings growth – savings increase – investment growth. This is achieved by linking state issued credits to production development investments, subject to currency restrictions of capital transactions, full responsibility of public authorities to achieve output growth objectives as well as continuing fight with corruption.
In the midst of the world financial crisis the mechanisms to make fiat money to serve the national interests have stopped working. At the same time there’s a sharp decrease in the fiat money efficiency – only each fifth dollar issued by the Fed reaches the real economy sector. The rest becomes part of financial bubbles, that redistribute public wealth in favor of the bankers close to the Federal Reserve. It should be added that the global financial crisis occurred due to excessive emission of fiat money by private banks. After lifting the restrictions for attracting deposits by American investment banks the latter increased dramatically the dollar emission, bringing its credit leverage almost to triple-digit values. This was an evident feature of a two-level banking system that got outside of the Central Bank’s control.
The socio-economic effectiveness issue of the fiat money is proportional to the capacity of the state to monitor its handling and to use seigniorage for social-economic development. Digital money, unlike fiat currency, does not require a wide range of administrative control and indirect regulation. Their emission is controlled by a defined algorithm, whereas all transactions are recorded, providing automatic monitoring of circulation.
The use of virtual money allows to do without traditional banking information exchange. At the same time funds are used more efficiently and effectively. Digital currency is different from its electronic counterpart in a way that transactions are recorded on the blockchain, a ledger distributed between multiple users. It provides a reliable control of transferred funds, rules out unauthorized withdrawal, including theft, improper use and exchange into foreign currency. Such mechanism does not need bank guarantees, it is not subject to banking risks, including sanctions (accounts suspension, stopping transfers, disconnection from SWIFT, etc.). Digital money can significantly reduce transaction costs, decrease interest rates, and support target lending aimed at project investments necessary for economic development. Transfer of digital money can be controlled automatically when it comes to salary payment, dividend distribution or loan repayment.
The use of digital technologies for targeted credit emission in national currency is fundamentally different from the emission of private cryptocurrencies like bitcoin. The issuer in this case is an organization approved by authorities. The volume is set by monetary regulator, with the corresponding sum reserved on the account of the authorized issuer in the Central Bank. This would lower the loan interest rate for real economy sectors, enlarge the production and investments to the level of available scientific-production capacity.
Digital money, like fiat currency, is not supported by any material equivalent, but possess several advantages described earlier. It takes on the functions of the fiat money plus solve the issue of theft and disappearance when banks go bankrupt. It makes perfect sense to make it part of national and international financial systems. This requires the creation of an independent digital environment that would facilitate payment settlement, financial investment, currency exchange transactions, beneficial for all member participants. The infrastructure of such environment should include the following:
– digital supranational settlement currency, linked to countries’ basket with the weights proportional to countries’ trade turnover;
– emission and clearing center which can be the pool of BRICS foreign currency reserves;
– international contract defining the emission and circulation of supranational digital money, as well as member-countries’ obligation to support their own currencies;
– emission rules and distribution of loans.
Supranational digital currency could become a convenient way for cross-border trade and investments, making cash flows transparent, and cash exchange fair. In its turn the blockchain technology and high transaction volume should receive a regulatory backup. The supranational digital currency should be indexed by the currency basket of members-states that will join into the association.
Contributed by Sergey Glazyev, a Russian politician and economist, advisor to the president of the Russian Federation on regional economic integration.
