Five years ago, I thought blockchain technology had the potential to solve the big problems of international payments, which are slow, risky, expensive, and in many countries and rural areas difficult or impossible to access. It was a challenge that would justify central banks’ interest in this technology, but that promise has not been realized.
The title of this note, Fewer Monies, Better Monies, is borrowed from a 2001 article by the late Rudi Dornbusch in the American Economic Review, in which he argued for pegging the currencies of Argentina, Mexico and other open economies to the US dollar. , through commitment to the currency board’s rules. In a recent article, I have gone further, showing that small economies no longer have reason to issue their own currencies. They are better off using US dollars for domestic transactions, since they are obligated to use the dollar for all international trade that drives domestic activity (Worrell, 2021).
The challenges of international payments are explained in Worrell (2023, chapter 10). Money everywhere is mostly digital, in the form of registrations of deposits and credit with banks and financial institutions. Most international payments are also digital, carried out by debit and credit instructions using cheques, credit, debit and debit cards, online payments, mobile phone credit exchanges and mobile phone apps. Banknotes and coins are almost never used for legitimate international payments.
International payments are slow, risky and expensive due to the problem of verification. Also, poor and rural people cannot make international payments because they lack access to the banking system. We now routinely process real-time international payments for large and small transactions. However, there is always an interval before the payee has access to his funds, caused by the need to verify the identity of the seller and the buyer, and the financial status of the buyer. Because there is a financial institution at each end of the transaction, anyone who does not have a bank account is excluded from the international payment system.
Blockchain appeared to offer the promise of providing a secure identification and verification of each transaction, embedded in the transaction itself. At least that’s my understanding of the blockchain’s unique nature. The problem, however, is that it is impossible to represent the content of any transaction on the blockchain in a language that can be understood by the active agents in any transaction – buyers, sellers, banks or regulators. It is for this reason that blockchain does not seem to have a future as a solution to the shortcomings of international payments.
There is no need or interest in any new currency, digital or otherwise, that does not solve the problems of international payments. There is no place in a modern economy for a currency, a unit that combines means of payment, store of value and unit of value. We have real-time payment instruments; what is missing is real-time settlement. It has never been possible to store values; the notion of a store of value is an illusion, an example of misplaced concreteness. The third supposed use of currency, as a unit of account, has become a trivial matter in a world of instant communication. It does not matter which currency is used for accounts, when there is immediate information about the conversion rate to another currency at all times. As for the problem of access to the international payment system for the poor and those in remote areas, the solution is to invest in telecommunications to provide access to the banking system.