The modern international monetary system is gradually beginning to crumble. Blockchain technology is one of the likely options that can come to replace it.
The global financial system in the 21st century has indeed become truly global. It can even be recognized as ‘globalized’: the dependence of individual economies on each other and on international financial institutions is stronger than ever. At the same time, it’s difficult to call the modern global financial system balanced.
The US dollar is the main settlement currency and, accordingly, the world reserve currency. The global recognition of the dollar as an ‘unshakable’ value is based not only on the economic strength of the US and its corporations, but also on the existing structure of exports and reserves of leading economies. Among the 15 largest holders of the public debt of the United States are all the BRICS countries (except South Africa), accounting for 27% of the US national debt.
The Chinese renminbi is also becoming one of the world’s leading currencies. The inclusion of the renminbi in the list of IMF reserve currencies led to an increase in the volume of operations with Chinese currency by the central banks of the world – the yuan is already included in the reserves of the ECB, the Bank of France, and the Bundesbank. The economies and currencies of many Asian countries depend more on the renminbi than on the dollar. Finally, a very important fact is that the end of March 2018 saw the launch of trade in oil futures, nominated in RMB.
So, what are the advantages of a world reserve status for a national currency? First of all, the stability of the financial system, supported not only by the issuing state itself, but also by other ‘consumers’ of such a national currency. Secondly, the huge lending opportunities, as such states are able to borrow money very easily and their banking system, in turn, becomes a beneficiary of enterprises and the population, taking our loans and not only within the country itself. Out of the 10 largest banks in the world, four have Chinese origins and only three originated in the US.
It is also important to mention the actual lack of full sovereignty in terms of monetary policy for countries whose central banks operate under rules similar to those under which the Bank of Russia operates. One might even call it a ‘colonial-type financial system’. I am fairly sure that under increasing sanctions pressure and artificial limitations of the country’s export potential, Russia will be left with less and less financial resources to stimulate economic growth.
Having analyzed the problems in the field of economics, international finance, and monetary policy, I proceeded to develop the concept of the International Digital Monetary System. In this part of the article, I would like to focus the readers’ attention on external and internal problems, which are relevant to Russia, the member states of the EAEC, most of the BRICS countries, and many other nations. Let’s view them through the prism of the example of Russia.
The external problem is a dependent economy caused by non-sovereign emission of the ruble, which entails the dollarization of the economy and the inability to fully influence it from within. The use of the US dollar as an international means of payment threatens to disorganize foreign trade and other overseas economic transactions in Russia. A significant part of the country’s gold and currency reserves remains in dollar assets (US treasury securities and bank deposits in foreign banks), and these funds could be easily ‘frozen’. Thus, stockpiling dollars as international reserves of the Russian Federation weakens the Russian economy and strengthens the position of the United States (basically, these are interest-free loans to the United States).
There are also internal problems of the financial system that are relevant for most emerging economies. Some of them are caused by the aforementioned external conditions: limited resources for lending to own economy, outflow (export) of capital, and raw material specialization. Others have to do with the insufficient development of modern economic infrastructure, as well as instruments of economic and financial planning for both public and private entities. Such problems include a high share of the ‘gray’ sector of the economy and an opaque turnover of cash, which leads to corruption, tax evasion, and other negative phenomena. Also, there are no mechanisms to ensure liquidity of a great deal of properties and rights, which slows down the work of enterprises and does not allow them to get sufficient loans.
The global financial system operating today carries risks for the world’s largest economy, the United States. A decrease of investments into US debt securities can lead to the weakening of the dollar and the need to redeem obligations by the FRS. Depreciating reserves and greater competitiveness of US goods will lead to an even greater reduction in US lending and the process will repeat itself.
Unquestionably, the risks described above are palpable to all participants and each of them studies or models the various possible scenarios in which the situation might develop. I would venture a guess that there are several possible competing scenarios for the transformation of the world monetary system.
The first scenario is a return to the gold standard, which was abolished in 1971. The accumulation of gold by Russia, China, and some other serious players on the world stage speaks in favor of this scenario. At the same time, gold reserves within sovereign currency systems are decreasing or falsified.
The second scenario is the transition to international settlements using the SDR (Special Drawing Rights) system, which was first proposed by the IMF in 1969. Favoring this scenario is the inclusion of the Chinese renminbi into the SDR basket in 2016. Today, the SDR basket consists of the US dollar, the euro, the yuan, the yen, and the British pound. Some time ago, the euro became the successor to the ECU, the European Currency Unit, in the same vein.
The third scenario, which applies to modern digital technologies, is the transition to new interbank systems that will allow for settling accounts in national currencies. In favor of this scenario is the launch of China’s PVP payment system, which is equivalent to the SWIFT system. The PVP system was launched on 9 October 2017 and is now used to conduct transactions in renminbi and Russian rubles, which allows for mutual settlements without the ‘mediation’ of the dollar.
The fourth scenario is the development and gradual transition to new digital currencies and the corresponding monetary systems. The concept that is described in this article describes this very scenario.
One example of such digital systems is the Utility Settlement Coin project. The project is being developed by banks. These are Barclays, Credit Suisse, the Canadian Imperial Bank of Commerce, HSBC, MUFG, and State Street. These banks belong to the US Federal Reserve System, the ECB, the National Bank of Switzerland, the Bank of England, the Bank of Japan, and the Bank of Canada. A company, Clearmatics, has been developing the project since 2015. The adviser to the project is Vitalik Buterin; the creator of Ethereum. Digitalization of property rights is envisaged within the Utility Settlement Coin system, i.e. a network is created through which participants can transfer property rights along with the corresponding monetary equivalent. According to Hyder Jaffrey, UBS director of Strategic Investment and FinTech Innovation, the Utility Settlement project “may well inform the way central banks choose to move things forward. We see it as a stepping stone to a future where central banks issue their own [cryptocurrency] at some point.”
Finally, the fifth scenario, perhaps the most fantastical, but still with a chance of being implemented, is a switch to the digital US dollar. This scenario is supported by the existence of cryptodollars, which are, however, only in circulation among cryptocurrency exchanges. These tokens are considered equivalent to the US dollar and are called Stable Coins. The most famous projects using this currency are Tether (USDT) and True USD (TUSD). In the case that the fiat dollar starts migrating toward the digital dollar, the process could easily clear the dollar deposits all over the world, excluding those holders who cannot confirm the origin of their fiat dollars.
Another alternative scenario that could be considered is the creation of a new competitive monetary system, which could be developed together with our partners. Its tentative name could be IDMS (International Digital Monetary System).
IDMS is a network built using the distributed ledger technology (blockchain). Since the creation of any international system is a multifaceted and complex task, it is advisable to implement IDMS as a single blockchain platform for potential member countries. For example, a parallel launch of the development and implementation of such a system within the framework of the EAEU or BRICS could significantly reduce both the time and financial costs for all potential participants in the process. An alternative would be a set of blockchain platforms, which would be compatible with all databases and encryption algorithms, and with a single regulatory system at the international level.
For a more detailed description of the concept and principles of IDMS operation, it is necessary to define a minimum set of terms:
As part of the description of the basic principles and functions of the system, the national and international transactions of economic entities will be considered. First, it is useful to consider the mechanism of the system functioning within one country (using the example of Russia). Let’s call this the perimeter of the Regulator.
A digital equivalent of the ruble (DR) is created inside the country – a token that has purchasing power equal to the purchasing power of the ruble. The DR is a token in the IDMS blockchain network. All transactions carried out with the DR and objects are transactions within the IDMS network and all transaction records are stored in the blockchain. All IDMS entities have a unique identifier and therefore all transactions can be associated with specific entities, which allows you to collect and analyze information on economic activity in real time. Objects (assets and rights) belonging to the entities also receive unique identifiers. Thus, digitalization of value takes place. (By the way, Russia is already creating a regulatory and legal framework for regulating such processes. In March 2018, a draft law was introduced to the State Duma that defines digital rights.)
The Regulator also creates basic smart contracts for transactions that contain binding conditions in terms of legal framework, tax policy, and rules of information transfer. Such smart contracts allow you to automatically deduct taxes and fees in favor of federal and regional budgets.
Since IDMS as a block system requires transaction validation and database storage, the holders of the full nodes of the network are required. Such holders should be the Regulator and the entities that meet the established requirements.
In my opinion, the initial launch of IDMS within the Regulator’s perimeter should take place while the existing financial system is fully preserved and run as a parallel process. Increasing the volume of transactions within IDMS will be a gradual transition to digital financial interactions.
But how exactly can the system be launched? The following option looks best: Initially, entities (public and private organizations) who are ready to participate in the initial launch of the system are selected. Preliminary analysis of their economic relations, supply chains, etc. is conducted. The initial offering of some DRs is issued by the government and the selected entities receive a loan in DRs at a rate set by the Regulator (initially the rate may be 0% to attract the first participants). Further, the entities (primary recipients of the DRs) acquire assets and rights using the DRs and an increasing number of participants connect to the system. Further emission of the DR is carried out as the number of entities increases, taking into account the plans of the Regulator to provide additional liquidity.
Thus, the Regulator can extend credit to the economy in the form of DRs, or accept the DRs as deposits from entities that have excess liquidity (in this case, for the Regulator, the DR deposit performs functions similar to those of a federal loan).
Within the IDMS network, individual objects and rights possessing value (and in some cases, also possessing the ability to be uniquely identified) are digitized/tokenized as assets, rights, goods, or services. Transaction with digital objects and rights can be made outside the trading platforms using smart contracts (direct transactions). Also, the Regulator creates a trading platform in which digital/tokenized IDMS objects could become objects of transactions (buying, selling, pledging, borrowing, renting, etc.)
When executing a smart contract, the tokenized rights are transferred from one entity to another entity, a mutual settlement takes place in DR form, the internal logic of the smart contract ensures fulfillment of the obligations of all parties when it comes to taxes and fees and their distribution between the accounts of budgets and departments. The data generated during the execution of the smart contract is transferred to the appropriate regulator service for subsequent monitoring and analysis. Entities can enter into smart contracts that are debt obligations – this is the creation of a direct lending market (P2P, B2B, etc.)
Thus, a single digital space is formed in which digital rights acquire liquidity, become objects of transactions, and automatic registration of the transfer of these rights takes place.
The launch of the IDMS system within individual countries can take place in test mode with the involvement of enterprises interested in the transition to digital finance. There are platforms in the EAEU countries that can become the primary centers that will begin working with IDMS.
As for the launch of IDMS at the intergovernmental level, it is necessary that at least two countries start using IDMS within their perimeters. In this case, for the initial launch of the system, an international digital currency is created between the countries, which is not the national digital currency of any of the Regulators. I propose at this stage to use a neutral working title – the Unit.
The Unit would be emitted directly to IDMS and the emission process can be launched by all Regulators, regardless of the decisions of other Regulators (except for a consensus that changes the algorithm for all participants). The Unit would be used for all international settlements, both between Regulators and between entities in different perimeters. For example, the acquisition of equipment by an Indian enterprise from a Russian enterprise can be made using the Unit.
The unit has no other issuing center except for the IDMS platform itself and the issuing is carried out in two ways:
The use of transnational digital currency for settlements allows market participants to operate in equal conditions, since the national currency of any state would not be the basis for calculations at the intergovernmental level. There would be no growth in the money supply that is not a result of real economic activity.
Thus, the following types of interaction between IDMS parties arise:
The development and implementation of IDMS is consistent with the goals set in the Digital Economy government program that includes improving the country’s competitiveness, the quality of citizens’ lives, and ensuring economic growth and national sovereignty.
At the moment, it is difficult to assess the cost of developing and implementing IDMS both at the domestic and international levels. Answers to questions about possible risks, necessary legal regulation, short-term and long-term effects of using IDMS are also needed.
Despite the scale of such projects and the likelihood of their use only in the distant future, research and development in this area are already actively pursued. Above, I mentioned the example of the Utility Settlement Coin project in the banking sector. However, the possible use of such platforms is beyond the scope of classical finance.
The active development of robotics and AI technologies leaves no doubt that the use of digital technologies in mutual calculations will be necessary for the interaction of machines with people and with each other. One example is a draft team of Russian engineers and programmers. Since 2015, they have been working on the AIRA (Autonomous Intelligent Robot Agent) project, implementing the standard of “human-robot” and “robot-robot” economic interaction through smart contracts.
Another huge area in which the IDMS concept should find application is international trade. In preparing this article, I consulted with experts in this area.
“Digitalization of international trade and the emergence of a truly unified global market in terms of rules of interaction is what big and small business is waiting for,” said Natalia Podgoretskaya, founder of the Export. Online international trading platform. “Universal trading platforms are already in trend, but the digital economy will give a new, strong impetus to their development.”
This article is intended to draw the attention of possibly like-minded people to the problems discussed. The next step, in my opinion, should be the creation of a working group to discuss and develop the concept.
