A Personal note on Digital Currencies

1.4/50 Summilux ASPH, Leica M10P, RAW

Four years ago (2019), on June 18, there was a bit of a historic event.

Facebook founder Mark Zuckerberg announced the launch of a digital currency system alongside state-issued currencies. The concept is not to launch the system as a single company, but as a large consortium including Visa, MasterCard, vodafone, paypal, ebay, spotify, lift, etc. The system will be able to deliver value at low cost to anywhere in the world in real time, including those who could not previously afford a bank account. The name was Libra. Needless to say, the whole world was in an uproar.

Until now, the right to issue currency has been held by the "state," the largest unit within the framework of a community with normal binding rules *1, and the carving out of the right to issue currency from the state is unprecedented and has caused various waves of expectation and anxiety and shock. *2 At the time, this was in the midst of various discussions of optimism that platform players like GAFAM/BATJ might replace the roles of the state, and that the state would eventually disappear if their rolls proceeded. *3

Although there were doubts about whether this concept would be feasible (in dealing with the state, etc.), the "posture" (structure and members) of the launch was so impressive that there were various expectations that the project might go unexpectedly well. As expected, however, the U.S. monetary authorities and other central banks around the world showed considerable reluctance, and Mark was summoned to a congressional hearing. He attended the hearing in a full suit, which was unusual for him since he usually wears a T-shirt and jeans, and explained strongly but politely, but he was beaten to a pulp and told that he did not know who he was talking to and that we could break your company (Facebook, now Meta) into several pieces.


The Libra initiative was then renamed Diem, and last July, it finally died out and has been in existence ever since.



In the same year, in parallel, Coindesk, the world's leading media company on Blockchain, created a Japanese entity (Coindesk Japan) and in the fall of 2019, its flagship event, the first b.tokyo 2019 was held. I happened to be invited to discuss digital currency, Libra, and CBDC (central bank digital currency) at the event, which was moderated by Mr. Jun Hori, with Mr. Toyotaka Sakai of Keio Economics, Mr. Junichi Kanda of Money Forward (currently a member of the House of Representatives), and others. This discussion took place only three months after the announcement of Libra. The topic was quite hot and most people were not familiar with blockchain, cryptocurrency, or the Libra/Calibra system, so I remember that the room was full and some people were standing.


At the conference, I said that the discussion of "currency" should be divided into three steps: value creation, value distribution (delivery), and value use (settlement). However, the discussion on digital currency has been too much of a muddled mess.


There are four types of value creation: The first is to create value based on something that has value in the first place, as is typically the case with gold coins, and there was a time for quite a long time in the world when the weight of the same copper coin was directly proportional to its value, as is typically the case with the gold standard.

The second is to issue only the amount of something of obvious value, typically the gold standard, which is an extension of the first, but a nice mechanism that eliminates the need for a separate source of value. Incidentally, the Edo period had a rice standard. *4

The third is issued on the credit of something that is the parent of the issuer. Typically, the state. Modern Japan, born from the overthrow of the shogunate, did not have sufficient credit at first, so it issued bank notes initially on the credit of Mitsui, and then on the credit of Japan itself after the Bank of Japan, the central bank, was established. Incidentally, paper money, no matter how difficult it is to counterfeit, is still a piece of paper, but unlike bills, it can be used at any place. This is why currency is currency. *5

The last one is the algorithmic value creation started by Bitcoin (BTC), which is an extremely interesting scheme that has an algorithmic upper limit on the amount of value creation and requires heavy arithmetic to be created, and it is truly an invention that will remain in human history.


Value was basically distributed (1) in a form that was extremely difficult to counterfeit (or meaningless to counterfeit), such as banknotes and coins, and transported in person, by registered mail, or by cash truck, or (2) by a dedicated VAN (Value Added Network) for the distribution of highly secured value such as CAFIS *6 or BANCS *7.

(3) A mechanism to carry money on a web3-like distributed network (using a dedicated DAO) and record it in a distributed ledger has been added. Although this system looks great at first glance, it is a challenge because the exchange is exposed unless it is done over a private network, and synchronization takes a considerable amount of time, resulting in a considerably low QPS (query per second) as called for by search entities.


Regarding the use of value (payment), there are several ways to pay with cash, transfer to an account, use a credit card, pay with electronic money *8 such as WAON/Suica, or pay with QR code payment such as Paypay/Line pay, etc. In the case of cryptocurrencies *9such as BTC, the transfer is made between wallets dedicated to cryptocurrencies.


In this, obviously, there can only be a third type of value creation for CBDCs as long as they are issued by the central banks of major countries. There is absolutely no reason for a country to create value based on algorithms, and while the second, the xx standard, is logically possible, it is completely impossible given how such an approach once ended when economic growth was no longer balanced by the quantity of valuable things.

Incidentally, Libra was a scheme in which "a basket of the world's major legal tender currencies was used as a predetermined weighted average of the value of one Libra". This is a type of scheme in which a country that cannot control inflation often pegs the value of its currency to the dollar (i.e., makes it dollar-linked) *10.

This is fine when the volume of money in circulation is small, but if this kind of thing is done aggressively, it directly leads to the question of how to think about the volume of currency in circulation, and the central bank, which needs to control inflation properly by raising interest rates for financial institutions and purchasing government bonds, would probably say, "Give us a break". The central bankers, who need to control inflation properly by raising interest rates on financial institutions and buying government bonds, are probably honestly asking for a break. It is quite understandable that the authorities reacted with the words, "Hey, enough!”


Regarding the circulation of value, it is certainly possible for the central bank to stop issuing bills and coins (so-called cash) that are difficult to counterfeit, but then the set-up would be to not use cash at all on the settlement side. No matter how far credit cards and QR payments spread, there are considerable doubts about whether this is really possible. There are many places where there is no communication or reading/writing devices *11, and the usefulness of cash is immeasurable even in countries like Japan, where there are almost no chips at all. Is it possible to teach children about money without coins and paper money? *12

Therefore, while we would like to see the elimination of cash *13 as much as possible as part of pandemic readiness, it does not seem likely that it will disappear completely, no matter how far we go. So CBDC in the sense of erasing cash is also not very realistic.

Incidentally, Libra was based on the premise of a dedicated wallet system called Calibra, which was to be operated by a consortium. The Calibra PF management can see all transaction data (even if they say they do not keep records, they will definitely go through it), and if it is really a cryptocurrency as announced, the transaction history will be stored (trackable) in a blockchain-like manner. If it is a cryptocurrency, it seems to me that the transaction history would be trackable like a blockchain. If all of this was provided to the government, the tax collectors might be happy, but few people would be happy to have all of this made visible, and in that sense, it was an unpleasant mechanism.

In light of the above considerations, the only thing left to be done with CBDC is distributed financial management using a distributed ledger system with private DAOs. However, if we do not want to see each transaction in detail, is such a system really meaningful? Why not simply create multiple common VANs with sufficient redundancy so that they will never fail? If you think about it, distributed ledger systems are really starting to smell pointless.

This is what I talked about at that time at the b.tokyo 2019. For the past year or two, I have been asked for my opinions on web3 and generative AI by government officials and others at a stage when most people hardly knew what they were.
when I hardly knew what it was.

For the past year or two, I have been asked for my opinions on web3 and generative AI by government officials at a stage when most people hardly knew what they were.


At lunch today, I happened to have an opportunity to speak with the top management of one of the largest financial groups in Japan, and not only did the implications and impact of Generative AI come up, but also CBDC for the first time in a long time, and we talked a bit, recalling the above discussion.

After four years, I think a lot of people have been able to think with a bit of a cooler head.

The CBDC discussion is not over yet. I would like to leave it in this corner of the web for a moment as a reminder.




(Added 5/10/2023, 4pm) I hadn't noticed, but Zimbabwe, suffering from years of hyperinflation, introduced a gold standard digital currency as of May 8th. Payments are made via a dedicated eWallet. I can certainly understand this move in a country where the cost of issuing coins and bills is too high. All that remains is fiscal discipline and gold reserves.


(translated mainly by DeepL Pro)

*1:the central bank is considered independent from the government, but is naturally part of the "state"

*2:One might say that there are local currencies, but almost all of these are based on the value of the country's currency, which, as you will see from the discussion that follows, is far from being a currency issue.

*3:Regarding this discussion, I have consistently said that the national and local governments (i.e. basic local governments) will never go away. Unless we have a government that is a tax collection and decision-making mechanism that is a priori accepted by many people, it is impossible to build and maintain high-cost but essential infrastructure such as roads, water, sewage, and education systems. It is also impossible to have fire, police, and defense systems to protect the people in the event of a major fire, natural disaster, or conflict. These can never be run on a stable subscription basis, and their budget allocation, or redistribution, can never be satisfactorily implemented without a well-designed mechanism, that is a legal government.

*4:In places where tribute could not be paid in rice, something of value such as sugarcane was used to pay tribute in rice equivalent

*5:Come to think of it, when I went to the U.S. to study, I was shocked when I suddenly received some counterfeit bills somewhere in the first week and the bank collected them, saying they were counterfeit bills...

*6:Abbreviation for Credit And Finance Information Switching system. It was developed by Nippon Telegraph and Telephone Public Corporation and is currently operated by NTT Data Corporation, and is mainly used for credit card transactions.

*7:BANks Cash Service

*8:Precisely, an "electronic wallet". What is in circulation is the central bank currency itself value

*9:Although it has the word "currency" attached to it, it is not really a currency since it can only be used in a limited number of places

*10:the fixed exchange rate system of ¥1 = ¥360 that was in place in postwar Japan until 1973 is a similar example

*11:so-called reader/writer; often abbreviated as R/W

*12:I still remember my daughter, now an adult, being quite surprised to see me make an electronic payment in front of her for the first time when she was about 5 years old. Until then, I had intentionally shown her only cash payments all the time. It was quite difficult to explain it all at once. LOL!

*13:This is one of the contactless elements of the "open sparsity" factor that I proposed three years ago. As I wrote in a previous blog entry, the Netherlands and Belgium are already destroying places where cash is accepted, including public transport and parking.